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All Contents © 2019The Kiplinger Washington Editors
By Will Ashworth
| May 31, 2017
The typical income investor who is retired needs dividend stocks that yield at least 3.5% to live off of them. Unfortunately, the average S&P 500 stock yields just 1.9%.
Care to guess how many S&P 500 stocks pay a dividend?
Exactly 418, or 83% of the index. Of those, 66 have a current dividend yield of 3.5% or greater.
With the list of possibilities whittled down to just 13% of the S&P 500 stocks, my job is cut out for me. That’s especially true when you consider this list of S&P 500 stocks to buy now represents one out of every six stocks in the index paying the required 3.5% yield.
To keep the portfolio of stocks as diversified as possible, I’ll make sure to include one stock from each sector plus two wild cards that I think have extraordinary capital appreciation potential in addition to their ability to pay a living wage.
Prices and data are from the original InvestorPlace story published on May 25, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Sector: Basic materials
The last time I recommended LyondellBasell Industries NV was in October 2016. At the time, the Houston-based chemical company’s stock wasn’t doing all that well, down 5% through 10 months of the year.
Fast forward seven months and LYB stock has barely budged, up less than 1% since October. Throw in the 4.2% dividend yield, and we’re talking about a 6% total return.
LyondellBasell announced its Q1 2017 earnings at the end of April, and they were a mixed bag. However, over the trailing 12 months, it generated adjusted EBITDA of $6.4 billion, $4.9 billion in cash from operations and $2.8 billion in free cash flow.
On the dividend front, the company announced May 24 that it’s raising the quarterly dividend to 90 cents, bumping the current yield to 4.5%.
Sector: Consumer goods
I’m a big believer that the cigarette companies are going to insert their way into the burgeoning cannabis business in the next 2-3 years.
At the top of that list is Philip Morris International Inc., who I see using this as its re-entry into the U.S., a market that it left in 2008 when it was spun off by Altria Group Inc. (MO).
Let’s face it; cigarette companies are already massive free-cash-flow-generating machines; cannabis would only ramp that up considerably.
Recently, Philip Morris said it would spend $337 million to convert a Greek plant so that it could produce 20 billion more heatsticks each year for use in its IQOS device. Soon, burning tobacco will be a thing of the past.
Apparently, the company is selling a lot of Marlboro heatsticks in Japan, making it the biggest growth area for PM.
Ventas, Inc. is one of America’s leading owners of senior housing. The REIT (real estate investment trust) also happens to be run by one of the best CEOs in the country — male or female.
In October, I recommended Ventas as one the three best female-led stocks to buy now. I liked the company not only because of the aging demographic but also because of CEO Debra Cafaro, one of the top-50 Best Performing CEOs in the world as named by Harvard Business Review.
“In this environment, we continue to believe it's most important for Ventas to remain financially strong and liquid,” Cafaro said at the end of April in its Q1 2017 earnings call. “[And] continue to elevate the already outstanding quality of our portfolio, make selective investments in our future growth and keep our team together and focused on creating value for customers and shareholders.”
While its stock hasn’t moved much in the past year, up just 2%, I see good things ahead for the Chicago-based company.
Sector: Health care
I’ve never really been a fan of Pfizer Inc. I just never could get excited about its business compared to some of its peers in the drug manufacturing field.
However, anytime you can get a 4% yield on PFE stock you have to consider owning it.
Yes, it has underperformed both its drug manufacturing peers and the S&P 500 in almost any period over the last 15 years, but it’s possible that reversion to the mean will deliver above-average returns over the next 15 years.
Here’s what we do know about Pfizer.
It had $13.9 billion in free cash flow in fiscal 2016, a healthy 26.3% of its revenue. It currently trades at 12.5 times cash flow; by comparison, Novartis AG (ADR) (NVS), its next biggest peer by market cap, trades at 16.3 times cash flow.
Pfizer is cheap, maybe perpetually so, but eventually that free cash flow generation has got to create shareholder value.
Frederick Weyerhaeuser, the founder of Weyerhaeuser Co., was worth $85 billion in today’s dollars, an astronomical sum that unfortunately did not make it to 2017.
It’s still an attractive business that’s more than just the largest private owner of timberland in the U.S. It also develops some of its landholdings into real estate communities, manufactures building products and invests in energy-related projects across the country.
Back in 2013, I recommended investors consider WY stock because its homebuilding business generated almost $900 million in revenue. The company decided to spin off that business into TRI Pointe Group Inc. (TPH) which would be able to focus entirely on homebuilding. Weyerhaeuser received $700 million in cash and $2 billion in TPH stock in the deal which went to WY shareholders on a tax-free basis.
