The best dividend stocks to buy right now are crucial parts of any investment portfolio. That’s because now is not a good time to be an income investor.
Not with the yield on 10-year Treasuries at a meager 2.3%.
Dividend stocks and high yield investments are the only way to get a good payday, then, and may be the only reliable source of income for investors in the near future. Sure, a December rate hike is widely anticipated, but how much do you think the Fed will crank rates up? 25 basis points? Big deal.
The sad truth for dividend stock investors is that you’ll either have to buy longer-term Treasuries, which still don’t pay but about 3% annually on the 30-year…or take a deep breath and hunt for high yield stocks in the equity market today.
There’s good news, though: There are plenty of high dividend stocks in today’s stock market, and most of them yield just as much as a 30-year Treasury. Not only that, but you’ll be able to participate in long-term capital gains, too.
If you’re a patient investor looking for some safe investments and a modest stream of income, these are the stocks for you as you prepare for a continued low-interest-rate environment in 2016… and probably beyond:
Best Dividend Stocks for 2016 – Cisco Systems (CSCO)
Dividend Yield: 3.2%
Market Cap: $135 billion
Cisco Systems (CSCO) is one of the most attractive value stocks in the entire stock market today. It’s been a blue-chip staple for years now, but not quite the go-go momentum stock it was in the ’90s.
That’s okay, because at a forward price-to-earnings ratio below 11, CSCO is a buy in just about any market. Not only is it a stable company with predictable earnings, modest growth and an impressive 3.2% yield, but it’s flush with cash, boasting $11.64 per share.
Cisco’s huge cash coffers make its valuation even more attractive; ex-cash, CSCO trades at a forward P/E of just 6.1.
Income investors will also note its manageable payout ratio — it paid out just 37% of its free cash flow on dividends over the last year — and management’s willingness to increase the dividend as two compelling reasons CSCO is one of the best dividend stocks to buy now.
Best Dividend Stocks for 2016 – Reynolds American (RAI)
Dividend Yield: 3.5%
Market Cap: $65 billion
Tobacco giant Reynolds American (RAI) has been on a tear this year. Shares are up 45% in 2015, adjusted for a September split. When you factor in dividend payments to the calculation, shares are up more than 48%.
Not bad, especially considering the S&P 500 is break-even for the year.
Believe it or not, RAI is actually growing revenues at an enviable clip: Analysts are looking for revenue growth of 25% this year and 18% in fiscal 2016. Few dividend stocks enjoy growth like that…and it’s even rarer in highly regulated industries like tobacco.
With an enviable portfolio of brands like Camel, Pall Mall, Winston, Kool, Doral, Salem, Grizzly and Kodiak to its name, Reynolds American should be one of the more solid stocks to buy for years to come.
Best Dividend Stocks for 2016 – Paychex (PAYX)
Dividend Yield: 3.2%
Market Cap: $19 billion
Paychex (PAYX) is another dividend dynamo that’s been walloping the market this year. Up 15% without factoring in the dividend checks, PAYX is up 17% on a total return basis so far in 2015.
The company, which processes payment checks and engages in other HR solutions for small- and medium-sized businesses, is thriving as the labor market recovers and the economy continues to steadily chug along.
PAYX has been growing its dividend payout for each of the last four years, including a 10.5% hike earlier this year. After peaking at 10.0% in October of 2009, the unemployment rate has been cut in half and now sits at a stable 5.0%, the lowest rate in more than seven-and-a-half years.
While employment growth is leveling out now, we’re still seeing about 95% of new jobs come from small businesses, which should be a net positive for PAYX stock and its shareholders.
Best Dividend Stocks for 2016 – Chevron (CVX)
Dividend Yield: 4.7%
Market Cap: $168 billion
As you probably know, Chevron (CVX) hasn’t really been doing too well this year. But what energy stock has been in the black for 2015, pray tell?
Down 18% in the calendar year, CVX is soldiering through a year that’s mostly seen oil trade below $60 a barrel, with sub-$50 prices more common in recent months. There’s no telling where oil prices will go tomorrow, but we do know that Chevron will emerge from the recent energy meltdown largely unscathed.
The same can’t be said for many small-time wildcatters and American frackers, many of whom need prices to rise to break even.
While it’s true that Chevron’s sizeable 4.7% dividend yield could eventually be threatened if prices remain super-distressed for a long time, history suggests the company will take a different course. CVX has increased its dividend payout for 29 consecutive years, and the company has instead opted to slash cash-intensive investments to save money going forward.
Best Dividend Stocks for 2016 – Johnson & Johnson (JNJ)
Dividend Yield: 3%
Market Cap: $280 billion
Last but not least, pharmaceutical and consumer goods giant Johnson & Johnson (JNJ) is yet again one of the best dividend stocks to buy.
It’s been a reliable blue-chip name for decades, and has been increasing the dividend payout for its shareholders each and every year for the last 52 years. It’s tough to find a comparable company as an investor, but Procter & Gamble (PG) might be the closest.
And when looking at PG vs. JNJ, Johnson & Johnson takes the cake every time. Its dividend is more sustainable (50% payout ratio vs. 85%), its got a more diversified revenue stream, and its pharmaceutical operations give it a dynamic source of future growth that consumer goods simply can’t offer.
Best Dividend Stocks for 2016 – HSBC (HSBC)
Dividend Yield: 5.1%
Market Cap: $166 billion
HSBC (HSBC) will go down as the only financial stock on this illustrious list. It’s not that there aren’t other safe, large cap financials that pay sustainable, decent dividends — Wells Fargo (WFC) pays a reliable, 2.7% dividend — it’s just that HSBC is the most attractive right now.
In fact, right now the financial sector is practically oozing with quality stocks to buy, especially with the Fed almost guaranteed to raise interest rates in the next several months. The economy’s improving, the unemployment rate is the lowest we’ve seen in Obama’s presidency, and housing prices are rising.
HSBC and its financial peers should be able to dramatically increase their profitability as interest rates rise, increasing the spread between what they borrow for and lend for.
On top of that, HSBC trades for less than 8 times forward earnings, its price-to-book is 0.86, and it only uses 45% of its earnings to pay its 5.1% dividend.
Best Dividend Stocks for 2016 – Merck (MRK)
Dividend Yield: 3.4%
Market Cap: $150 billion
If you’re trying to build a portfolio of dividend stocks to buy, why wouldn’t you want a heavy exposure to major pharmaceutical companies? The “Greying of America” isn’t a trend that’s going to reverse anytime soon, and major healthcare reimbursement reform, while frequently debated, is still a long ways off.
Merck (MRK) is a great way to play this broader demographic trend. It’s a value stock to boot, trading at just 14 times forward earnings. On top of that it’s dividend is sustainable (50% payout ratio), and MRK plans on getting into the lucrative Hepatitis C drug market.
Right now, Gilead (GILD) and AbbVie (ABBV) have a firm grip on that market, but Merck has plans to enter the space, which generated $9.5 billion in revenues in the first half of 2015. If Merck can successfully launch its Hep C treatment (and underprice GILD’s $1,000 a pill treatment), investors could be looking at their next big growth driver.
As of this writing, John Divine had no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at firstname.lastname@example.org.