Updated: Jan 23
“ It’s time to start looking at some dividend stock to help build your retirement.”
By: Allan R Kirby
These are unprecedented times with some stocks losing as much as 60% of their value in just a matter of weeks. This is ugly, terrible, and to be frank, a very painful time to be a retail investor, however, it's improving. History has also shown us that these times of panic can end up being the best opportunities to buy. I think this is going to be the case this time as well, although I do believe the coronavirus pandemic may result in consumer behavior changes. These behavioral changes could affect many businesses and industries over the long term such as the apparel industry, specifically department stores, as well as the travel industry, areas I'd avoid as an investor.
During this market meltdown, it is certainly a good idea to build up cash and take a pause on doing anything irrational. However, if you have the money and you are looking at building your portfolio with some great dividend companies then I have selected three great stocks for you to look at along with one extra.
I am always looking for high-quality stocks to put on my shopping list with strong fundamentals that have consistently increased their dividends over time. Additionally, it's important to understand the industry the stocks are in as well the secular trends that may positively or negatively affect the stock's long-term prospects. As I mentioned in another article, you need to be careful of the strategy of buying a stock and holding it forever. Sears is a good example that such a strategy can be dangerous to follow. However, I did some research and found CVS Health, AT&T, and Verizon are great dividend stocks with above-average dividend yields. I also added a speculative dividend buy, Tanger Factory Outlets. So let's take a brief look at these stocks.
Dividend Rate ($2.00 per year).
Through a series of acquisitions over the last couple of years, this is clearly a company on a health care mission. The company now encompasses a pharmacy chain (close to 10,000 locations), specialty pharmacy, Clinical services called MinuteClinic, a pharmacy benefits manager (PBM) and a health insurance company (Aetna). Although the company continues to build its moat with a number of small acquisitions, it’s no longer just a pharmacy company, it's a highly integrated health care company poised for growth due to the aging population.
Long term this looks like a great dividend company to invest in, however, there are a few headwinds. Such as pharmacy reimbursement rates, “Medicare for all”, as well as CVS has stopped its streak of dividend hikes in 2018. But it's not all bad because the dividend freeze was required in order to pay down the massive 76 billion in total debt CVS had after the acquisition of Aetna. The good news is CVS Health has paid down $8 billion since the close of the Aetna transaction, and it plans to pay down roughly $4 billion in debt in 2020. Medicare for all is likely not going to happen and at some point, pharmacy reimbursement rates will stabilize.
Dividend Rate ($2.08 per year).
AT&T like CVS is clearly on a mission. In AT&T’s case, they want to develop into a true media conglomerate instead of a pure telecommunications play. They have completed a number of high profile acquisitions such as DirectTV and Time Warner, which owns many media assets in news and sports as well as their premium HBO channels. Today AT&T has more than 375 million direct-to-consumer relations through wireless, internet, and video as well as a sizable advertising business to help reach those customers.
Long term this looks like a great dividend company to invest in. This is because even though AT&T has been dramatically changing over the past number of years, it's still a dividend aristocrat. It has paid higher dividends for 35 consecutive years, and its dividend still looks safe at this point in time.
Although the dividend looks good there are a few issues with AT&T which is mainly debt, in fact the company reported $151.7 billion in long-term debt as of Dec. 31, 2019. However, the company did reduce net debt since its acquisition by 20.3 billion. Debt reduction seems to be a priority for AT&T, let's hope they can continue to reduce debt. I believe the pace of dividend growth will be moderate while the debt remains a focus, however, the current yield is still high and gives you a nice return on your investment. As a bonus, we have a few additional positives such as their 5G and HBO rollout, merger synergies, and the sale of non-core assets.
Dividend Rate ($2.46 per year).
Verizon is similar to rival AT&T in the sense it is a telecommunications company but instead of becoming a media conglomerate, Verizon has continued to keep itself focused on its core business which is wireless. While Verizon has done a few acquisitions, most notable are Yahoo, AOL, and Straight Path Communications they have not been to the scale of AT&T. This has resulted in Verizon being a much leaner organization, with a sharp focus on building out their 5G network while not getting burdened with high debt loads.
Similar to AT&T, this looks like a great dividend stock to invest in. Verizon has paid uninterrupted dividends for over 30 consecutive years and has raised its dividend for over 12 consecutive years. Unlike AT&T, Verizon has reasonable debt loads and have plans to continue their rollout of 5G services which makes them a top-quality dividend stock with great long term prospects. Although Verizon’s yield is not as high as AT&T's, it still looks much more stable.
Tanger Factory Outlet Centers
Dividend Rate ($1.43 per year).
Tanger Factory Outlet Centers is a real estate investment trust (REIT) that owns 38 shopping centers comprising 14.1 million square feet and over 2,700 stores with locations across the U.S. and Canada. Unlike the other three picks, this investment trust has actually been a net seller of assets by selling a number of non-core outlet centers over the past few years. The proceeds were used to reduce debt and repurchase stock.
Tanger admittedly is a controversial pick on my list but I will provide more details on this stock. To start KeyBanc Capital recently cut its price target to a mere $3 from $12. But there is a good reason for the low price target and high dividend yield, no one knows what the impact will be from the coronavirus pandemic on the retail industry. Since Tanger depends on the retail stores to pay rent it’s rather hard for them to do so when their stores are closed.
Even with the expected shutdown of stores, no single tenant accounts for more than 10% of its revenues, which is reassuring, also it still has an investment-grade rating of BBB-. But one point I would like to highlight is that unlike some people who have analyzed Tanger and provided negative comments, I actually have been to a few of Tanger outlets. So I would like to dispel two arguments from naysayers: First, not all outlet malls are not in the middle of nowhere and secondly they are incredibly clean and well run. Tangers Ottawa’s outlet for example is surrounded by a very high-growth commercial and residential area and will serve the community well for many years to come.
The stock has been crushed, to put it mildly, and it's heavily shorted but it has recovered a little recently. It's also currently sporting a dividend yield north of 20%, which is a big red flag for me but it is covered for now. I do continue to believe that Tanger is going to be around due to its format and low-cost structure. I however need to keep in mind that online shopping and the possible behavior changes may affect Tangers model long term. As a result, I would put this as more of a speculative buy. But as a footnote, I should mention I have taken a position in Tanger and plan to hold it for a while.
Great buying opportunities
The three stocks I picked CVS, AT&T, and Verizon are great long-term investments and for me, even the more speculative Tanger Outlets is worth owning at these levels. It’s important to know that markets care about the future and not the past, so even if a company has done phenomenally well in the past does not mean it will in the future so do your homework before buying. The coronavirus pandemic has resulted in a huge sell-off, recession, and possible consumer behavioral changes, but the market sell-off has also present opportunities to start buying solid dividend stocks.
Disclosure: mysmallbank.com nor the author received any compensation from the mentioned security for this article. The article is our opinion only and is written to help readers learn more about community bank stocks. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.