When it comes to dividend stocks, investors can fall into the trap of focusing on dividend yield over all else. That can be a dangerous strategy, as high-yield stocks almost always are higher-risk.
But the issue isn’t just the risk in high-yield stocks. It’s the opportunity cost of ignoring lower current yields from companies with better prospects to grow their profits – and their dividends.
After all, the best dividend stocks over time have been the ones that have posted years, and often decades, of dividend increases. One famous example is the investment by Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) into Coca-Cola (NYSE:KO). As Buffett pointed out in last year’s shareholder letter, Berkshire now receives just more than 50% of its original investment every year in Coke dividends.
But KO also shows a potential risk in dividend growth names: as the boilerplate investment disclaimer goes, past performance is not a guarantee of future results. General Electric (NYSE:GE) was a Dividend Aristocrat until 2017, when it halved its dividend. GE stock has fallen 63%, and its dividend was slashed again to just a penny per quarter.
Yield favorite AT&T (NYSE:T) last month held its dividend flat for a fifth consecutive quarter after years of minimal growth. Financials like Bank of America (NYSE:(BA)C) ended dividend growth streaks during the financial crisis. A track record of dividend growth helps a bull case. It doesn’t alone create a bull case.
These eight dividend stocks, however, have a solid history, and a strong outlook to match. They should be on the list of every dividend growth investor:
- Johnson & Johnson (NYSE:JNJ)
- Broadcom (NASDAQ:AVGO)
- J.M. Smucker (NYSE:SJM)
- Portland General Electric (NYSE:POR)
- BOK Financial (NYSE:BOKF)
- International Flavors & Fragrances (NYSE:IFF)
- Comcast (NASDAQ:CMCSA)
- Realty Income (NYSE:O)
Dividend Stocks: Johnson & Johnson (JNJ)
J&J has one of the longest streaks of dividend increases in the entire market: some 59 years, according to Dividend.com. The 60th should be announced in May.
Even six decades in, the increases remain healthy, with an average hike of 6.1% over the past five years. Admittedly, JNJ stock has lagged the market over that stretch (total return of 89% versus 120% for the S&P 500), but that’s not necessarily bad news. As a defensive stock, JNJ should trail in a bull market. That’s the trade-off for the downside protection provided when equities turn south.
The good news is that J&J at the moment looks well-positioned to weather any environment in the coming years. The medical devices business doesn’t get all that much in the way of attention, but it continues to perform well. Trends are improving in both the consumer and pharmaceutical segments. Legal issues are in the rearview mirror.
Meanwhile, even with a sharp rally of late, valuation remains reasonable. JNJ trades at just 19x forward earnings, while yielding a healthy 2.4%. This still looks like a long-term, set-it-and-forget-it play.
Broadcom just barely makes this list. The company only initiated its dividend toward the end of 2010. But it’s been a hugely impressive decade.
In calendar 2011, AVGO stock provided 40 cents per share in dividends. In 2020, the total was more than $13. An investor could have paid $29 per share for Broadcom stock at the end of 2010, and 10 years later have received a yield on cost more than 40%.
Obviously, the rate of growth is going to slow, though Broadcom did just hike its dividend another 11% in mid-December. But there still should more dividend increases and more upside ahead. Semiconductor demand continues to be strong, and remains backed by multiple long-term trends. Broadcom’s impressive history of acquisitions continues, with even the surprising deal for CA looking like a winner. (The attempt to take over Qualcomm (NASDAQ:QCOM) in retrospect looks like a wise move as well, even if Broadcom didn’t get over the finish line.)
This is one of the best companies in tech. And after a modest pullback over the past few sessions, it trades at 16x next year’s earnings while yielding 3.24%. To some extent, the easy money has been made over the past decade, but that simply means that the gains will slow — not end.
Dividend Stocks: J.M. Smucker (SJM)
J.M. Smucker has delivered 20 straight years of dividend increases, but its recent history is a bit concerning. Dividend growth has slowed markedly over the past two years. It took a modest breakout over the past two sessions to get SJM stock positive over the past five years; it’s still returned just 3% before dividends over that period.
There are reasons why the stock has struggled. Smucker is trying to pivot from lower-growth legacy businesses to hotter industries like coffee and pet food. But a move like that takes years – and success isn’t guaranteed. Indeed, given those risks, among stocks with 10-plus years of dividend increases, SJM is probably at the highest risk of a dividend cut.
But there are real potential rewards here as well. The strategy makes sense. Fiscal second-quarter earnings, released in November, were strong. Smucker raised its full-year outlook as a result.
And at the midpoint of that guidance, SJM stock trades at a little over 14x earnings. An estimated $1 billion in free cash flow easily covers roughly $400 million in dividend payments at the current rate.
SJM does have risk, and it will take some patience. But there’s still an intriguing turnaround story here, with the potential to provide both improved dividend growth and long-awaited capital appreciation.
Portland General Electric (POR)
Utilities are among the most common dividend stocks. The combination of stability – thanks to usually regulated and consistent rate increases – and defensiveness makes them attractive to income investors.