Since the deal’s completion in July 2014, WY stock’s delivered mediocre performance. However, year to date, it’s up 10.3%.
It’s no secret that department stores aren’t doing well these days. It seems there’s a daily dose of bad news in the media, including the prognosis of its demise.
While that might be the case for some department stores, Nordstrom, Inc. is still doing relatively well.
Recently it gained notoriety in the press for selling a pair of jeans for $425 that included fake mud to give them the working man look. Unfortunately, the concept went over like a lead balloon on social media.
While full-line stores are facing a challenging retail environment, Nordstrom’s off-price Rack stores and its online business are doing very well. In the first quarter, Nordstrom Rack same-store sales grew 2.3% year over year, and online sales increased by double digits and now account for 24% of its overall revenue.
Trading in the low $40s and yielding 3.5%, JWN stock is a bargain historically speaking.
Earnings growth drives share prices higher. Sure, dividend growth helps, but nothing can replace good old-fashioned earnings growth.
In its first quarter report ended April 1, 2017, Garmin Ltd. demonstrated very clearly it understands this basic fundamental of investing.
While revenues grew grew 2% overall to $639 million, gross margins increased by 380 basis points to 58.3%, operating margins increased 160 basis points to 18.2% and its net income, excluding a $169 million income tax benefit, grew 7% year over year to $99 million.
The company finished the quarter with $1.1 billion in cash and securities and no long-term debt. With GRMN stock around $52, it’s trading for nine times cash, a very attractive multiple.
Garmin isn’t going to be a home-run stock, but it should deliver decent returns over the next few years.
Nothing bores me more than writing or even thinking about utilities stocks, but income investors like the consistent dividends that they blow off, so any discussion about dividend stocks usually includes something about power generating companies.
PPL Corp. is a utility holding company based in Allentown, Pennsylvania. PPL stands for Pennsylvania Power and Light. The company got its start in 1920 when eight Pennsylvania utilities with 62 power plants merged into one company. Almost 100 years later, it’s still going strong.
PPL has 10.2 million customers in Pennsylvania, Kentucky and the UK. Its overseas business generating over 50% of the company’s 2016 operating earnings of $2.45.
The company expects to grow earnings by 5%-6% annually over the next four years with dividend growth of 4% annually over the same period.
Investing $16 billion in its energy infrastructure over the next five years, PPL just continues to get stronger. It’s not a glamorous stock, but it will get the job done.
When an S&P 500 stock has a dividend yield of 5% or higher, there’s usually an unpleasant explanation attached. Mattel, Inc. is no exception.
MAT stock is down 19.8% year to date. Over the last three years, it has got an annualized total return of -11.2%, almost the mirror image on the downside to the S&P 500.
Mattel’s net income in 2016 was $318 million, one-third what it was just three years earlier. That was so weak, the company board hired former Google Americas President Margo Georgiadis to inject some life into its flagging sales.
The company is likely to cut its dividend from its current yield in half to around 2%-3%, reinvesting the savings. Along with the dividend cut, Mattel’s expected to announce a strategic plan at its June 14 analyst day.
Who knows, maybe Mattel will merge with Hasbro, Inc. (HAS)?
What we do know is that MAT stock hasn’t traded at these levels since 2010.
This final pick is a real wild card.
Leslie Wexner’s in for the fight of his life as L Brands Inc. appears to have completely gone off the rails. Victoria’s Secret, once the company’s major breadwinner, is hemorrhaging business.
On May 17, L Brands announced its first-quarter earnings. Revenues declined by 7% to $2.4 billion with same-store sales at Victoria’s Secret falling 12% over the same period a year earlier.
On the earnings front, operating profits declined 35% year over year to $209.2 million. Owning this stock isn’t for the faint of heart right now.
Despite analysts having a contrary opinion of LB stock, I don’t see its 2017 outlook for earnings of $3.10 per share to as high as $3.40 as awful despite the fact that’s much lower than the $3.98 per share it generated in fiscal 2017.
“A lot of apparel retailers have been getting it wrong. Yes, there are different channels of selling. Yes, you have to have modern technology,” said Wexner May 18 at its annual meeting. “But at the end of the day, you have either good or bad merchandise.
“Fundamentally, the merchandise has to be good — and our merchandise is getting better and better.”
If anyone can fix what ails Victoria’s Secret, it’s Les Wexner.
This article is from Will Ashworth of InvestorPlace. At the time this article was published, he held none of the aforementioned securities.
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