Our new approach to lining up the top dividend stocks in the S&P 500 was such a hit last month that we’ve decided to use it full-time.
It’s more subjective, of course, but it’s arguably much more useful.
You can do OK by just checking out the top few dividend payers in the S&P 500. There are some large yields, and some of the companies in that list are actually decent names to hold.
However, as interesting as it is to ogle those sky-high yields, you do get a number of dogs. After all, price and yield move in opposite directions. More often than not, a fat yield is a sign of a troubled stock.
Instead, we’re just going stock-picking.
Any S&P 500 dividend stock that yields more than 3% is a candidate for this list. Yes, that’s far from what you can get from the top yielders — which currently range from about 4.5% to more than 12% — but you’re still getting protection from price drops.
We like these 10 top dividend stocks mostly for their fundamental strength, and think they should deliver market-beating total returns for patient investors. (Note: Dividend yields as of May 23.)
Top S&P 500 Dividend Stocks to Buy #10: Merck & Co. (MRK)
MRK Dividend Yield: 3.3%
A continued focus on cost cuts and economies of scale through mergers and acquisitions is working pretty well for Merck & Co., Inc. (MRK). The company recently promised to deliver synergies from its acquisition of Sigma-Aldrich Corp. (SIAL) this year.
Just as important, Merck’s pipeline looks strong. MRK has five drugs that currently are being reviewed by regulatory agencies, as well as 25 late-stage and 11 mid-stage programs.
Shares are up 4% so far this year, which outperforms the S&P 500 by … well, by about 4 percentage points.
Throw in the dividend — which isn’t just substantial, but which has been growing steadily since 2011 — and this blue-chip should be good for continued better-than-benchmark returns.
Top S&P 500 Dividend Stocks to Buy #9: Procter & Gamble (PG)
PG Dividend Yield: 3.4%
Shoppers don’t care as much about paying up for premium brands as they once did. That makes the Amazon.com, Inc. (AMZN) announcement that it’s launching its own slew of consumer products the last thing that Procter & Gamble Co (PG) needs to hear.
But something tells us that P&G will be just fine in the long run.
Procter & Gamble has survived two world wars and economic catastrophes, and so has its dividend, with the payout going uninterrupted and steadily rising since the 19th century. PG’s products have survived technological change after technological change — people are still buying, and for now, there’s not enough compelling reason to believe that consumers will cool to P&G’s brands.
In the short-term, PG is returning cash to shareholders — $18 billion per year in dividends and buybacks — while cutting $10 billion in costs in 2016 alone.
Top S&P 500 Dividend Stocks to Buy #8: Boeing (BA)
BA Dividend Yield: 3.4%
Yes, aircraft deliveries will decline this year, but BA is killing Airbus in orders this year and taking market share. Just recently Boeing shares got a little nudge in the back courtesy of a $11.3 billion order to produce 100 jets for Vietnam carrier VietJet.
At the same time, other divisions — such as defense, space and security — are taking up some of the slack in commercial aircraft.
The current headwinds of lower production, discounts and weak global growth will likely weigh on BA stock all year, but shares still offer a compelling value for patient investors. With a forward price-to-earnings ratio of just 14, BA stock trades well below its own five-year average, as well as the broader market.
Top S&P 500 Dividend Stocks to Buy #7: Pfizer (PFE)
PFE Dividend Yield: 3.6%
Like other big pharmaceutical companies, Pfizer Inc. (PFE) relies heavily on deals to grow. That’s why the failure of its $160 billion bid for Allergan plc Ordinary Shares (AGN) seemed like such a big setback.
And yet, the market quickly shrugged that off to send Pfizer to new year-to-date highs. Why?
Like MRK, investors are increasingly optimistic about its pipeline, which includes such Phase 3 treatments as breast cancer treatment Ibrance, Xeljanz — which would treat several ailments, including ulcerative colitis and psoriasis — and several biosimilars. PFE is also pursuing smaller acquisitions as briskly as ever.
Past is not prologue, but a solid reputation does help. Pfizer stock has almost doubled over the past five years when you include dividends. The broader market has a total return of just 72% over the same span.
PFE admittedly did cleave its dividend during the financial crisis of 2008-09, but the payout, at 30 cents, is just a pair of pennies short of their pre-crisis levels.
Top S&P 500 Dividend Stocks to Buy #6: Cisco Systems (CSCO)
CSCO Dividend Yield: 3.7%
Does a stock that has been dead money since the start of 2015 sound crazy?
Bear with us here.
Cisco Systems, Inc. (CSCO) has an attractive long-term strategy, including a focus through M&A on the up-and-coming Internet of Things. For instance, earlier this year, Cisco finalized its acquisition of Jasper, a California-based company that makes it easier (and more cost-effective) for companies to launch IoT initiatives.
