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All Contents © 2020The Kiplinger Washington Editors
By Harriet Lefton, Contributing Writer
| May 9, 2018
In this current choppy climate, dividend stocks provide a welcome and profitable way to hedge your bets. Bank of America tells investors that dividends can help offset losses in weak markets, “and over long-time horizons, stocks with a history of increasing their dividend each year have also produced higher returns with considerably less risk than non-dividend-paying stocks.”
We recently utilized TipRanks’ stock screener to pinpoint the most compelling dividend opportunities right now. These are dividend stocks that boast wide support from the Street, and sizeable upside potential to boot.
All the stocks on this list share a “Strong Buy” analyst consensus based only on ratings from the last three months. In other words, sentiment isn’t just strong – it’s recent, and thus based on the most up-to-date information these analysts can have.
The following seven dividend stocks offer a one-two punch of income and return potential. Let’s take a closer look:
Data is as of May 8, 2018. Consensus price targets and ratings based on “Best Performing” analysts. Click on ticker-symbol links in each slide for current share prices and more.
Market value: $111.5 billion
Dividend yield: 2.8%
TipRanks consensus price target: $198 (18% upside potential)
TipRanks consensus rating: Strong Buy
Multinational biopharma company Amgen (AMGN, $168.49) pays out nearly 3% on a quarterly $1.32 payment – about 15% better than what it was paying just a year ago.
Top Cowen & Co analyst Eric Schmidt (view Schmidt’s TipRanks profile) has just released a report calling shares “undervalued.” He blames lack of clarity and competitive threats for the current “discounted” share price of just 12x his new 2018 EPS.
But Schmidt believes these competitive pressures will wane. He is upbeat on AMGN following the company’s strong first-quarter report, led by growth from newer franchises. The most notable outperformer comes from high-cholesterol drug Repatha; this was Repatha’s best quarter (+26% sequentially, +151% year-over-year) since launch. And looking forward, management reiterated its optimism for a bright future driven by an expanded label, updated treatment guidelines, and improved reimbursement.
“We view Q1 as one of Amgen’s better financial reports in some time, and believe continued financial engineering coupled with efforts to extend some of the company’s more mature franchises should position Amgen to (once again) beat nearer-term financial expectations” Schmidt says.
Schmidt’s ratings on Amgen have a solid track record, with a 70% success rate and 9.6% average return per recommendation. At the moment, this Top 25 analyst sees AMGN spiking to $204, or 21% higher from current prices.
Market value: $241.9 billion
Dividend yield: 3.4%
TipRanks consensus price target: $145 (13% upside potential)
Oil and gas giant Chevron (CVX, $126.57) is a premium dividend stock in the energy space. Not only does it offer a nice yield of more than 3%, but the company has improved its dividend without interruption for 32 years, even during the energy plunge of 2014-15. That qualifies it for inclusion among the Dividend Aristocrats, a group of elite S&P 500 companies with 25-plus years of rising dividends.
Oil prices have been on the rise of late, helping CVX shares rebound by 14% over the past three months. Brent crude, the international benchmark, has peaked above $75 a barrel for the first time in four years, while West Texas Intermediate has cleared the $70 mark. As one of the world’s biggest oil producers, CVX has outsized exposure to oil fluctuations.
RBC Capital’s Biraj Borkhataria (view Borkhataria’s TipRanks profile) explains: “Higher commodity prices are obviously a catalyst for any commodity producer, but Chevron would likely benefit more than peers given its high operating leverage, especially with its liquids-heavy exposure.”
Top Barclays analyst Paul Cheng (view Cheng’s TipRanks profile) goes a step further, telling investors not only to turn to CVX, but to leave rival Exxon Mobil (XOM) behind. “(Chevron’s) positive first-quarter result was an encouraging sign that Chevron is executing well and we remain constructive on the company’s long-term, shareholder-friendly plan,” he says. This is in “in stark contrast to an uninspiring print by Exxon.”
Market value: $104.6 billion
Dividend yield: 4.8%
TipRanks consensus price target: $76 (35% upside potential)
Altria (MO, $55.27) is the parent company of some of the world’s most famous tobacco brands, including Marlboro, Virginia Slims, Parliament and Merit.
“MO offers consumer packaged goods (CPG) investors a scarce combination of positive pricing, minimal exposure to rising costs and insulation from the retail evolution that is plaguing the broader CPG space” cheers RBC Capital analyst Nik Modi (view Modi’s TipRanks profile). He has just upgraded MO from Hold to Buy with a $65 price target.
Modi explains that he has been cautious on Altria shares over the past 18 months because of a combination of fundamental and macro concerns. But now the tide is turning, and “while some of these issues still persist,” Modi says he can no longer justify staying on the sidelines given the current low valuation. Indeed, at current prices, MO shares trade at roughly 13 times earnings.
Altria’s last dividend hike was a 6% improvement to 70 cents quarterly that pushes its current yield to nearly 5% – one of the highest among the dividend stocks on this list, and well above consumer staples’ average of about 2%.
