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Love Dividends? 3 Stocks You Might Want to Buy

Savvy investors have long included dividend stocks in their portfolios as a reliable wealth accumulation tool, and eventually a foundation for steady income in retirement. Unfortunately, several companies with dividend payouts have had to cut or suspend them recently to help them account for the current financial crisis brought on by the coronavirus pandemic.

The current recession and the market fallout from COVID-19 highlight the importance of investing in companies capable of maintaining payouts even during times of significant market stress.

The Home Depot (NYSE: HD), Texas Instruments (NASDAQ: TXN), and Johnson & Johnson (NYSE: JNJ) have proven to be dividend stalwarts, and should have the financial strength to keep their dividends intact during this current economic turmoil. None of these companies are flashy or high growth, but their dividends are dependable and growing, making for ideal wealth accumulation or steady income for investors. Let's take a closer look at these three companies and find out why.

Image source: Getty Images.

1. Home Depot

Home Depot, the world's largest home-improvement retailer, was deemed an essential business and has stayed open during the pandemic. This fact, combined with the current stay-at-home lifestyle where home improvements became an outlet or opportunity for action for some consumers, has helped the company not only weather the economic storm, but even benefit from it.

The company reported earnings on May 19, and the report showed first-quarter sales were $28.3 billion, up 7.1% from last year. Diluted earnings per share for the quarter were $2.08.

Also in May, the retailer declared a quarterly dividend of $1.50 a share. At a minimum, given its strong trailing-12-month free cash flow at $29.54 per share, the company should be able to easily maintain the dividend.

Home Depot CEO Craig Menear said during an investment conference in late May that "we are committed to the dividend" and that "we want to continue to grow the dividend as we grow earnings." The company pays a 2.4% dividend yield, and last raised it 10.3% in February.

2. Texas Instruments

Texas Instruments, the analog chipmaker, pays a higher dividend yield than many in the tech sector. The average yield among technology stocks paying a dividend is a measly 1.31%. Texas Instruments shares yield 2.93%.

In April, Texas Instruments declared a quarterly dividend of $0.90 cents per share, mirroring its previous recent payouts. It raised its dividend by 17% in September 2019, and has raised its dividend every year for 16 years.

Dave Pahl, head of investor relations for Texas Instruments, said at a technology conference June 3:

Our dividend last quarter was somewhere between 50% to 60% of our trailing 12 months free cash flow. So certainly very sustainable. That's the first priority. And the second one is we want to have a dividend that will continue to grow. So, even if free cash flow is flat or down a little bit, we'd still like to grow it. That's what the objective is. And then the balance of the free cash flow we will return with buybacks.

Image source: Getty Images.

3. Johnson & Johnson

Johnson & Johnson, the healthcare conglomerate, announced a 6% increase in its dividend payout in the middle of the COVID-19 crisis. In April the company said the dividend would increase from $0.95 to $1.01 per share. The dividend yield is 2.7%.

While medical device sales may suffer a temporary downturn as elective surgeries have been deferred as a result of COVID-19, the company's well-diversified pharmaceutical and consumer products divisions are making up the difference and performing strongly. Health- and self-care products are benefiting from the stay-at-home lifestyle, with the unit reporting first-quarter sales growth of 11.3%.

Since January, the company has been actively working with partners on a coronavirus vaccine and therapies research. Working on an accelerated timeline, phase 1 clinical trials will start by September at the latest, while global production capability is simultaneously scaled up. The company expects that a vaccine could be ready for emergency use in early 2021.

Of some concern for investors, Johnson & Johnson has been wrangling over legal issues surrounding the use of its baby powder potentially causing cancer, and its pharmaceutical connection to the U.S. opioid crisis. After a contentious 2019, settlements are finally being reached in some of these cases. To be sure, a number of cases will continue to dog the company through 2020, but progress is being made to put that chapter behind the company.

Johnson & Johnson has had 36 consecutive years of adjusted operational earnings growth, and 58 consecutive years of dividend increases, keeping it among the select group of S&P 500 Dividend Aristocrats who have raised their dividend payouts for 25 straight years, as well as the very select group of Dividend Kings who have raised their payouts for at least 50 straight years.

Steady dividend stocks pay investors during rocky market periods

Income investors should carefully reevaluate their stock portfolios now, given the dividend cuts and suspensions being announced by varous companies over the past several months. The economic environment presents the opportunity to identify consistent dividend-paying companies that are able to ride out the kind of crisis COVID-19 presents.

The Home Depot, Texas Instruments, and Johnson & Johnson are companies with strong management and great businesses, and all have demonstrated a commitment to shareholder return. Including any or all of these stocks in your portfolio should provide a firm foundation for the future. All three companies should have dividends reinvested, unless the dividends are needed as a stream of income by the investor.

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Anne Burdakin owns shares of Johnson & Johnson. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool owns shares of Texas Instruments. The Motley Fool recommends Johnson & Johnson and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.


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