Dividend stocks and diversified portfolios are two investment strategies that never go out of style.
After all, a steady stream of payments from dividend stocks give them somewhat of a defensive cushion, as well as the potential to generate superior returns over the long haul. And as for diversification, that’s about as important a defensive move you can make, seeing as it’s rare for every stock and sector to tumble at the same time.
Sectors that are traditionally generous with dividends include telecommunications, utilities and energy, but that doesn’t mean other sectors are bereft of quality dividend stocks. Heck, even the tech sector has become a source of dividends as growth slows down for information technology but the cash keeps piling up.
The S&P 500 is divided into 10 major sectors, and each one includes at least a handful of names that can be considered high-quality, generous dividend stocks. Drilling down into these names reveals dividend stocks ranging from a restaurant companies to a packaged food firm.
One thing they have in common, however, is that they’re all dividend stocks yielding at least 3%.
Here, then, is one top-notch dividend stock to represent each sector of the market. (Dividend yields as of Jan. 23.)
Dividend Stocks: Darden Restaurants, Inc. (DRI)
Sector: Consumer Discretionary
DRI Dividend Yield: 3.6%
Darden Restaurants, Inc. (NYSE:DRI) is on the comeback trail. The operator of Olive Garden, LongHorn Steakhouse and Bahama Breeze, among other names, is in the midst of a successful turnaround.
The key to this resurgence was DRI’s sale of the Red Lobster chain to a private equity buyer for $2.1 billion. Indeed, DRI stock is up 30% since it jettisoned the seafood chain last summer.
DRI pays a 55-cent quarterly dividend good for a yield of 3.6%, which is among the highest payouts to be found in the S&P 500’s sector of consumer discretionary stocks. More importantly, the dividend looks sustainable, backed up by a payout ratio of less than 45% and ample cash flow.
Dividend Stocks: Altria Group Inc (MO)
Sector: Consumer Staples
MO Dividend Yield: 3.8%
Plenty of investors won’t have anything to do with Altria Group Inc (NYSE:MO) because it’s a tobacco stock. That’s fine. There are other names that generate excellent dividends and good returns.
But as for consumer staples, there aren’t many dividend stocks paying a yield of at least 3%, and most of the names that do are from the tobacco sector.
Indeed, with no growth left, the only thing left for tobacco stocks to deliver is cash to shareholders. MO stock has a payout ratio of 90%, and that’s a dividend investors can bank on.
Happily, MO also has been good for price appreciation recently. Over the last 52 weeks, Altria has been a market crusher, outperforming the S&P 500 by about 35 percentage points.
Dividend Stocks: Chevron Corporation (CVX)
CVX Dividend Yield: 4%
True, the energy sector is a traditional sector for dividends, but this is getting ridiculous. Indeed, the energy sector is littered with dividend stocks paying high to insane levels of distributions, but that’s only because shares have been hammered so hard by tumbling oil prices.
Fortunately, the big, diversified oil majors like Chevron Corporation (NYSE:CVX) are more insulated from the oil shock than the pure-play exploration, production and services companies, and that could make them a bargain these days.
CVX has held up reasonably well in the selloff, losing 6% over the last 52 weeks. That’s help lift the dividend to 4%, but that’s hardly an unsustainable level for this blue chip.
Hey, energy investors might as well enjoy a steady and sizable dividend while they wait for oil prices to bounce back.
Dividend Stocks: Cincinnati Financial Corporation (CINF)
CINF Dividend Yield: 3.4%
The financial sector was once a gusher of dividends, but ever since the financial crisis, the dividend flood has slowed to a trickle. Stricter capital requirements and federal oversight have made payouts quite thin across the sector. Indeed, the number of S&P 500 financial dividend stocks yielding at least 3% can be counted on one hand.
Property and casualty insurer Cincinnati Financial Corp. (NASDAQ:CINF) happens to be one of these names, and business there is looking up. CINF, a top 25 insurance company by net written premiums, is generating annual revenue growth of more than 8%.
As good as the dividend is, recent share performance is disappointing. CINF is up just 1% over the past 52 weeks, lagging the broader market by 9 percentage points.
Dividend Stocks: Pfizer Inc. (PFE)
PFE Dividend Yield: 3.4%
A lot of investors roll their eyes at the mention of Pfizer (NYSE:PFE), or indeed at the entire pharmaceutical industry. A loss of blockbuster drugs to generics has left the sector standing with its hands in its pockets, more interested in mergers and acquisitions than new drugs.
