Fund manager Michael Morey beat the bear market. Over the past year, Morey’s Integrity Dividend Harvest Fund (IDIVX) has managed to return 1.4% versus an 17% loss for the S&P 500 index.* His secret: Picking winning dividend stocks—not sleepy utilities for widows and retirees. He aims for high-quality companies at bargain prices that can provide reliable dividend payments in any environment.
In recent years, dividend investing has been ignored as investors chased fast-growing companies that could promise profits only sometime in the future. Now, with high inflation and a looming recession, Wall Street is once again prizing stocks that have strong earnings and rock-solid balance sheets.
Morey says that even if you don’t need the income, dividend stocks can help long-term investors sleep better at night, especially if the bear market persists…and these stocks may continue to outperform growth stocks in the coming years.
Bottom Line Personal asked Morey how he selects dividend stocks and which are his favorites…
I was the son of a commodities trader, so I learned that investing was about controlling risk, ignoring hype, having patience and maintaining a disciplined process. I look for four criteria when screening for stocks, regardless of the environment. Result: I don’t have to guess when the Fed will stop hiking interest rates…whether we are in a recession…or whether the market has hit bottom. The criteria…
Market capitalization of at least $10 billion or more. Large companies like this generally are more stable in rough markets. They typically earn revenues from a diversified lineup of products and services and have strong balance sheets.
Beta of 0.75 or lower. Beta measures how closely a stock has risen and fallen over long periods versus the S&P 500 Index. A beta of 1.0 indicates that a stock’s price fluctuations equal the index’s volatility. The stocks I own have an average beta of 0.75, so I expect my fund to fall about 25% less than the S&P 500 in down markets.
Dividend yield at least 0.5 percentage points higher than the S&P 500’s yield. Over time, reinvested dividend income can contribute to total return and is a more consistent source of investment return than capital appreciation. Dividend payments are an indicator of a company’s profitability.
Record of boosting dividends annually for at least 10 consecutive years. Companies that do this are committed to dividend payouts.
At least 80% of the Integrity Dividend Harvest Fund’s net assets are Tier 1 or Tier 2 companies—they meet at least three of the four criteria above. I focus on attractive valuations relative to long-term valuations and future earnings growth. I often find companies in defensive sectors such as utilities and consumer staples, but the bear market has offered opportunities for undervalued dividend payers in areas that I haven’t considered in recent years…
Energy may still have plenty of room to run. Despite their huge run-up in 2022, oil and gas stocks should continue to do well because they still trade at the cheapest valuations of any sector in the S&P 500, and oil prices should remain high for the next three to five years. Reasons: Supply-and-demand imbalances and low global inventories. Oil companies have reduced their investments in exploration and production. Even if they start allocating more resources, it will take time for new supply to reach markets. My favorite energy stocks now…
Coterra Energy (CTRA) operates shale-drilling sites on nearly 600,000 acres in the US. With Europe desperately in need of alternatives to Russian natural gas, Coterra is positioned to benefit. Like many shale drillers, it has shown greater fiscal discipline in recent years, emphasizing shareholder payouts over rapid expansion and production. It has committed to buy back $1.25 billion of its own shares. Recent yield: 8.83%. Recent share price: $28.92.**
Exxon Mobil (XOM). The largest oil producer and refiner in the US saw its year-over-year earnings nearly quadruple in the second quarter of 2022. By 2027, it expects to double its earnings and cash flow from 2019 levels thanks to cost-saving efficiencies and new, high-margin oil fields. Exxon has doled out dividends every year since 1882 and raised them for 39 consecutive years. Recent yield: 3.5%. Recent share price: $100.62.
Think profitable tech…not sexy New Tech. Technology firms seem like an odd choice for a cautious dividend investor. But I have taken advantage of the sector’s extreme pullback this year by focusing on profitable tech stocks that have offered steady rather than fast growth. My favorite old tech stock now…
Broadcom (AVGO). The semiconductor chip maker, our second-largest holding, manufactures radio frequency filters and amplifiers for Apple and Samsung smartphones and connectivity chips for Wi-Fi and Bluetooth. I expect Broadcom to benefit as the country’s telecom infrastructure is upgraded to handle 5G speeds. It is using its massive cash flow to make acquisitions that will enhance stable growth, including the $61 billion purchase of software giant VMware, a specialist in cloud-management computing. The company has a consistent history of beat-and-raise quarterly reports and strong dividend growth. Recent yield: 3.77%. Recent share price: $435.37.
Turn to health-care stocks for a blend of defense and growth. Three out of our top 10 holdings are pharmaceutical companies. They do well in high-inflation, recessionary environments because they can pass along price increases to consumers and demand for health care doesn’t slack as economic growth slows. My favorite health-care stock now…
AbbVie (ABBV), one of the largest pharmaceutical companies, is the portfolio’s top holding. Investors are worried about the loss of profits when its big arthritis drug, Humira, loses patent protection next year. My take: AbbVie has launched two immunology drugs—Skyrizi and Rinvoq—with blockbuster potential, as well as the blood-cancer drug Imbruvica. It has a strong pipeline of about two dozen other drugs in late-stage clinical trials. AbbVie has raised its dividend payouts for 50 consecutive years. Recent yield: 3.91%. Recent share price: $144.41.
Hunt for bargain-priced consumer-defensive stocks with big dividend yields. Some investors don’t want to own tobacco companies. But these stocks should hold up especially well if the bear market persists or the US economic outlook darkens. While cigarette usage continues to fall in the US, tobacco companies have kept sales consistent and grow earnings with price hikes and other initiatives. Their stock prices look attractive now. My favorite consumer-defensive stock now…
Philip Morris International (PM) is one of the world’s largest tobacco makers with annual revenues of $30 billion. Demand for its brands such as Marlboro and Chesterfield doesn’t falter during economic uncertainty, and its pricing power has offset the decline in global cigarette usage. Meanwhile, it is positioning for the future with health-care and reduced-risk tobacco products. Revenues for its heat-not-burn tobacco sticks, IQOS, have soared 20% year-over-year. It acquired Fertin Pharma, which specializes in medicinal chewing gum and is awaiting approval to purchase Nordic tobacco giant Swedish Match. Recent yield: 5.96%. Recent share price: $85.57.
