In this low-interest-rate environment, it’s only natural for investors to want to chase dividend yield to generate enough income to meet whatever commitments those cash flows are used for. The problem is that high yield often translates into high risk, and the closer you are to retirement, the less you can afford to see your income flushed down the toilet.
Investing in dividend stocks doesn’t mean you have to go down that road to meet your income goals. Investors who’ve refrained from playing this game over the past five years by accepting reasonable dividend yields from companies whose businesses were growing have easily been able to replace the income lost by opting for 2% yields instead of 5%.
The S&P 500 — via the SPDR S&P 500 ETF Trust (SPY) — currently yields 2.07%; its five-year annualized total return through April 25 is 11.6%. The S&P 500 yield in those five years has held steady between 1.92% and 2.2%. So, capital appreciation was responsible for more than 80% of its total return. The index is proof positive you don’t need big dividends to deliver above-average returns.
But just in case you’re not convinced, I’ve assembled a portfolio of stocks currently yielding between 1%-2% whose five-year annualized total returns have doubled the S&P 500’s.
Here are seven dividend stocks with “hidden” yields that you should own.
Dividend Stocks With “Hidden” Yields: Sherwin-Williams Co (SHW)
Dividend Yield: 1.1%
Five-Year Annualized Total Return: 30.1%
It seems like only yesterday that Sherwin-Williams Co (SHW) was licking its wounds after it failed to acquire Mexico’s largest paint supplier, Comex, because of Mexican competition concerns. That was in August 2014.
Fast forward to today, and it has been able to buy itself an even bigger prize — The Valspar Corporation (VAL) — an $11 billion acquisition that puts it in the big leagues when it comes to global paints and coatings. The merged company has $15.6 billion in revenue and $2.8 billion in EBITDA on a pro forma basis and is expected to save as much as $280 million annually from the synergies created through the merger.
Sherwin Williams’ five-year annualized total return is 30.1%, significantly higher than SPY’s. And that’s despite a yield of just 1.1%.
Dividend Stocks With “Hidden” Yields: Spectrum Brands Holdings, Inc. (SPB)
Dividend Yield: 1.4%
Five-Year Annualized Total Return: 30.8%
Sector: Consumer Staples
Spectrum Brands Holdings, Inc. (SPB) hit an all-time high of $159.65 in mid-April, and although it has dropped back a few dollars, it’s still up 9.5% year-to-date through April 25.
Spectrum — which operates in four different segments, selling everything from batteries (Rayovac) to pet food (Iams) to home improvement (Kwikset) and auto care (Armor All) — is a company with something for everyone.
It’s a great problem to have in an age of big-box stores where depth and breadth of one’s offering makes a big difference in getting in the front door.
With a bevy of well-known brands, SPB is ready to take on the big boys in consumer products.
Dividend Stocks With “Hidden” Yields: Broadcom Ltd (AVGO)
Dividend Yield: 1.3%
Five-Year Annualized Total Return: 31.6%
Sector: Information Technology
Barron’s recently had much praise for the dominant player in the market:
“AVGO should be rewarded with multiple expansion. The multiple relative to wireless and networking peers has appreciated but the stock remains near a historical low relative to analog peers…”
With multiple growth areas including cloud infrastructure and wireless solutions, expect AVGO stock to continue delivering index-beating returns.
Dividend Stocks With “Hidden” Yields: Home Bancshares Inc (HOMB)
Dividend Yield: 1.6%
Five-Year Annualized Total Return: 36.8%
Arkansas regional bank Home Bancshares Inc (HOMB) just announced Q1 earnings, and they were exceptional. Net income grew 33% over Q1 2015. Another important stat: organic loan growth in the quarter grew by $218 million with a core efficiency ratio of 37.5%. Since its founding in 1998, Chairman John Allison’s been busy making acquisitions to transform the bank from nothing but a bunch of paper to a financial institution operating in four states including New York City where it has a loan production office.
Ranked as one of the best regional banks in the country, it recently announced a two-for-one stock split.
Dividend Stocks With “Hidden” Yields: Gilead Sciences, Inc. (GILD)
Dividend Yield: 1.7%
Five-Year Annualized Total Return: 39.6%
Gilead, boasting the second TAF-based drug to get permission from the EU, continues to expand the number of products physicians can use to treat HIV. Gilead is blessed with a lot of cash, too — more than $26 billion at the end of 2016 — so it has been doing some share repurchases and bumped its dividend in 2016 by 10% .
But in the coming quarters, investors can expect GILD to make some noise on the M&A front.
Dividend Stocks With “Hidden” Yields: Alaska Air Group, Inc. (ALK)
Dividend Yield: 1.5%
Five-Year Annualized Total Return: 39.6%
Being a Canadian, I always thought Alaska Air Group, Inc. (ALK) was some remote airline that flew passengers from the north down to the lower 48.
Wrong, wrong, wrong.
Sure, it does have a major hub in Anchorage, but it also has a big presence in Seattle, Portland and elsewhere.
In early April, it announced that it was acquiring Virgin America Inc (VA) for $2.6 billion plus the assumption of $1.4 billion in debt. The deal strengthens Alaska Air’s West Coast presence thanks to Virgin’s Los Angeles and San Francisco bases of operation, and it gains slots in New York and Washington D.C.
As Bud Fox said in the movie Wall Street, “It’s a comer … great slots in major cities.”
Dividend Stocks With “Hidden” Yields: Domino’s Pizza, Inc. (DPZ)
Dividend Yield: 1.1%
Five-Year Annualized Total Return: 50.3%
Sector: Consumer Discretionary
It turns out that pizza dough isn’t the only thing that rises.
Domino’s Pizza, Inc. (DPZ) stock has been on a tear the past five years, delivering growth in the U.S. and abroad.
How hot has DPZ been? It hasn’t had a down year since it lost 64% of its value in 2008 (and, if you remember, more than a few companies struggled that year too).
Up 20.5% through April 25, it seems that DPZ can do no wrong. According to Barron’s, Domino’s has gained 160 basis points in market share from its U.S. competition; overseas, it’s growing new units at a 5%-7% clip; and its store renovation program is expected to be completed on a worldwide basis by the end of 2017.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.