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All Contents © 2019The Kiplinger Washington Editors
By Jeff Reeves
| November 2016
In an uncertain market there’s a lot to be said for having a firm foundation of dividend stocks for your portfolio. A good income play at a good price isn’t quite as sexy as a roaring momentum stock, but over the long-term, the reliable returns from dividends really add up.
Every investor needs to be biased toward income stocks right now — even if they are at or near retirement, and looking to take some risk off the table. After all, current yields are about 1.8% on T-Notes and just under 2.2% on investment-grade corporates.
Where else are you going to get income?
If you want stability, then well-priced dividend stocks will provide a great backbone for your portfolio in 2017. And if you’re looking for income, you have to remember that even conservative bond funds still have interest rate risk and could lose principal value if and when the Federal Reserve raises rates in the coming months.
In short, there’s no better place to put your money than dividend stocks right now. Here are nine great picks to consider:
2016 performance: -7% year-to-date (vs. S&P 500: +4%)
Market cap: $10 billion
Current yield: 7.4%
Seagate Technology PLC is one of the largest hard drive manufacturers in the world. Some investors are leery of a PC-focused business like Seagate, but while the stock has flopped considerably from its 2014 highs, it remains fairly valued with a forward price-to-earnings ratio of less than 10 and continues to hang tough in this mobile age.
That bargain P/E comes even as Seagate has rallied strongly lately. Shares of STX bottomed at under $20 in mid-2016 and have been steadily on the march through the second half of the year. That momentum bodes very well for 2017.
But more importantly, who cares if the lion’s share of the gains are behind us when Seagate is such an income powerhouse? STX is one of the biggest dividend plays on Wall Street, with its 63-cent payout each quarter equaling a roughly 7.4% yield right now. And since the dividend is about 68% of next year’s earnings, it is very secure and not at risk of a cut.
2016 performance: 13%
Market cap: $148 billion
Current yield: 3.4%
Cisco Systems, Inc. is not the tech powerhouse it once was, but value investors can still find a lot to like in this enterprise technology leader.
Chuck Robbins took over from longtime leader John Chambers as CEO in mid-2015, and he has already started reshaping the company to be more agile. Although revenue is only set to grow by single digits in 2017, earnings per share will jump 13%. This is in part thanks to efficiencies that include the painful decision to lay off 20% of its workforce this summer.
Furthermore, while top-line growth isn’t burning down the house, there is assuredly good growth ahead in the dividends of CSCO stock. Its payout has surged more than fourfold in five years, from just 6 cents a quarter in 2011 to 26 cents currently. Even now, the payouts are highly sustainable at less than half next year’s earnings.
Looking forward, Cisco continues to reshape its company via acquisitions including six deals in 2016 across everything from semiconductor designers to data center managers to cloud computing companies. This will position the company very nicely for success in the new year and beyond.
2016 performance: 24%
Market cap: $48 billion
Current yield: 3.7%
You may think it’s silly to consider any stock that has run up more than 20% in a year as a “value” play. But when you compare current pricing of Caterpillar Inc. versus highs of about $110 in 2011, 2012 and most recently in 2015, you can see why this company isn’t exactly going like gangbusters despite recent momentum.
The thing holding back CAT stock during the last few years has been commodity prices, of course. An ill-timed move into mining equipment via the 2011 acquisition of Bucyrus — at a massive premium, no less — has ruined the company’s performance since then. But it looks like we’ve hit a bottom in commodity prices as oil and gold have stabilized after long-term declines, and that bodes well for Caterpillar.
Investors piling in lately have noticed this, but more important is a 12-month target price target from Goldman Sachs at $112 — up big-time from a prior target of $76 that was long overdue for revision.
A 3.7% dividend and hopes of continued economic recovery could also help this heavy equipment company power even higher, but most important is the notion that the worst is over for CAT in terms of commodity prices and in terms of hangover from its snake-bitten 2011 buyout of Bucyrus.
Invest with confidence here now that the worst is behind Caterpillar and momentum has returned in 2016 … even if the company still isn’t quite back to where it was before.
2016 performance: 4%
Market cap: $250 billion
Current yield: 2.8%
It’s rough out there for many financial stocks lately, given the lack of confidence in the financial sector since the Great Recession and the increased scrutiny by regulators and politicians. But JPMorgan Chase & Co. continues to stand strong amid the headwinds, posting a string of better-than-expected earnings lately.
That’s admittedly thanks to cost-cutting measures, but it also helps that JPM remains the largest bank in America with over $2.3 trillion in total assets. And while JPM isn’t exactly known to be squeaky clean, recent trouble at Wells Fargo & Co (WFC) makes it look much more principled by comparison and could help both investor sentiment and consumer perceptions of the bank.
JPMorgan is one of the best-run operations out there, weathering the financial crisis better than its peers and quickly ramping back its dividend to an attractive 2.8% yield at current pricing even though that payout remains just about one third of total earnings. The 4-cent dividend increase in 2016 was an increase of more than 9%, and long-term value investors should expect to see another move like that in 2017.
Yes, JPM had a rough start to 2016, but it recently started to get its groove back and is once again challenging its previous 52-week highs. That could mean that a breakout soon in this financial stock.