When looking for utilities with a consistent track record of dividend increases, there are plenty of options. But the sector’s reputation for investor safety doesn’t always hold. For instance, Dominion Energy (NYSE:D), one of the nation’s largest utilities, cut its dividend late last year, largely due to an onerous debt load.
POR stock, however, looks like it should be a reasonably safe and consistent grower. Its debt load is reasonable. The Portland, Oregon, metro in which PGE operates has seen steady population growth. It should weather any post-pandemic urban exodus,” if indeed that trend plays out.
Meanwhile, PGE has raised its dividend for 14 consecutive years. A 3.8% yield is attractive, particularly in this environment. Again, investors have plenty of choices among utility stocks, but POR stock is at least a name to consider.
Dividend Stocks: BOK Financial (BOKF)
Bank stocks too are a common target of income investors. But since (and even before) the financial crisis of the late 2000’s, the sector’s reputation for reliability unsurprisingly has taken a big hit. The largest financial institutions had to slash or even suspend their payouts during the crisis. Even now, the Federal Reserve has taken steps to cap dividends as recently as last year.
It thus makes some sense to look beyond the big banks, at least in terms of consistent income. BOK Financial is one interesting choice. The Tulsa, Oklahoma-based bank has paid higher dividends for 14 straight years. Not only did it avoid a dividend cut during the financial crisis, it prospered. Between 2006 and 2011, the payout more than doubled.
To be fair, there was some luck involved. The regional economy actually did well during the crisis, as oil prices often were above $100. And the fear now is that the reverse will hold, with crude back near the lows. A 2% dividend raise last year, a notable deceleration from recent trends, highlights the case for caution.
That said, the Oklahoma economy has diversified away from its former sole reliance on energy. So has BOK as it’s expanded to multiple states. Management is solid. Valuation is attractive, with the stock trading for just over 1x book value. There’s an attractive case here.
International Flavors & Fragrances (IFF)
IFF stock declined 15.6% in 2020. On that, I was wrong: I had argued that the stock, after a 4% drop in 2019, was set for a big year.
The pandemic obviously played a role in the decline. The company’s scents segment saw pressure as perfume and cologne sales plunged. But, though IFF stock declined last year, the company itself actually performed quite well. Based on preliminary numbers, adjusted operating profit actually rose 16% year-over-year.
After three straight years of declines (IFF stock fell 12% in 2018), the stage is set for a nice rebound. The long-awaited merger with the nutrition business of DuPont (NYSE:DD) is finally set to close. Steps toward a “return to normalcy” should boost several end markets.
And with the multi-year pullback, a stock that once was expensive by large-cap standards now looks cheap. IFF trades at 19x forward earnings, and yields a solid 2.8% after 11 years of dividend hikes. Merger integration and continuing market weakness both pose risks, but IFF stock looks like a bet worth taking.
Dividend Stocks: Comcast (CMCSA)
Comcast has gained 6% in trading Thursday after posting an impressive fourth quarter report. There’s a case for more upside to come.
Technically, CMCSA looks set for a breakout, as it’s again challenging resistance just above the current price of $51. Fundamentally, there’s a nice case as well.
To be sure, the risks are obvious. Comcast continues to lose video customers to cord-cutting. Its filmed entertainment business is taking a hit from the pandemic and audience fragmentation. Theme park results will take years to recover.
But at its core, this is a play on the internet, whose value becomes greater by the day. And Comcast’s market dominance is such that its pricing power should be impressive. Video customers are lower-margin anyway, and the filmed entertainment and theme park businesses remain a smaller slice of profits.
The headline yield, of just 1.9% at the moment, perhaps isn’t that impressive. But Comcast has raised its payout for 10 consecutive years, and there’s little reason to think that trend won’t continue. In fact, given the cash that the data business throws off, patient investors may have a handsome yield on cost in just a few years.
Realty Income (O)
Realty Income has been one of the best dividend growth companies out there. It’s paid dividends for 51 consecutive years, going back to its days a private company. Since going public in 1994, Realty Income has increased its dividend 108 times.
That’s four times a year, which sounds unusual. But Realty Income, somewhat famously, pays its dividend monthly, allowing for more flexibility in terms of raises.
Dividend growth may well slow. Longer-term, there’s even the risk of a cut. The concern is that Realty Income’s focus is on retail real estate, and that segment may well come under pressure. One estimate suggests that 10,000 stores could close for good this year alone. As a result, it’s no surprise that O stock declined 23% over the past year.
But for investors willing to play the contrarian, history should give some comfort. Realty Income has managed all sorts of environments, and its dividend growth has continued. 2020 numbers in context aren’t terrible, and a “return to normalcy” should relieve some of the pressure.
A 4.7% dividend yield looks attractive, even as it also highlights the risk in O stock. An investor needs to be a real estate bull to even consider this name, but those that are could be well-compensated for taking that risk.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
After spending time at a retail brokerage, Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.