Dividend stocks can be boring, especially when AI-powered stock gains spread quickly. Still, buying sustainable dividend stocks with solid growth potential is a timeless strategy for long-term investors.
Two dividend stocks worth buying right now are telecom giants AT&T (NYSE:T) and technical heavyweight International business machines (NYSE: IBM).
Wireless and fiber optic growth
While rival Verizon Although the number of wireless subscribers has declined, AT&T has continued to expand its wireless customer base. Growth has slowed in recent quarters as the pandemic boom fades, but the company is still posting solid results.
AT&T added nearly 350,000 net postpaid phone subscribers in the first quarter, a solid showing in the current environment. Postpaid churn fell to just 0.72%, the lowest level in at least two years. A combination of consistent customer growth and minimal customer churn has driven wireless revenue growth.
AT&T’s fiber operations are also performing well. AT&T had 8.6 million fiber subscribers at the end of the first quarter, after an increase of 252,000. Average revenue per fiber subscriber has consistently increased and the company sees a path to expand its fiber network to as many as 50% more locations than the original plan. Fiber optic should be a solid growth engine in the coming years.
AT&T expects to generate free cash flow between $17 billion and $18 billion this year even as it continues to invest heavily in its wireless and fiber networks. The stock is dirt cheap, trading at just seven times the midpoint of its free cash flow outlook, and the dividend is hard to resist.
AT&T has not increased its quarterly dividend since cutting it in the wake of its WarnerMedia spinoff two years ago. Still, the quarterly payout of $0.2775 per share equates to a dividend yield of about 6.4%. The company plans to achieve its debt reduction targets by mid-2025, after which dividend increases or even share buybacks could be on the table.
A return to dividend growth or a stock buyback program next year could be the boost the market needs to lift AT&T shares out of their lows. While investors wait for stocks to recover, they can collect a sustainable high-yield dividend that will only eat up about 45% of free cash flow this year.
A business AI leader
IBM has a number of advantages as the tech giant aims to become the go-to enterprise AI platform. First, the company has embraced strategic partnerships with leading cloud providers and other technology companies. These partnerships generate billions of dollars in revenue for IBM annually, and the company’s Watsonx AI platform is integrated by IBM’s partners.
Second, IBM’s consulting business can provide a complete solution to customers who want not only AI software, but also guidance and implementation services. IBM’s consulting department can create solutions that combine IBM’s products and services with the products and services of its strategic partners. The majority of AI-related business for IBM to date has been in the consulting space, a testament to the importance of consulting to IBM’s business model.
While AI still makes a small contribution to IBM’s revenue, it has the potential to accelerate growth in the coming years. As things stand, IBM has returned to consistent, albeit modest, revenue and free cash flow growth. The company expects revenue to grow by a mid-single-digit percentage this year, excluding currency, with free cash flow of about $12 billion.
Like AT&T, IBM’s dividend growth has been slow in recent years. The company recently increased its quarterly dividend by less than 1% to $1.67, for a dividend yield of 3.9%. The dividend will eat up about half of IBM’s free cash flow this year, so faster dividend growth will likely require faster free cash flow growth.
AI could be the key to accelerating IBM’s free flow growth in the coming years as the company wins over enterprise AI customers. Until then, investors can collect a nice dividend every quarter.
Should You Invest $1,000 in AT&T Now?
Consider the following before buying stock in AT&T:
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Timothy Green has positions in AT&T and International Business Machines. The Motley Fool recommends International Business Machines and Verizon Communications. The Motley Fool has a disclosure policy.
The Best Dividend Stocks to Buy Right Now was originally published by The Motley Fool
