This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
Dividends have played an integral role in many S&P 500 companies. The payouts serve as a stabilizing force in such stocks, and some continue to hold considerable growth potential.
Admittedly, many of the S&P's top dividend stocks have set new all-time highs recently. Nonetheless, investors can still find dividend payers worth buying -- stocks that have struggled of late but show signs of resilience. Not only can they offer shareholders cash payouts but also the potential for stock price gains.
Two worth considering now are AT&T (NYSE: T) and Realty Income (NYSE: O). Both could prosper despite recent challenges. Here's why.
AT&T
Telecom giant AT&T may not look like a desirable dividend stock, given its troubles over the last few years. Unwinding bad investments in DirecTV and its media segment, now owned by Warner Bros Discovery, helped lead to the end of a 35-year annual streak in payout hikes. Moreover, it was left with a massive debt load that potentially threatened its remaining payout.
However, its $1.11 per share annual dividend reflects much of the stock's long-term decline as it has a dividend yield of 5.1% even after the reduction in 2022. Additionally, it has generated sufficient free cash flow to cover over $8 billion in dividend costs and reduce total debt by $9 billion over the last 12 months.
Such financial improvements show that even though the stock is down 51% below its peak in the late 1990s, it may finally be ready for a comeback. In the first three quarters of 2024, the company reported almost 1.2 million postpaid phone net additions with a churn rate hovering around 0.75% in each of the three quarters. AT&T Fiber also added more than 700,000 customers, pointing to the rising popularity of its service and the ability to retain its customers.
These improvements likely played a role in the stock rising more than 50% over the last year. Also, despite that increase, its P/E ratio stands at about 18, well under rival T-Mobile at 26 times earnings.
Furthermore, investors should not forget that AT&T controls one of America's three wireless networks. With the critical role it continues to play in communication and, more recently, artificial intelligence (AI), the dividend and potential growth the telecom stock offers may be too attractive for investors to ignore.
Realty Income
Realty Income plays a unique role in the business landscape. The real estate investment trust (REIT) owns about 15,500 single-tenant, net-leased properties. Many of the top retailers, including Walmart, Home Depot, Dollar General, and others, no longer want to own their real estate.
Hence, Realty Income buys and leases these properties, bringing the REIT revenue. Moreover, the tenants cover maintenance, taxes, and insurance costs, which addresses some of the challenges that come with property leasing.
Despite such benefits, its stock has suffered amid higher interest rates, down about 27% from its pre-pandemic high.
While the high rates probably reduce its profitability, Realty Income has continued to develop properties amid an occupancy rate of almost 99%. For the first half of 2024, 198 properties were either acquired or under development. Moreover, the purchase of Spirit Realty in 2023 added nearly 2,100 properties to its portfolio.
Hence, while Realty Income would probably welcome lower interest rates, it has continued its expansion in the current environment. Additionally, Realty Income continues to increase its monthly dividend periodically, and it has risen at least once yearly since its 1994 inception. At $3.16 per share annually, the stock currently yields about 5.2%.
Finally, assuming it earns the forecast $4.24 per share (at the midpoint) in normalized funds from operations (FFO) income, the stock trades at a price-to-FFO ratio of about 14. With an expected tailwind from lower interest rates, Realty Income could become a safe, lucrative source of considerable income and market-beating returns.
This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.
