Written by Jonathan Weber for SureDividend
The stock market has been pressured by a range of economic issues, including rising interest rates, high inflation, and fears about a potential recession in the coming quarters. Many equities sold off, but at the same time, moving out of equities does not necessarily seem like a great idea, considering the fact that treasuries and other fixed-income alternatives do not offer the yields that are necessary to combat inflation.
Investors that are looking for reliable stocks that can offer above-average income yields may want to look at blue-chip stocks that have proven business models and reliable dividends, especially if they trade at or below fair value.
1: Verizon Communications (VZ)
Verizon is one of the largest telecommunications companies in North America. Together with its peer AT&T (T), it controls a large portion of the US wireless market, although T-Mobile US (TMUS) has become a major competitor as well, following its takeover of Sprint a couple of years ago.
Verizon reported its most recent quarterly results in July. During the second quarter, the company generated in-line revenue of $33.8 billion, which was also unchanged from one year earlier. Company-wide revenues were flat despite a strong performance in the wireless segment, which saw revenues rise by 9% year over year. Broadband performed well, too, as that unit added 260,000 new customers during the period. The net impact of M&A and declines in Verizon’s wireline business were the reasons that prevented Verizon from growing on a company-wide basis.
Verizon earned $1.31 per share during the second quarter, which annualizes to around $5.20. Verizon’s current guidance for 2022 is at a relatively comparable level, as the company expects earnings-per-share to come in between $5.10 and $5.25 this year.
Verizon has raised its dividend for 17 years in a row, which means that it isn’t a Dividend Aristocrat yet, but it has a pretty compelling dividend growth track record nevertheless. More recently, Verizon’s dividend increases have been relatively small, at $0.01 each. That pencils out to a dividend growth rate in the 1.5% to 2.0% range, which isn’t overly strong.
That being said, the company offers a pretty high dividend yield, at 5.7%. Combined with the dividend growth we have seen in the recent past, 7%-8% annual returns seem likely, before factoring in multiple expansion tailwinds.
Since Verizon is trading for just 8.6x this year’s expected net profit today, we do believe that multiple expansion will be a meaningful tailwind for Verizon’s total returns going forward. We do believe that multiple expansion could add 7% to the company’s total returns in the future, which is why we are forecasting a mid-teens annual return from this high-yield Blue Chip stock.
2: The First Of Long Island Corp. (FLIC)
The First Of Long Island Corp. is the holding company for The First National Bank Of Long Island, a Long Island & New York City-focused bank that operates around 50 branches. Despite not being overly large, FLIC has a very compelling dividend growth track record, as the company has managed to grow its dividend for a hefty 44 years in a row, easily making it a Dividend Aristocrat that is on its way of becoming a Dividend King a couple of years from here.
Past recessions, and even the housing bubble burst, didn’t force FLIC to cut its dividend, which compares very favorably to the dividend growth performance of most other banks. This includes much larger banks that cut or eliminated their dividends during the Great Recession. FLIC’s management operates with a focus on keeping risks low, which is why the company has done so well during past crises.
In the most recent quarter, FLIC was able to grow its revenue by a compelling 10% on the back of a 26 base point increase in its net interest margin. The Fed’s tightening cycle allowed the bank to expand its net interest margin, which is a trend that could remain in place as the Fed will likely continue to increase interest rates. The revenue increase, combined with the impact of buybacks, allowed FLIC to grow its earnings-per-share by an attractive 13% versus the previous year’s quarter.
FLIC offers a dividend yield of 4.2% right here, and its 5-year dividend growth rate is 5.9%. When we also account for multiple expansion potential, which we see as very likely due to the currently pretty low 9x earnings multiple, then FLIC could deliver total returns well in the double-digit range.
3: QUALCOMM Inc. (QCOM)
QUALCOMM is a semiconductor company that focuses on voice and data communication chips and that owns a large IP portfolio from which it generates high-margin royalty payments.
QUALCOMM has reported its most recent quarterly results in late July, showing it had generated revenues of $10.9 billion, which was up by an outstanding 37% year over year. QUALCOMM also was able to grow its earnings-per-share by more than 50%, to $2.96 for the period ending June 26. For the current year, QUALCOMM is expected to earn around $12.50 on a per-share basis.
QUALCOMM is well-positioned in its major markets, such as handsets and the Internet of Things, while still small but fast-growing areas such as automotive provide significant growth potential over the coming years.
QUALCOMM has raised its dividend for 20 years in a row, which means that it could turn into a Dividend Aristocrat in a couple of years. At current prices, QUALCOMM offers a dividend yield of 2.0%. That’s not the highest dividend yield in the Blue Chips group for sure, but QUALCOMM has considerable dividend growth potential, thanks to a dividend payout ratio of less than 25%, while QUALCOMM also should deliver compelling share price gains going forward.
Based on our fair value estimate, QUALCOMM could deliver 6%-7% annual returns from multiple expansion alone for the next five years. When we add the dividend yield and the company’s earnings-per-share growth potential, it seems highly likely that QUALCOMM will deliver annual returns in the 15% range.
This article was first published by Jonathan Weber for Sure Dividend
Sure dividend helps individual investors build high-quality dividend growth portfolios for the long run. The goal is financial freedom through an investment portfolio that pays rising dividend income over time. To this end, Sure Dividend provides a great deal of free information.
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