I’m kind of down on dividend stocks these days. That’s not because dividend stocks are a bad idea, it’s just that the market is about 20% overvalued, and the rush to replace meager bond income resulted in dividend stocks being bid up too far. So that’s why I prefer to stick with Dividend Aristocrats.
Dividend Aristocrats have a slight advantage over what might be characterized as your standard blue-chip stock, in that they have been raising dividends annually for over 25 years straight.
That speaks to a high degree of success in the business, of course, but it also speaks to ongoing growth. It means that free cash flow is likely expanding from year to year, thus permitting more of that cash flow to be paid out as a dividend.
So here are three Dividend Aristocrats that I think pay a reasonable dividend, but also have a shot at capital gains.
Dividend Aristocrats to Buy: AbbVie (ABBV)
Dividend Yield: 4.2%
Long-Term Earnings Growth: 15%
The first choice for Dividend Aristocrats is one I frankly didn’t expect, but after checking it’s financials, I think it may have the best chance for per-share earnings growth in 2017 — AbbVie Inc (NYSE:ABBV).
ABBV is a spinoff of the famous Abbott Laboratories (NYSE:ABT). It primarily serves the oncology, immunology and virology therapeutic sectors, but it’s moving into neuroscience.
It would stand to reason that a pharma play would have the best shot at growth. Even though blockbuster Humira is coming off patent, earnings are pegged to rise 13% this year and 15%-plus annually over the next five years. A new lymphoma drug just got approved, as well.
The quarterly dividend just got bumped 12% to 64 cents per share, giving ABBV a yield of about 4.4%. I think ABBV may be reasonably priced here, and I frankly don’t see too much long-term risk.
Dividend Aristocrats to Buy: Cardinal (CAH)
Dividend Yield: 2.4%
Long-Term Earnings Growth: 10%
At 2.4%, Cardinal Health Inc (NYSE:CAH) doesn’t have a whopper of a yield as far as Dividend Aristocrats go, but it has a great opportunity for growth going forward. Distribution is one of the best areas to be invested. With its footprint and infrastructure, Cardinal’s ability to distribute supplies of any kind (healthcare in this case) will net some pretty thick margins.
There’s no fuss or muss regarding manufacturing or quality control. Distributors just need to get the product to the church on time. CAH has a massive 25,000 customer pharmacies it distributes to — everything from generics and OTC to specialty pharma. It also distributes consumer products and handles logistics involving inventory management, pricing, chargebacks and the like.
It also has a medical, surgical and lab products segment that distributes those products to relevant places.
CAH is a solid 10% earnings grower over the next five years, with well over $2.5 billion of free cash flow even after paying $465 million in annual dividends.
Dividend Aristocrats to Buy: Hormel (HRL)
Dividend Yield: 1.9%
Long-Term Earnings Growth: 8%
It may sound wacky, but Hormel Foods Corp (NYSE:HRL) may have a crack at 8% to 10% earnings growth going forward, on top of its 88 straight years of paying dividends — and raising it 51 years in a row. The 1.88% yield is nothing to get too excited about for one of these Dividend Aristocrats, but HRL may just have some bright per-share earnings gains coming even beyond what is projected.
Yes, Hormel is the company behind the famous Spam. But here’s the key difference between HRL and the struggling snack food “blue-chips stocks”: protein. HRL pushes meats as a snack. In fact, that’s one of its catchphrases for marketing.
It makes Jennie-O meats and Skippy peanut butter, along with other protein products like Muscle Milk, Natural Choice Meats, Rev wraps and other popular bacon products.
Hormel is also making a big push into organics, which, as we know, is what grocery stores have been demanding, making the future look very protein-rich indeed for its bottom line.
Lawrence Meyers is the CEO of PDL Capital, and manager of the forthcoming Liberty Portfolio stock newsletter. As of this writing, has no position in any stock mentioned. He has 22 years’ experience in the stock market, and has written more than 1,600 articles on investing. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.