CSCO is also investing in growth on the enterprise side, with deals to serve everything from predictive maintenance for industrial manufacturing to usage-based car insurance. It also has made a successful expansion to software and cloud service businesses for enterprise and carrier networking customers.
The market appears to be buying CSCO’s forward-looking goals; it’s up a solid 3.9% YTD. The new opportunity could make analysts’ predicted growth rate too conservative, and that would lead to multiple expansion.
Meanwhile, Cisco’s dividend has more than quadrupled from 6 cents to 26 cents currently since the payout’s establishment in 2011.
Top S&P 500 Dividend Stocks to Buy #5: AbbVie Inc. (ABBV)
ABBV Dividend Yield: 3.9%
The rout in oil prices and a more hawkish Federal Reserve makes it hard to like energy stocks and real estate investment trusts (REITs) these days.
So instead, we get yet another drug company.
AbbVie Inc. (ABBV) isn’t blowing anyone away with its 2016 performance — it tops the S&P 500 by less than a point — but it’s dangerous to be shortsighted with this name.
Immunology treatments are a big growth area, and AbbVie has Humira, the world’s top-selling immunology drug. If the company can continue to build on that success, it should remain a market-beater easily.
Meanwhile, its pipeline is stocked with drugs to treat breast cancer, ovarian cancer, pancreatic cancer and multiple myeloma, among other things.
AbbVie hasn’t been around for too long, but it has grown its dividend from 40 cents quarterly to 57 cents since late 2012, when it split from Abbott Laboratories (ABT).
Top S&P 500 Dividend Stocks to Buy #4: Ford (F)
F Dividend Yield: 4.6%
We’ve argued many times that Ford Motor Company (F) is a bargain-busting buy without even touching on the fat dividend.
And that fat dividend alone makes for one heck of a bull case.
First, Ford has monthly sales growth the likes of which it hasn’t seen in 10 years. Importantly, sales of higher-margin sport utility vehicles and trucks get credit for the performance. Sales of F-Series pickup trucks rose a 13% increase in year-over-year April alone.
And lest anyone worry about a slowdown in China — the world’s largest car market — F is chugging along there too.
Meanwhile, Ford has gotten serious about its dividend since restating it in 2012. What started out as a 5-cent quarterly payout has now tripled to its current 15 cents.
Top S&P 500 Dividend Stocks to Buy #3: Mattel (MAT)
MAT Dividend Yield: 5%
This one might be a bit of a stretch, but after a prolonged period of pain, Mattel, Inc. (MAT) might be at the beginning of a rebound.
MAT has been a high-yielder for a long time because shares collapsed from 2013 through last year on weak Barbie and American Girl sales and the loss of the Disney Princess license to Hasbro, Inc. (HAS).
But now, things are finally starting to look up.
While Barbie sales were down 3% in the most recent quarter, the company is doing well across its Fisher-Price and Hot Wheels divisions. Meanwhile, early results from its DC Super Hero Girls — a long overdue female line of toys that the company first rolled out in Target Corporation (TGT) stores — are encouraging. If MAT has a hit on its hands, shares could take off.
Top S&P 500 Dividend Stocks to Buy #2: General Motors (GM)
GM Dividend Yield: 5%
Just as we see with Ford, General Motors Company (GM) is priced too low for the risks it carries — especially when you build in the cushion of the generous yield.
In the most recent quarter, GM’s profit more than doubled on record earnings in North America and continued strength in China. Europe, long a sinkhole for General Motors, almost broke even. Even South America, which is in a serious funk, posted a narrower loss.
Despite all this, GM stock trades at only five times forward earnings. That far below its own five-year average, as well as the S&P 500.
And GM also has been trying to make things right by throwing cash at shareholders, starting with a 30-cent dividend in 2014 that it has since raised twice to the current 38 cents.
Top S&P 500 Dividend Stocks to Buy #1: AT&T (T)
T Dividend Yield: 5%
Like competitors, AT&T Inc. (T) is dealing with the a lack of industry growth by branching.
Its acquisition of DirecTV might seem a bit behind the times, but other efforts remain promising. The Internet of Things, cloud services and tapping Mexico’s wireless market are all credible strategies to boost revenue over the long haul.
On dividend side of things, T is routinely one of the highest yielders in the S&P 500, with uninterrupted payouts stretching back to the Reagan administration. And it’s no slouch, either — AT&T would make a list of the top S&P 500 stocks by pure yield alone.
Furthermore, T is a great stock for playing defense. By S&P Capital IQ’s reckoning, T has a five-year beta of 0.27, making it far less volatile than the S&P 500.
There’s nothing novel about buying AT&T, but it doesn’t mean it’s not a good strategy.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.