Market value: $71.6 billion
Dividend yield: 4.2%
TipRanks consensus price target: $75 (28% upside potential)
Ketchup creator Kraft Heinz (KHC, $58.76), which is partially backed by Warren Buffett’s Berkshire Hathaway (BRK.B), is witnessing soft spending by U.S. shoppers along with rapid changes in consumer preferences. But an encouraging first-quarter report revealed that change is afoot, and shares look ready to reverse some of these losses. Indeed, on earning results, shares leapt 4%.
Top Jefferies analyst Akshay Jagdale (view Jagdale’s TipRanks profile) predicts upside potential of 38% from current levels. He explains: “Management continues to expect a meaningful improvement in U.S. sales growth trends in (the second half of 2018) as certain headwinds that impacted recent results are expected to fade and/or become tailwinds … while innovation is also expected to be a bigger contributor.”
Moreover, Jagdale believes the market has so far underestimated the company’s sizeable cash generation. Over the next five years, Kraft’s free cash flow margins should expand to $10 billion to $12 billion after dividends. That’s good news for shareholders because “in the absence of a large accretive acquisition, we expect cash allocation to prioritize continued deleveraging, dividend increase and potentially share buybacks over time.”
This “strong buy” dividend stock pays a relatively high yield of 4.2%.
Market value: $152.8 billion
TipRanks consensus price target: $70 (22% upside potential)
TipRanks consensus rating: Moderate Buy*
Merck (MRK, $56.76), one of the world’s largest pharmaceutical companies, delivered more than $40 billion in revenues last year. Its top-selling drug right now in terms of revenue is the fast-growing Keytruda, an immune modulator for the treatment of certain types of cancer. And Keytruda doesn’t come cheap – a treatment for one patient for one year costs about $150,000.
“Merck had a good 1Q18 with strong ex-US performance of key core franchises (Keytruda, Januvia and Gardasil) that we believe deserved more credit” writes BMO Capital’s Alex Arfaei (view Arfaei’s TipRanks profile). He believes its recent earnings beat reflects Merck’s strong commercial execution and its excellent R&D. Looking forward, he forecasts Keytruda sales of roughly $7 billion in 2018, ramping up to about $13 billion in multiple indications by 2026.
Keytruda is a “pipeline in a drug” Arfaei writes.
Meanwhile, top Goldman Sachs analyst Jami Rubin (view Rubin’s TipRanks profile) has also just upgraded MRK. In fact, he made the bold move of adding the stock to the firm’s Conviction Buy List on April 23, giving it a new $73 price target.
Merck, like many other large pharma stocks, boasts a nice yield of more than 3%, and has improved the payout for six consecutive years.
* Merck garners a consensus “Strong Buy” from TipRanks-designated “Top” advisers.
Courtesy Matt Dempsey via Flickr
Market value: $3.7 billion
Distribution yield: 5.3%*
TipRanks consensus price target: $78 (17% upside potential)
Theme park giant Cedar Fair LP (FUN, $65.62) is in the business of fun. And so far, that business seems to be working; shares are up nearly 60% over the past five years.
But Cedar Fair also is a strong income play. This company is structured as a master limited partnership (MLP), which means it actually pays distributions, which are similar to dividends but have different tax considerations. At the moment, its yield is more than 5%.
Top B. Riley FBR analyst (view Crockett’s TipRanks profile) accepts that 2017 results were “flattened” by sub-par weather, but he “continues to see Cedar Fair as an appealing combination of growth and yield.” With this in mind, he retains his buy rating on the stock with a bullish $79 price target (20% upside potential). He continues to see mid-single-digit revenue growth as “very reasonable” given major new attractions and rides and free season passes for very young children.
Interestingly, Crockett’s investment thesis is partly based on a bullish outlook for the theme park space in general. For Crockett, they represent “consumer favoring experiences” that are largely immune to internet threats. Given the limited construction of meaningful new theme parks in the U.S. that could pose a serious threat to Cedar Fair, FUN has a promising longer-term outlook.
*Master limited partnerships pay distributions, which are similar to dividends, but are treated as tax-deferred returns of capital and require different paperwork come tax time.
Market value: $32 billion
Dividend yield: 1%
TipRanks consensus price target: $27 (42% upside potential)
Hot stock Lam Research (LRCX, $194.86) is a pure play on memory-chip manufacturing tools. It’s also not the highest yielder at just 1% currently, but that could certainly change over the years ahead.
At an “upbeat” analyst’s day on March 6, management announced an expanded dividend and share buyback program. “As we expected from management’s previous remarks, cash return was addressed with a very significant 120% dividend increase to $1.10/quarter and a $2B (stock buyback) addition on the heels of 11/17’s $2B move” B. Riley FBR’s Craig Ellis (view Ellis’ TipRanks profile) wrote on March 7. The company now has a goal of returning at least 50 percent of free cash flow over the next five years.
TipRanks’ No. 2-ranked analyst, Ellis sees prices hitting $285- indicating upside potential of over 45%. And he isn’t alone. LRCX boasts 100% support from the Street with no recent hold or sell ratings. No fewer than 12 analysts have published buy ratings on the stock in the last three months. The general consensus: Any pullback in the stock price should be considered a “long-term buying opportunity.”
Harriet Lefton is head of content at TipRanks, a comprehensive investing tool that tracks more than 4,700 Wall Street analysts as well as hedge funds and insiders. You can find more of TipRanks’ stock insights here.