Microsoft, AT&T and Intel Are Strong Buys for Dividends and Safety

NEW YORK (TheStreet) -- The market appears to be at a standstill, waiting for some catalyst to send stock prices higher. But like the bogeyman, there's also the constant fear of a 5% to 10% pullback. It's "right around the corner," prognosticators claim.

Still, not every stock will be affected if or when a meaningful market pullback emerges. In that vein, in Microsoft  (MSFT), AT&T  (T) and Intel  (INTC) are three stocks to buy and hold for the long term.

Aside from paying solid dividends, all three companies are solid picks to buy on any dip, allowing investors to create a valuable nest egg they can retire on. Better still, they're trading at cheap valuation relative to their future earnings potential. Let's take a look at each one, starting with the world's largest software company.

MSFT Dividend Yield (TTM) Chart
MSFT Dividend Yield (TTM) data by YCharts

After surprising the market in 2014, posting stock gains of 24%, Redmond, Wash.-based Microsoft has been a relative disappointment so far in 2015, delivering flat gains against 2% returns for the S&P 500  (SPX). Still, the Dow component, which pays a 31-cent quarterly dividend that yields 2.70% annually, remains a compelling buy at this level.

For one thing, this is not the same Microsoft of the 1990s. Better still, new CEO Satya Nadella has helped the market forget the lost decade under former CEO Steve Ballmer. While declining sales in personal computers remain an overhang, Microsoft is growing less reliant on PC sales, as evidenced by the strong growth in its commercial cloud business, which has delivered 100% year-over-year growth for six straight quarters.

Sure, cloud still remain a small portion of its total revenue. Microsoft's Windows and Office businesses continue to carry the bulk of the weight. But that doesn't mean it will remain that way indefinitely. Plus, with Microsoft having confirmed M&A interest with cloud giant Salesforce.com  (CRM), Microsoft is demonstrating how serious it is about establishing a leadership position in the cloud.

The shares have a consensus buy rating and Microsoft's earnings are expected to grow at a 10% annual rate of in the next five years. Given how aggressive Microsoft is pushing its cloud strategy, these growth estimates and its average analyst 12-month price target of $50 -- suggesting 8% gains -- look conservative. All told, Mr. Softy looks hungry. Investors looking for strong dividend payer that is trading at a cheap multiple (price to earnings ratio of 19 versus 21 for the S&P 500) should pile into MSFT stock.

Like Microsoft, wireless communications giant AT&T has many qualities deserving of entry into any portfolio, starting with its quarterly dividend of 47 cents per share, yielding 5.40%. Sure, AT&T might have been unceremoniously booted out of the Dow Jones Industrial Average  (DJI). Had it remained, it would be the most generous dividend payer in the group.

As it stands, its dividend yield is more than twice the 2% yield paid out by the average company in the S&P 500. And that's where the safety of owing AT&T comes in. In other words, it doesn't/shouldn't matter as much if the market takes a wrong turn since investors can rely on a nice dividend check each quarter to help offset any weakness in the market.

It's not just about safety for AT&T. Sure, growth has been hard to come by recently. But its pending merger with DirecTV  (DTV) along with its recent acquisition of Nextel Mexico gives shareholders a lot of reasons to be optimistic about AT&T's future. Like Microsoft, AT&T -- by moving away from phone-subsidizing business model -- is looking to change how it has done things in the past.

AT&T wants to focus more on long-term customer contracts, which will give it a more predictable revenue stream. Plus, in Nextel Mexico, AT&T is buying an asset that will not only expand its international but achieve the business diversification the company craves. It will also create long-term value for shareholders. All told, at around $34 per share, there's still plenty of untapped value in AT&T stock, which looks poised to reach $40 in the next 12 months.

Of the three companies, Intel, which pays a 24-cent quarterly dividend, yielding 3% annually, looks the most attractive. With shares down around 12% on the year and trading at just 13 times earnings against a 21 P/E for the S&P 500, it's tough to ignore how cheap INTC stock has become. As one of the worst-performers in the Dow, it's more important to focus on why Intel shares have been beaten up. Declining PC sales is likely the biggest reason.

But like Microsoft, Intel is becoming less dependent on PCs. Revenue from its PC-related business makes now account for 50% of its sales, down from 80% in the past three years. The Internet-of-Things has become Intel's primary focus, prompting its deal last year for Basis Science, a company that specializes in wearable devices for health and wellness applications.

While it's still early to proclaim Intel the winner in IoT, with its recent deal for Altera Corp  (ALTR), Intel has created even more of an advantage when compared to rival Qualcomm  (QCOM) and Broadcom  (BRCM). Given Intel's recent investments in chips to power objects like door locks and thermostats -- the type that can be controlled through the internet, it's tough to not like Intel's chances against any rival.

Even when factoring out any potential advantage in IoT, Intel still looks like no-brainer at this level. The stock has a consensus "Buy" rating with an average analyst 12-month price target of $36 from current level of around $31. This suggests 15% gains from current levels.

Coupled with the stock already down more than 13%, Intel will likely avoid any further punishment if the market takes the wrong turn. In other words, Intel offers tons of value for relatively minimal risk.

This article is commentary by an independent contributor. At the time of publication, the author held no shares in any of the stocks mentioned.

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