CVX and IBM: These Dividend Stocks Can Generate Sustainable Returns

This year’s treacherous environment continues to keep the market outlook uncertain. In such a backdrop, stocks such as Chevron (NYSE: CVX) and International Business Machines (NYSE: IBM), which are consistently paying decent dividends, even amid sky-high inflation, higher interest rates, and as a result, high expenses, are worthy of investors’ attention.

Before discussing why CVX and IBM could be great stocks to pick up for your dividend portfolio, let us first understand why to consider dividend stocks in the first place.

Are Dividend Stocks Good Investments?

Getting straight to the point, dividend stocks offer the dual benefits of a relatively less risky investment option that can deliver value appreciation as well as dividend income, which can again be reinvested for higher returns. We say less risky because stocks that pay consistent dividends have the ability to generate strong cash flows (hence the ability to return profits to shareholders).

Additionally, most dividend-paying companies have sustainable and resilient business models that do well during inflationary times, eventually boosting their profits.

That said, how much dividend stocks can be good for your portfolio also depends on how you strike a balance. A stock that is paying a very high dividend yield may look very tempting to an investor. However, a high yield often means that the company is returning most of its stock value to shareholders, leaving very little room for reinvestment toward the company’s growth.

A rule of thumb that experts suggest is a yield between 2% and 6%, not more, not less. Companies whose dividend yields have consistently been within this range have the highest probability of returning shareholder value while achieving meaningful growth over the years.

To that end, Chevron and IBM have dividend yields of 3.5% and 5.09%. Now that we have chosen two worthy stocks, let us delve deeper into the companies’ fundamentals and see how they are doing in the current uncertain market environment.

Chevron (CVX)

Robust demand for oil and gas is keeping Chevron’s shares on an uphill trek. Shares of the company have gained 36% so far this year. Now, with winter approaching, the Russia-Ukraine war still ongoing, the Iran nuclear deal revival uncertain, and an oil production cut by OPEC in the vicinity, oil prices are expected to remain high despite some pressure from lower demand. This is expected to continue to benefit Chevron in the near term.

Moreover, the company has been consistently paying dividends since 1989. Over the years, Chevron has improved its cash from operations, with the help of higher crude realizations. This has helped Chevron regularly hike its dividend payments.

Early this year, the company raised its quarterly dividend by 6% to $1.42 per share. In Q2, Chevron paid $2.8 million in dividends. Moreover, free cash flow of $10.6 billion and operating cash flow of almost $14 billion were also encouraging.

Is Chevron a Good Stock to Buy Now?

On September 12, Piper Sandler analyst Ryan Todd maintained a Buy rating on the stock and raised the price target to $190 from $189. The analyst remains bullish about near-record distillate margins that are consistently driving upside to refining estimates. This trend is expected to continue into winter and through 2023.

Wall Street is cautiously optimistic about Chevron, with a Moderate Buy rating. 11 analysts have rated the stock a Buy, whereas five analysts chose Hold. Moreover, CVX stock’s price target stands at $179.81 on average, indicating 12.8% upside potential.

International Business Machines (IBM)

Shares of tech giant IBM have been stuck in a rut since the company’s sales slumped back in 2013. The behemoth was outpaced by competitors as the industry moved towards digitalization.

However, interestingly, despite being a traditional tech stock, it seems to have outperformed most of its peers in price performance so far this year, with only around a 4.8% year-to-date decline in its share price.

Also, nothing has been able to divert the company from its commitment to paying dividends. IBM has been returning cash to shareholders for more than 30 years – consistently. Between 2000 and 2021, the company has returned over $194 billion to investors through dividends and share repurchases.

Its dividend payout ratio is 69.46%, which means 69.46% of the company’s net income is given out as dividends. Moreover, its dividend yield of about 5% is handily above the technology sector’s average yield of 0.94%.

In addition, its payout has increased over the past few quarters. Solid cash flow generating capability allows IBM to maintain consistency with dividend payments. For example, the company generated free cash flow of $2.91 billion in the second quarter of 2022.

Last month, Credit Suisse (NYSE: CS) analyst Shannon Cross gave IBM a Buy rating. She was upbeat about the broader IT hardware industry’s historical outperformance during recessionary times, supported by the strong balance sheets and cash flow of the industry players (which include IBM).

The analyst is also optimistic about the company’s prospects in the hybrid cloud market opportunity worth $1 trillion.

Wall Street is cautiously optimistic about IBM, with a Moderate Buy consensus rating based on five Buys, four Holds, and one Sell.

What is the Target Price for IBM Stock?

Analyst Shannon Cross raised her price target on IBM to $163 from $156. Meanwhile, the average IBM price target is $146, implying 14.7% upside potential.

Conclusion: CVX and IBM Are Likely to Keep Generating Great Returns

Summing up, stocks that pay dividends only up to a limit is a great barometer to judge a good stock with sustainable capital and dividend growth. The best analogy between Chevron and IBM is that they are both great cash-flow generators, have a solid legacy of dividend payouts, and have business models that are resilient to market cycles. Both CVX and IBM make great dividend stocks to consider.

Disclosure