Identifying great dividend stocks can be a difficult task. It’s a kind of “beauty is in the eye of the beholder” problem, as appeal is often based on who the investor is.
For some younger investors, high dividend growth is key to generating a sufficient income stream once they reach retirement. For older investors, on the other hand, income stocks with the highest yields might be the best for income during retirement.
Some investors also like to concentrate their portfolios in no more than 15 to 20 carefully selected securities, while others try to hold as many stocks as possible.
Generally, I try to avoid extremes — whether choosing high-yield or high-growth income stocks or when choosing between a concentrated or diversified portfolio. Instead, I prefer to focus on companies with yields and dividend growth in the middle. I also prefer to hold about 40 to 50 income stocks.
With that in mind, these three stocks, all chosen by me one year ago as part of a collective effort by a group of dividend newsletters, are prime examples of my moderate approach:
Chevron (NYSE:CVX) engages in petroleum, chemicals, mining, power generation and energy operations worldwide. This dividend champion has raised distributions for 25 consecutive years — and has managed to boost dividends at an average rate of 8.8% per year over the past decade. Currently, Chevron trades at 8.7 times earnings and yields 3.1% — not too shabby. For more, check out my full analysis of the stock.
Enterprise Products Partners LP
This next company, Enterprise Products Partners LP (NYSE:EPD), provides midstream energy services to producers and consumers of natural gas, natural gas liquids, crude oil, refined products,and petrochemicals. It has also been a dividend achiever, raising distributions for 15 consecutive years and boosting them by 7.6% a year over the last decade.
Currently, Enterprise Products Partners yields a solid 4.9% and is one of the few master limited partnerships (MLPs) without incentive distribution rights, which eat into distribution growth for limited partners. In addition, the company is also one of the few MLPs with very good coverage of their distributions from cash flows. Most of its assets generate fee-based income anytime crude oil or natural gas is being transported through its vast network of pipelines. I would like to add to my position on dips below $51. Find more on the stock here.
Another dividend champion is worldwide fast-food franchise McDonald’s (NYSE:MCD), which has raised distributions for 35 years in a row. On top of that, over the past decade, the company has managed to boost dividends at an average rate of more than 27% every year. Currently, McDonald’s yields 3.4%. The company earned $5.27 per share in 2011, but that is expected to jump to $5.42 a share in 2012 and $5.96 a share in 2013. Read more on the stock here.
These three securities generated a return of 8.6% year-to-date and just over 26% since their selection in September 2011. The S&P 500 has returned about twice as much year-to-date, but only beats my picks slightly over the past year, with returns just short of 30%.
The performance of other bloggers is listed below. Each of the eight bloggers selected three income stocks for a total of 24 picks:
- Wealthy Canadian 37%
- The Dividend Monk 34%
- Dividend Mantra 28%
- Dividend Growth Investor 26%
- Passive Income Earner 22%
- My Own Advisor 16%
- The Dividend Guy Blog 12%
- Dividend Ninja 10%
As of this writing, Dividend Growth Investor was long MCD, EPD and CVX.
- How to retire with dividend stocks
- Dividend Portfolios – concentrate or diversify?
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Enterprise Products Partners (EPD): A Pipeline Cash Machine