Most stocks that pay dividends have had a rough time over the past few years. Their prices have lagged behind stocks of companies that focus on fast growth but don’t pay dividends…and one dividend-paying category—utility stocks—even lost 4.2% in 2015 through December 24. Many investors fear that dividend-paying stocks will continue to lag over the next several years as interest rates rise because investors will be able to get higher yields elsewhere.
But top stock picker John Buckingham says that investors who are scared away from dividend-paying stocks will be missing some great opportunities.
Rates Won’t Soar, Profits Will Jump
Wary investors will begin to realize that profits for certain dividend-paying companies with beaten-down stocks will jump as the economy strengthens…that growth stocks have become way overpriced…and that interest rates won’t rise as sharply as many investors expect. In fact, dividend-paying stocks have done well during past periods of slowly rising interest rates.
If you are convinced that interest rates are going to skyrocket, you shouldn’t invest in dividend-paying stocks. But you’ll be proved wrong about rates. Here’s why: The Federal Reserve has pledged to push up rates slowly and methodically. It can’t afford to do otherwise. A rapid rise in interest rates would derail the US’s modest economic growth. Soaring rates could also cause an already strong US dollar to rise even more against foreign currencies, hurting US exports. And with the core annual inflation rate at 1.3% as of November as measured by the Personal Consumption Expenditures Price Index, compared with the Fed’s 2% target, there’s little chance that the Fed will need to raise rates in order to slow rising consumer prices. Even with moderately rising interest rates, not every dividend-paying stock will shine. Here are characteristics I look for to find attractive dividend-payers…
Safe, growing dividends. This means that a company’s underlying cash flow should be robust enough to allow it to avoid cutting dividends and even to keep raising them.
Market dominance. The firm should be among the leaders in the industries in which it competes and have a sustainable competitive edge such as powerful brand recognition and/or patented technology.
Sector variety. Don’t limit your holdings to traditional dividend-paying sectors such as old-line telecommunications or utilities. Many technology, health-care, consumer-goods and industrial companies have steady earnings and offer generous dividends.
My Favorite Dividend-Payers
The following 10 stocks could work together as the income-producing part of a diversified equity portfolio, or you could choose some of them individually to round out your portfolio. They meet the above criteria…are attractively priced…and recently had an average yield of 3.3%, compared with 2.3% for a 10-year US Treasury bond.
Duke Energy (DUK). The nation’s largest provider of electricity has paid quarterly dividends for 88 consecutive years. Duke should see improving profits over the next decade because it has been granted favorable rate increases by regulators in its key markets in Florida and the Carolinas. Recent yield: 4.5%. Recent share price: $72.
Eaton PLC (ETN). This former truck-transmission manufacturer has reinvented itself as a producer of energy-efficient products and services ranging from hydraulic systems for aircraft to electrical components for data centers. It has relocated its headquarters to Ireland, which charges a much lower corporate tax rate than the US—part of a controversial trend. Recent yield: 4.1%. Recent share price: $53.28.
Fifth Third Bancorp (FITB). This financial services company was badly hurt during the 2008–2009 financial crisis but has become one of the best turnaround stories in banking. Now solidly profitable, it operates about 1,300 locations with strong market positions in Ohio, Michigan and Illinois. Most investors overlook the bank’s lucrative, multibillion-dollar stake in Vantiv, a fast-growing digital-payments processor that it spun off several years ago. Recent yield: 2.5%. Recent share price: $20.46.
General Motors (GM). GM still carries a stigma due to its 2009 bankruptcy and its faulty ignition switches linked to at least 399 deaths and injuries. It has vowed to change its culture and seems to be doing so…it generated $5 billion in free cash flow over the past 12 months…and its cars have greatly improved in quality and appeal. Warren Buffett sharply increased Berkshire Hathaway’s investment in GM in the third quarter of 2015. Recent yield: 4%. Recent share price: $34.78.
Gilead Sciences (GILD). Biotech companies probably don’t come to mind when you’re looking for dividends. But Gilead, which initiated its first quarterly payout in June 2015, is a stable blue chip. It has $18 billion in cash and manufactures some of the leading drugs for the treatment of HIV and hepatitis C. Management is committed to raising its dividend substantially in the coming years. Recent yield: 1.3%. Recent share price: $103.14.
International Business Machines (IBM). Many investors worry that this 104-year-old company is a dinosaur, selling “mainframe” computers that can’t compete with tech rivals that offer data-storage and system-management services over the Internet. But IBM is moving into major new businesses including customized analytic software that processes huge amounts of data. Recent yield: 3.6%. Recent share price: $138.54.
Kohl’s Corp. (KSS). Traditional apparel retailers face major challenges from online retailers. But Kohl’s, which operates 1,166 stores across 49 states that appeal to value-conscious customers, will be one of the healthier survivors. In addition to a strong balance sheet and steady sales, it has rolled out a promising new outlet-store concept—Off-Aisle sells merchandise returned to Kohl’s stores and to its e-commerce operation at discounts up to 90%. Recent yield: 3.8%. Recent share price: $47.40.
MDC Holdings (MDC). This major home builder and mortgage lender targets first-time buyers and first-time move-up buyers through its subsidiary Richmond American Homes. It has a billion-dollar backlog of homes being built and is well-positioned to benefit from rising home prices and job growth in the western US. Recent yield: 3.9%. Recent share price: $25.78.
Norfolk Southern (NSC). One of the largest railroad operators in North America, Norfolk Southern dominates train freight shipments in the eastern US and has the highest profit margin in the US railroad industry. The company, which recently rebuffed a $30 billion takeover bid from Canadian Pacific Railway, has been hurt by the decline in domestic coal shipments. But once commodity prices rebound, the company will thrive. Recent yield: 2.7%. Recent share price: $86.85.
Prudential Financial (PRU). The second-largest US life insurance provider has revamped its operations since the global financial crisis. It relies less on aggressive investment of its premiums to generate revenue and more on lucrative new business niches. Recent yield: 3%. Recent share price: $82.96.