Sector: Real estate
2016 performance: 19%
Market cap: $24 billion
Current yield: 4.4%
Ventas, Inc. is a real estate investment trust (REIT) that is capitalizing on the graying of America, and is one of the largest operators of senior living facilities in the U.S. VTR owns approximately 1,300 properties, ranging from skilled nursing facilities to specialty hospitals.
While the long-term trend lifting Ventas is powerful, you won’t have to wait years for the profits to transpire. VTR stock has outperformed nicely in 2016, and continues to power higher thanks to a great portfolio of properties and efficient operation.
Almost half of Ventas’ properties operate under the lucrative “triple net lease” model where tenants are responsible for paying real estate taxes, building insurance and maintenance. That’s a streamlined and cost-effective deal for the operator, and VTR investors have been paid back nicely via a 4.4% dividend fueled by these properties.
As baby boomers age and rely on facilities from companies like Ventas to keep them healthy and active, there will only be increased demand for these kind of services in the coming years. That demographic shift makes VTR all but a sure thing no matter what turmoil strikes Wall Street in the next year or so.
2016 performance: -10%
Market cap: $49 billion
Current yield: 6.3%
Spanish telecommunications giant Telefonica S.A. is not just a big player in Europe, but also in Latin America.
This emerging-market exposure has been a double-edged sword, though, because while it has allowed for big growth in some areas, it also has caused headaches of late. But as Latin American markets like Brazil and Argentina have put up significant outperformance since spring 2016, the future is once again bright for TEF stock.
Beyond the 2017 outlook, the longer-term prospects of emerging markets remain bright as growing middle class consumers increasingly turn to cell phones and mobile technology. And while Europe itself isn’t exactly going bananas, the economy on the continent has improved from the double-dip recession a few years ago. It’s certainly much more stable.
If you’re looking for growth, in all honesty, TEF isn’t going to really provide it. But with a big dividend and a fair price now that the telecom trades at just 12 times next year’s earnings, this pick is a great way to add an international flavor to your dividend stocks portfolio.
The dividend is huge, too, at 6.3%. And while foreign stocks like this have payouts that can be volatile and only pay twice a year instead of quarterly — and while you have to consider foreign taxes on dividends as well — buy-and-hold investors will assuredly be well-served by this stable European telecom amid an otherwise uncertain outlook for 2017.
2016 performance: 8%
Market cap: $5 billion
Current yield: 9.9%
Business development companies (BDCs) like Ares Capital Corporation are popular options for investors chasing yield because these publicly traded stocks operate much like investment funds. When you buy in, you are buying their portfolio of equity and debt investments.
Since ARCC has a close relationship with private equity giant Ares Management LP (ARES), that means ready-made access to financing in some big-ticket deals. And while there is always risk in these loans, both Q1 and Q2 numbers from Ares showed a marked improvement in non-performing loans compared with previous quarters.
An additional plus is that Ares Capital is savvy about buying up smaller and sometimes even bigger rivals, consolidating power while debt is relatively cheap in an effort to maximize its control of the market.
Shares probably won’t move much, judging by the rangebound nature of this stock since 2010 after a snap-back from the Great Recession bottom. But with a yield approaching double digits, who needs share appreciation from ARCC when you can get huge dividend checks each quarter?
2016 performance: 12%
Market cap: $195 billion
Current yield: 4.1%
Chevron Corporation is up 13% in 2016, fighting back nicely from its spring lows when we saw crude oil prices bottom at under $27. But while Chevron has been riding a recovery in oil in 2016, its outlook for 2017 remains bright.
That’s in part because OPEC continues to talk about production cuts in the coming months and into the New Year, but also because of serious restructuring that included laying off 12% of Chevron’s workforce in the wake of lower oil prices. This OPEC move will keep oil prices firm, and the efficiencies will keep Chevron’s costs low going forward.
CVX also is in the middle of a large asset sale to strengthen its balance sheet and improve its margins in the era of $50-per-barrel oil. In 2015, Chevron sold $5.7 billion in assets and its goal for 2016 and into 2017 $5 billion to $10 billion in additional cash.
This will not only support the business, but also the company’s nice 4.1% dividend yield.
CVX is not just one of the best performers in the Dow with a double-digit return in 2016, but also one of the highest-yielding with this kind of yield. Chevron also just kept up its streak of consecutive annual dividend hikes by raising its payout, albeit by a penny per share.
Sector: Consumer discretionary
2016 performance: 16%
Market cap: $11 billion
Current yield: 4.8%
Surprised to see toymaker Mattel, Inc. on this list? Don’t be — because since Mattel began paying dividends regularly in 2011, it has boosted payouts 65% in just five years.
Yes, MAT stock fell on hard times in 2014 and 2015 as it plummeted over 50% peak-to-trough in part because of its biggest brands like Barbie and Fisher-Price falling out of favor — and, of course, because it lost the right to license Walt Disney Co. (DIS) princess toys. However, the company implemented aggressive cost cutting measures and is now in the middle of a turnaround that appears to be taking shape quickly.
In fact, Mattel was just upgraded to a buy in September by Monness Crespi Hardt based on a turnaround in its core brands and better days ahead.
With new products in the pipeline, Christmas could be very strong for Mattel. So don’t delay and buy this dividend payer while your yield is good and before prices rise.
This article is by Jeff Reeves of InvestorPlace.
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