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3 Dividend Stocks I'd Buy Right Now

It's tempting to chase high-growth stocks as the market hits fresh highs. However, investors shouldn't ignore slower-growth stocks with generous dividends, since high yields can set a floor under the stock when the bears pounce.

When seeking out a dividend stock, investors should look for wide moats, low valuations, sustainable payout ratios, and yields which exceed the S&P 500's average yield of 1.7%. Let's examine three stocks which pass those tests: Philip Morris International (NYSE: PM), Seagate Technology (NASDAQ: STX), and AT&T (NYSE: T).

Image source: Getty Images.

1. Philip Morris International

Philip Morris International was spun off from Altria (NYSE: MO) in 2008. PMI generates all of its revenue overseas, while Altria mainly sells its products in the United States.

PMI is the world's second-largest publicly traded tobacco company (in terms of revenue) after British American Tobacco, which claimed the crown after its acquisition of Reynolds American in 2017. It sells a wide range of cigarette brands, including its flagship brand Marlboro, and iQOS "heated tobacco" products which warm a stick of tobacco instead of burning it.

PMI is struggling with declining smoking rates worldwide, but it offsets those declines with price hikes and the growth of its iQOS business. That balancing act is holding steady, and analysts expect its revenue to rise 5% and 8%, respectively, next year. Those are solid growth rates for a stock that trades at 16 times forward earnings.

PMI has raised its dividend every year since its split with Altria, and currently pays a forward yield of 5.3%. It spent 87% of its free cash flow (FCF) on that dividend over the past 12 months, which is somewhat high (on average) but still gives it adequate room for future hikes.

2. Seagate Technology

Seagate is the world's largest maker of platter-based HDDs (hard disk drives). HDDs face tough competition from flash memory-based SSDs (solid-state drives), which are smaller, faster, more power-efficient, and less prone to damage.

But instead of expanding aggressively into pricier SSDs, Seagate pivoted away from lower-capacity HDDs and developed higher-capacity HDDs for data centers -- which generally prioritize higher storage capacities at lower prices.

Image source: Getty Images.

Seagate's revenue and gross margins tumbled over the past year, as macro headwinds throttled enterprise spending and OEMs sold fewer PCs. However, its revenues have been rising sequentially, its gross margins are stabilizing, and it's consistently repurchasing shares to boost its earnings.

Analysts expect its revenue to dip 1% next year but its earnings to grow 7% -- which is a decent growth rate for a stock that trades at 12 times forward earnings. Seagate only spent two-thirds of its FCF on its dividends over the past 12 months, and it raised its dividend last year -- which marked its first hike in four years. It currently pays a forward yield of 4.3%.

3. AT&T

AT&T, the top wireless carrier in the U.S., has raised its dividend annually for 34 straight years. This makes it an elite Dividend Aristocrat of the S&P 500 -- a component of the index which has raised its dividend annually for at least 25 straight years. AT&T spent just 51% of its FCF on its dividend over the past 12 months, so it has plenty of room for future hikes.

AT&T's massive wireless, wireline, pay-TV, and media businesses give it a comfortable moat against its rivals. However, it's been struggling with the sluggish growth of its wireless business, an ongoing loss of pay-TV viewers at DirecTV, and the integration of WarnerMedia's assets into its fragmented ecosystem of streaming services. It's also trying to reduce its long-term debt of $153.6 billion -- which was mainly incurred from its purchases of DirecTV, Time Warner, and AWS-3 spectrum licenses.

Despite those challenges, AT&T expects its FCF levels to remain stable as it cuts costs, divests non-core assets, and streamlines its digital efforts. It also expects to continue growing as it merges its various services into cost-effective bundles.

Wall Street expects AT&T's revenues to stay nearly flat next year as its earnings advance just 2%. Those growth rates look anemic, even relative to its low forward P/E ratio of 11, but its forward dividend yield of 5.4% should set a firm floor under the stock.

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Leo Sun owns shares of AT&T. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.


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