There is a balance in the dividend gap between high yields and dividend sustainability. In the end, it is generally more important to find stocks that can continue to pay – and hopefully increase – their dividends than to stretch for high yields that are ephemeral because they are backed by dividends that are likely to decline. If you want to add some good dividend names to your portfolio, these three Motley Fool associates think you'll want to take a look at biotech Gilead Science (INSTRUCTION: GILD), the telecommunications giant Verizon (NYSE: VZ), and a specialist in consumer products Procter & Gamble (NYSE: PG).
Stellar income opportunity
Orwell Budwell (Gilead Sciences): Gilead's science may no longer be as high-growth as it used to be this decade, but biotechnology has turned into a top-notch revenue and stock market in recent years. The shares currently offer 3.9% yield and trading with the highest level of 9.2 times earnings forecast for next year. It's a pretty attractive package for any biotech with blue chips.
However, the best part is that Gilead should be able to continue to grow its dividend at a healthy pace for the foreseeable future. Apart from the fact that it reported a monstrous $ 30.2 billion in cash, cash equivalents and debt securities sales at the end of the last quarter, it is also expected to be its mega-blockbuster HIV drug Biktarvy and the experimental anti-inflammatory drug filgotinib. big winners for the company over the next decade.
For example, bicyclists are expected to reach a staggering $ 7 billion in sales right away in 2024, according to a report by EvaluateParma. Filgnitib has sales of $ 6.5 billion at the beginning of the next decade, depending on how the market for anti-inflammatory drugs is finally shaking. Taken together, these two high value drugs should be able to provide the type of free cash flow needed to maintain and grow Gilead's dividend for the coming years.
Huge barriers to entry protect this dividend
Brian Stoffel (Verizon): I own exactly zero stocks because of their dividend. This makes sense, because investing income doesn't fit my approach, for over three decades until I hit my golden years. That said, if I were to retire tomorrow, I would definitely put a piece of my portfolio in Verizon.
There are several great reasons for this. First and foremost, dividends have been a constant source of income for a long time. The company did not miss dividend payouts from the first of March 20, 1984 – when it was known as the White Atlantic. In addition, it has increased its dividend by 14 consecutive years.
Just as important, even if the company does not increase its dividend, it is already paying 4.3%. It's a huge payoff for investors around the world who see negative interest rates spreading across Europe.
It can afford that payment because it raised $ 17 billion in free cash flow over the past year. Of this, about 59% was used to pay the dividend. It's a very healthy relationship: It means that Verizon still has room to grow its dividend sustainably if the business goes well and should be able to continue its current payout if the business stagnates.
However, perhaps the most important is Verizon's competitive position. There are high barriers to entry in telecom. It takes billions of dollars to build the infrastructure to connect the masses and it is a highly regulated industry. With the largest market share of mobile subscribers and being the first to market with 5G technology, I think Verizon is a great bet for dividend investors.
Time-tested brand manager
Rubin Greg Brewer (Procter & Gamble): You know the names sold by the giant consumer products Procter & Gamble, including iconic brands Bounty, Tide and Crest (among many others). Most of its products are daily necessities so they are bought in good weather and bad. This provides P&G a solid revenue base from which to pay a dividend. And with long-term debt with a reasonable 30% of capital structure, there's no reason to worry about the company's balance sheet.
That is the foundation upon which P&G has built over six decades of a series of annual dividends. There is no reason to doubt that it can pay investors year after year. But what's missing this big picture is probably the most important piece of the puzzle: P&G is a brand manager. That means buying and selling brands over time to ensure that it has the best possible portfolio of assets working for investors.
It didn't always get the mix right, but it did work well over time. The latest change is a great example. In 2016, it sold more than 40 beauty brands Koti (NYSE: COTY). This has allowed P&G to focus on its best beauty brands, which have achieved solid success. Meanwhile, Koti struggled to make the acquisition pay off.
P&G is doing pretty well today, and stocks have been strong this year. It's not cheap, but the yield of 2.5% is higher than what you would get from S&P 500 Index And you should be able to rely on the dividend payable and increase it for years to come. For conservative income investors looking to add a little bit of diversification to their portfolios, it is still worthwhile to dive deeper.