That’s unfair, of course, and Pfizer, a component of the Dow Jones Industrial Average, proves it. Blockbuster drugs going off patent are hurting PFE, but it does have replacements in the pipeline — notably a breakthrough drug for breast cancer.
Pharma stocks tend to cycle with their pipelines, and this in-between time has PFE lagging the broader market over the last year. Happily, investors can collect a solid dividend while they wait for PFE’s next hit.
Dividend Stocks: Caterpillar Inc. (CAT)
CAT Dividend Yield: 3.3%
Caterpillar Inc. (NYSE:CAT) looked like a can’t-lose bet when growth in China was supporting ever-higher prices for commodities. That growth has cooled however, as so has the once mighty commodities supercycle.
Talk about bad timing: CAT made a major acquisition in the mining sector right before the bottom fell out of the market. No one knows when and if prices will bounce back, but it might not matter as far as catalysts are concerned. CAT’s construction equipment business is ramping up thanks to U.S. growth.
As a bet on long-term global economic growth, CAT, a Dow stock, will enjoy more upside — eventually. Until then, new money will have to get by with the better-than-average dividend.
Dividend Stocks: Seagate Technology PLC (STX)
Sector: Information Technology
STX Dividend Yield: 3.4%
No sector is seeing faster growth in dividends than the tech sector, but the yields still tend to be rather thin. If you’re looking payouts above 3%, the pickings are slim.
Happily, Seagate Technology PLC (NASDAQ:STX) is the rare tech large-cap with a fat yield. The disk-drive maker was one of the first tech names to institute a dividend more than a decade ago, and it has the wherewithal to keep them coming. Indeed, STX has a payout ratio of of just 38%.
STX is hardly out of growth, however. Wall Street thinks it will generate compound annual revenue growth of 12%. That’s well above the broader market and should eventually push STX back to its market-beating ways after lagging by 6 percentage points over the last year.
Dividend Stocks: Dow Chemical Co (DOW)
DOW Dividend Yield: 3.8%
Dow Chemical Co (NYSE:DOW) stock has had a volatile and disappointing last few years, so it needs to keep that dividend yield up to make sure investors don’t get restless. A payout ratio of less than 50% and $2.7 billion in levered free cash flow over the trailing 12 months means the dividends will keep coming.
Recent strategic changes afford Dow Chemical stock a chance for price appreciation, too. For too long, the company was held back by commodity business, as well as other noncore assets. Shedding those operations for about $8 billion should boost growth, which would then flow to the share price.
In other shareholder-friendly moves. Capital expenditures are forecast to decline after this year, further supporting DOW’s ongoing $6 billion stock repurchase program.
Dividend Stocks: AT&T Inc. (T)
T Dividend Yield: 5.6%
Telcos are a bastion of fat payouts, and when when it comes to Dow dividend stocks, you can’t beat AT&T Inc. (NYSE:T). And the current yield of 5.6% isn’t some kind of fluke on a falling share price. T stock has a five-year average yield of 5.5%.
There’s little growth left in the North American telecom market, so expansion has to come from market share gains and mergers and acquisitions. To that end, T made a huge splash by buying DirecTV (NASDAQ:DTV) for nearly $50 billion last year. DTV is the largest pay-TV provider in the U.S., so AT&T’s acquisition will give it much more leverage with media companies in negotiations for ther negotiates for their channels.
Maybe that will get shares moving. After all, T stock is a longtime market laggard, so the dividend has to be good.
Dividend Stocks: Consolidated Edison, Inc. (ED)
ED Dividend Yield: 3.7%
Utilities are another sector known for dividends, and there are few names more dependable than Consolidated Edison (NYSE:ED). Indeed, ED has been paying a steady and rising dividend since 1975, giving it a place on InvestorPlace’s list of dependable dividend stocks.
Utility stocks have been seeing unusually strong prices gains over the last year or so, as the dividends suck in investors tired of paltry bond yields. That how ED, a long-time market laggard, gain more than 30% over the last year.
At some point, interest rates will rise and the appeal of utilities will diminish. If you can ride out the reset in share price, ED promises a steady income stream throughout the process.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.