By Michael Dubois, Head of Corporate at VG Global Holdings 

The stock market has been so volatile lately that I believe that many investors, especially those with a low risk tolerance, should explore other options, and one of the safest, although least lucrative, is to invest in dividend stocks. They may not offer the explosive growth potential of high-flying tech stocks, but they can provide steady income, which, for many investors, is an important aspect of their wealth management.

You need to look for solid and established companies that pay regular dividends, especially ones which have done so over a number of years. These companies tend to be mature firms with durable competitive advantages, loyal customers, manageable debt loads, and seasoned and established leadership teams, which generate so much cash that they are able to distribute some of it to shareholders, while still being able to re-invest some in order to grow the business.

Investors can also reinvest their dividend payments and increase their returns through the power of compounding – regular dividends buy more shares, which in turn generate their own dividends, and so forth. If you choose durable and established companies, this cycle can go on for a number of years, and it can prove to be a valuable investment which can provide steady and ultimately high returns.

However, it’s important to be selective and find companies which have a history of increasing annual dividend payments, and companies which tick all the boxes: solid fundamentals, good management executives, turnaround potential, stability, and high yields for those seeking passive income.

AT&T 

AT&T (NYSE:T) provides wireless services to 223 million U.S. subscribers, and, while, due to competition, the company lacks pricing power, its services remain indispensable as people will continue to pay their phone and internet bills even in economic crisis. This means that the company will always generate plenty of recurring cash flow to support its operations, and to be able to pay its shareholders the 7% dividend yield.

This is a telecom giant which is staging a comeback after years of heavy pressure, and one which offers considerable value. The company has faced its share of challenges recently, including some ill-fated media acquisitions which ended in disaster and forced the company to cut its dividend and spin-off WarnerMedia last year. However, since this massive shakeup, its stock plunged almost 50% from its decade highs, which has created a great investment opportunity.

AT&T reported Q3 results that beat expectations, with earnings per share of 64 cents on revenue of $30.35 billion, and it generated $10.4 billion in free cash through three quarters of 2023, up $2.4 billion year-over-year. It is also investing heavily in next-generation 5G and fiber broadband networks, which, while it will put pressure on free cash flow, it will allow AT&T to better meet surging data demand in the long-run – the company is expected to reach 130 million customers with midband 5G by the end of 2023, while its fiber network will likely pass 30 million locations by the end of 2025. This will attract more customers, and it also has various cost-cutting initiatives in place which should expand their margins.

After an underperforming year, AT&T stock has pulled off a sharp recovery, yet its shares are still trading at just 6-times forward earnings, which means that this is a good time to buy this high-yielding telecom stock.  

IBM (IBM) 

IBM (NYSE:IBM) has been one of the most stable tech stocks of the past decade, and it still retains this position, largely due to its huge enterprise customer base that provides a steady stream of recurring revenue – most of its customers have relied on its products and services for decades and are thus unlikely to switch to any other provider unless there is a disaster in service.

Despite the fact that growth has been slow in recent years, the company has a massive cash hoard that allows it to pay high dividends, and at the same time invest in emerging technologies and new business segments which will assure its future in the long term. One of the sectors where IBM is arguably the most well-positioned company to make a commercially-viable system, is in the quantum computing division, and if this takes off, it could transform IBM’s bottom line, as other companies adopt its proprietary technology which allows for computations that impossible with normal computers.

In the more near-term, IBM’s focus areas include hybrid cloud, AI, and cybersecurity, and it recently unveiled a watsonx Code Assistant which leverages large language models to help developers be more productive. IBM can also leverage its expertise in Enterprise IT to integrate AI into solutions tailored to the specific needs of its clientele.

The bottom line is that IBM generates plenty of cash flow to fund future investments, while covering itself for all the dividends today, and the stock’s 4.5% dividend yield is supported by a 28-year streak of payout raises.

 

The author does not own any stock, option or similar derivative position in any of the companies mentioned, and has no plans to initiate any such positions within the next 72 hours. This article only reflect the author’s own opinions. The author is not receiving compensation for it  and has no business relationship with any company whose stock is mentioned in this article.