This is a guest contribution by Nathan Parsh of Sure Dividend. 

Bert and Lanny have amassed a portfolio of some of the best dividend paying stocks in the market. Many of the stocks that they own have increased their dividends for multiple decades.

Past dividend growth does not guarantee future growth. That being said, companies with long track records of dividend growth often enjoy very high levels of free cash flow. Companies that are able to grow free cash flow are much more likely to continue paying and raising their dividends going forward.

The following five stocks are those from Bert and Lanny’s portfolio that we believe investors can purchase right now.

Best Bert and Lanny Stock #1: AT&T Inc. (T)

AT&T can trace its history back to Alexander Graham Bell and the original telephone in the late-1800’s. Today, the company is the largest communications company in the world. AT&T is composed of four separate business segments: AT&T Communications, which provides mobile, broadband and video, WarnerMedia, which includes Turner, HBO and Warner Bros., and AT&T Latin America. The company trades with a market capitalization of $245 billion, with annual revenues of approximately $170 billion.

While it had been primarily a phone company, AT&T has attempted to diversify its revenue streams in recent years by purchasing DirecTV in July of 2015 and Time Warner Inc in June of 2018. These two deals added a combined $40 billion to AT&T’s already bloated balance sheet. At the end of the first quarter of 2019, the company had more than $190 billion in short and long term debt.

AT&T business generates a massive amount of free cash flow that has allowed it to simultaneously pay down debt and fund a very hefty dividend.

The company believes it will be able to pay off nearly three-quarters of the debt it issued to purchase Time Warner Inc by the end of 2019. AT&T is targeting an end-of-year net debt to adjusted EBITDA ratio of 2.5x. At the end of the first quarter, this ratio was 2.8x.

AT&T has increased its dividend for the past 35 years, qualifying the company as a Dividend Aristocrat. Dividend Aristocrats are those companies that have increased their dividends for at least 25 consecutive years, While the company’s average dividend increase is just 2% over the last 10 years, the current yield of 6.1% is very attractive.

Even better, this high yield is well supported by free cash flow. Over the past 12 months, AT&T has generated $25.4 billion in free cash flow. The company has paid out $14.1 billion in dividends, for a free cash flow payout ratio of just 56%. This makes AT&T’s dividend very safe.

Best Bert and Lanny Stock #2: Cardinal Health Inc. (CAH)

Cardinal Health is a drug distribution company that services more than 24,000 United States pharmacies and more than 85% of the nation’s hospitals. The drug distribution industry is dominated by three companies: Cardinal Health, McKesson (MKC) and AmerisourceBergen (ABC). Cardinal Health’s size and market share give it an advantage in price negotiations.

Cardinal Health operates two business units: pharmaceutical and medical. While almost 90% of revenues come from the pharmaceutical segment, the medical segment offers higher margins and growth potential. The company has a market capitalization of $14 billion and had $137 billion in sales in fiscal 2018.

The company is also a Dividend Aristocrat, having increased its dividend for the past 32 years. Cardinal Health offers a yield of more than 4% at the moment, which is nearly double the stock’s 10-year average yield of 2.1%. Dividends have compounded at a rate of nearly 12% over the last 10 years, though the company gave investors just a 1% increase for the July 15th payment.

Cardinal Health’s capital investments are very minimal, so almost every dollar that the company produces from operating activities translates to free cash flow. Over the last year, Cardinal Health has generated $2.4 billion in free cash flow while paying out $580 million in dividends. This equates to a free cash flow payout ratio of just 24%. This is the lowest dividend payout ratios on this list.

Best Bert and Lanny Stock #3: Caterpillar Inc. (CAT)

Over the last nearly 100 years, Caterpillar has become the world’s leading manufacturer of construction and mining equipment. The company also manufactures diesel and natural gas engines, industrial gas turbines and diesel-electric locomotives. Caterpillar produced $45 billion in sales last year and has a current market capitalization of $80 billion.

The trade war between the U.S. and China has weighed on shares of Caterpillar. Though the company only receives about 10% of revenues from China, the stock has increased less than 12% year-to-date. This is well behind the S&P 500’s return of more than 20%.

This lack of capital gains has allowed the stock to yield more than 3% for much of this year. Income investors will be happy to note that Caterpillar increased its dividend 20% for the upcoming August 20th payment. This is the largest dividend increase in the company’s history and nearly triple the average annual raise over the last decade.

Caterpillar can offer such an uncharacteristic increase because its dividend is well covered by free cash flow. The company’s free cash flow totaled more than $4 billion over the last year. During this period of time, Caterpillar paid out $2 billion in dividends, for a payout ratio of just 50%. The company has now increased its dividend for 26 years and is one of the newest members to the Dividend Aristocrats index.

Best Bert and Lanny Stock #4: CVS Health Corporation (CVS)

CVS Health Corporation is an integrated healthcare services provider that operates a pharmaceutical services business. The company also operates the largest chain of pharmacies in the U.S. CVS Health Corporation operates more than 9,700 retail locations, 1,100 medical clinics and services more than 90 million plan members every year. The company has a market capitalization of $75 billion today and produced $194 billion in revenues in 2018.

CVS Health Corporation completed its acquisition of health insurer Aetna in November of 2018. The company had to use $45 billion in new debt and $21 billion in new equity to fund the transaction. CVS Health Corporation also had to pause its dividend growth due to this purchase.

This pause in dividend growth makes CVS Health Corporation the only company on this list that isn’t currently growing its dividend. Prior to this, the company had increased its dividend for 14 years.

Investors should note that the company did not cut its dividend after acquiring Aetna. CVS Health Corporation was able to maintain its dividend due to its sizeable cash flows. The company has generated $6.2 billion in free cash flow over the last 12 months. CVS Health Corporation paid out $2.3 billion in dividends over this period of time. This means that the company’s dividend consumed just 37% of free cash flow.

Best Bert and Lanny Stock #5: WestRock Co. (WRK)

WestRock is a leading provider of paper and packaging solutions. The current form of the company was created in a July 2015 merger of Rock-Tenn and Mead-Westvaco. WestRock has a market capitalization of $9.2 billion, with annual revenues of $16.3 billion in fiscal 2018. The company has two segments: the corrugated packaging segment, which contributes 55% of revenues, and the consumer packaging segment, which accounts for 45% of revenues.

On November 3rd, 2018, WestRock completed its purchase of KapStone Pape. This acquisition will increase the company’s product offerings and geographic diversity. Increases in prices and synergies related to the KapStone purchase are likely to help the company improve its free cash flow.

WestRock’s free cash flow over the last year was $1.15 billion while the company paid out $455 million in dividends over this same time period. This means that WestRock’s dividend payout ratio was just 39%. The stock’s current yield is 4.9%. For context, since the merger in 2015, WestRock has an average dividend payout ratio of 43% and an average yield of 2.5%.

Final Thoughts

AT&T, Cardinal Health, Caterpillar, CVS Health Corporation and WestRock all offer yields that are well above the 1.9% average yield of the S&P 500. Each company on this list has a free cash flow payout ratio below 60%. This gives each company ample room to continue to pay and raise its dividend even in the event of a downturn of its business.

Investors looking for higher yields that are likely safe are encouraged to consider any of these names for purchase.

I am long T, CVS