We have seen that the yield curve has inverted and sent investors into a frenzy. So, when the 10-year Treasury yield is as low as 1.6%, where do investors park their funds? Investors can look at stocks with a high dividend yield as an alternative.
The yield curve has been a key market indicator over the last five decades. An inverted yield curve has preceded a recession by 12 to 24 months in the last 50 years.
Are high-dividend stocks attractive in a choppy market?
In an interview with CNBC on August 14, former Morgan Stanley executive Stephen Roach stated, “I’m very worried about the global outlook — especially the intersection between the trade war and the problems in Hong Kong and the weakness in the European economy.”
If a recession hits the stock market—which is a definite possibility—investors would want to play it safe and create a steady stream of income. In this story, we’ll analyze the top tech stocks that provide investors with a high dividend yield.
AT&T: 5.8% dividend yield
AT&T (T) pays an annual dividend of $2.04 per share, indicating a payout ratio of 58%. This telecom giant has a dividend yield of 5.8%, and it has increased its dividend payments in the last 34 consecutive years. AT&T has strong fundamentals and is trading at a low forward PE ratio of 9.8x.
With an operating cash flow of almost $50 billion, we expect AT&T to increase its dividend payouts in the coming years. Its recent acquisition of WarnerMedia and the upcoming transition to 5G provides AT&T with robust growth opportunities. Analysts expect AT&T’s earnings to grow at an annual rate of 2.2% in the next five years.
Seagate (STX) has a dividend yield of 5.3%. It pays an annual dividend of $2.52 per share, indicating a payout ratio of 40.4%. Although Seagate did not increase its dividend payout in the last year, the company has raised dividends at an annual rate of 3.8% in the last five years.
Seagate shares had lost considerable value between April 2018 and December 2018 when the stock fell 37% in that period. Although Seagate shares are up 27% year-to-date, its forward PE multiple is comparatively lower at 9.5x.
Analysts expect Seagate’s earnings per share to rise at an annual rate of 6.4% in the next five years, indicating that the stock is undervalued at the current price. The semiconductor downturn is coming to an end, which means chip stocks should outperform the broader indices going forward.
IBM (IBM) has a dividend yield of 4.8%. It pays an annual dividend of $6.48 per share, indicating a payout ratio of 47%. This tech heavyweight has increased its dividend payments in the last 19 consecutive years. IBM has increased dividends at an annual rate of 7.5% in the last three years.
IBM stock is trading at a forward PE ratio of 10x, and analysts expect IBM’s earnings to grow at an annual rate of 2.2% in the next five years. The stock is overvalued considering the PE multiple, but investors can expect the company to increase its dividends going forward.
NetApp (NTAP) has a dividend yield of 4.1%. It pays an annual dividend of $1.92 per share, indicating a payout ratio of 49%. This storage heavyweight has increased dividend payments in the last five consecutive years. NetApp has increased dividends at an annual rate of 20.3% in the last three years.
NetApp shares are trading 46% below its 52-week high. The stock has lost over 20% this month after it released preliminary results that were considerably lower than Wall Street estimates. The slowdown in tech spending could impact NetApp’s sales over the next few months.
NetApp stock is trading at a forward PE ratio of 10.3x, and analysts expect the company’s earnings to grow at an annual rate of 7.2% in the next five years. In our view, the stock is undervalued, considering its PE multiple.