Dr. Jeremy Siegel is right. Dividend stocks are great.
The Wizard of Wharton recently opined that “equities are the major income-producing asset of the future.” I tend to think he’s right. Heck, equities are the major income-producing asset of right now.
From inflation-beating income to generating market beating returns, the best dividend stocks on the market simply have the goods. Yes, it’s nice when companies throw money into buying back shares, as that theoretically does make what you’ve got worth a little more … but frankly, I’d rather have the cash myself to reinvest as I’d like.
Of course, finding the best dividend stocks can be tricky. There are a number of dividend traps — high-yielding stocks whose fat payouts are actually too good to be true. And there’s nothing worse than holding a dividend stock that cuts or suspends its payout, because typically, shares are going through the ground as well.
No, it takes a certain set of fundamentals — cash flows, payout ratios, earnings growth and more — to make a good dividend stock.
Which stocks have the goods? We look at the best dividend stocks on the market, and to give a nod to a diversified portfolio, we’ll look at an income gem from each of Wall Street’s 10 sectors.
The 10 Best Dividend Stocks: NextEra Energy (NEE)
Dividend Yield: 2.8%
Utilities are a fertile ground for dividend stocks. After all, the steady nature of their business implies regular cash flows and ample yields.
But only a certain subset of utilities offer growth, and NextEra Energy Inc (NEE) is in that number.
The key for NEE’s growth is its focus on renewables. NextEra boasts the nation’s largest collection of co-generation plants, solar and wind farms. That keeps NEE from having to worry about expensive regulations and costs connected to coal-fired plants, and it provides plenty of juicy tax credits for its operations. As a result, NEE has enjoyed much stronger earnings growth than its boring, more traditional rivals.
Still, NextEra is a utility, so it still offers plenty of stability from servicing the power needs for 4.8 million customers. Meanwhile, dividend growth has been just swell, as NEE has improved its quarterly payout by around 150% since 2005.
In short, NextEra is more than just your standard “boring” utility stock.
The 10 Best Dividend Stocks: Wells Fargo (WFC)
Dividend Yield: 3.2%
When it comes to financial stocks, the best dividend stocks are going to belong to the most conservatively run companies. In terms of the big banks, that would be Wells Fargo & Co (WFC).
WFC’s quality underwriting standards helped it avoid the bulk of the housing meltdown during the Great Recession. It also helped Wells avoid and plan for many of the energy-related loan losses effecting rivals today.
Additionally, Wells hasn’t chased “risky” investment bank profits like big rivals JPMorgan Chase & Co. (JPM) or Citigroup Inc (C). Trading assets and other similar activities remains low at WFC. It’s “just” a bank, through and through.
Still, WFC does have some firepower.
During the meltdown, Wells Fargo purchased struggling Wachovia for a song, which did give the company some asset managing muscle — mutual funds and the like provide extra oomph, but still are pretty tame from a risk perspective.
It’s easy to see how WFC hasn’t posted an annual loss since the 1960s, and why Warren Buffett continues to plow big bucks into Wells Fargo and its big-for-a-bank-stock 3.2% dividend.
The 10 Best Dividend Stocks: Simon Property Group (SPG)
Sector: Real Estate
Dividend Yield: 3.2%
Dividend stocks and real estate investment trusts (REITs) have historically gone hand in hand. This equity class typically kicks out high dividends thanks to juicy tax benefits at the corporate level.
REITs once were rolled up in the financial sector, but now they’re on their own. And a best-in-class name in the group is Simon Property Group Inc (SPG).
SPG is the nation’s largest owner of premium shopping malls, outlet centers and community lifestyle centers. The key is the word “premium.” Simon has shifted its portfolio toward the high end through asset sales, focusing on key markets and the spinoff of its less-than-desirable malls.
Removing lower-income shoppers has done wonders for the business; last year, SPG reported record funds from operations (FFO) growth.
And while SPG doesn’t boast a monster headline yield, its dividend growth has been outstanding, with the REIT growing its payouts by roughly 70% since 2012.
The 10 Best Dividend Stocks: Apple (AAPL)
Dividend Yield: 2.4%
A lot of ink has been spilled when it comes to tech superstar Apple Inc. (AAPL), and a lot of it isn’t flattering.
But AAPL still has an argument to be considered among the best dividend stocks in technology.
Yes, Apple has struggled to reignite the torrid growth of years’ past, but people forget that Apple has been down this road before. But the iPhone is still a wildly popular device that helps fuel music subscriptions, as well as iTunes and App Store downloads, and the company appears to be working on the next big thing — it’s just that the next big thing might be a car, not a mobile device.
Apple also boasts a fast-growing dividend powered by one of the largest cash piles in the known world. At 57 cents quarterly, Apple’s dividend is some 50% larger than the first payout it issued in 2012. And with a scant 23% payout ratio, AAPL has all sorts of headroom to improve the dividend further.
The 10 Best Dividend Stocks: Phillips 66 (PSX)
Dividend Yield: 3.2%
The best dividend stocks from the energy sector offer the perfect combination of growth and stability — the latter of which has been exceedingly hard to find.
We get that in Phillips 66 (PSX).
PSX is one heck of a refiner, whose stability comes from the fact that it actually benefits from low crude oil and natural gas prices. But unlike rivals, Phillips 66 isn’t just about gasoline and diesel fuel — it has plenty of higher margined chemicals processing under its belt, too. These divisions have helped PSX deliver rising cash flows since being spun off from ConocoPhillips (COP) a few years ago.
Phillips 66 hasn’t just sat on that cash — it has plowed much of those flows back into new midstream businesses. After inheriting plenty of pipelines from ConocoPhillips, PSX has expanded that network through acquisitions and organic projects — many of which it has dropped down into its MLP, Phillips 66 Partners (PSXP).
This combination of a slow and steady refining business and a faster-moving midstream business has created a dynamo dividend stock that generated operating cash flow of $5.7 billion. PSX poured all of that and then a little more into capital expenditures to grow the business, but the company still found room to hike the dividend 12.5% last quarter.
Since its IPO, PSX has raised its dividend a whopping 215%.
The 10 Best Dividend Stocks: J.M. Smucker (SJM)
Sector: Consumer Staples
Dividend Yield: 1.9%
When it comes to growth stocks, peanut butter, jelly and coffee don’t exactly come mind … but they should, because that’s what consumer staple gem J M Smucker Co (SJM) does.
SJM has transformed its portfolio of consumer goods into one that pays big benefits for investors. That’s included adding “complimentary products” to its major brands, as well as a healthy addition of natural/organic products.
Smucker’s has also become a coffee powerhouse, selling coffee under the Folgers and Dunkin Doughnuts brand names. Sales here have also been quite brisk, as the firm has embraced single-cup brewing options.
And let’s not forget its foray into high-margin pet food that has helped power Street-crushing results like SJM’s most recent quarter, which saw Smucker beat estimates by a whopping 66 cents per share.
Yes, SJM yields just south of 2%, but here, you’d be very silly to ignore it on that basis. Smucker has juiced its dividend by about 140% over the past decade, all while outperforming the S&P 500 17.6% to 7.6% annually on average over that time.
SJM isn’t the biggest name in consumer staples, nor is it the highest-yielding, but it’s one of the best dividend stocks in the sector, if not the king.
The 10 Best Dividend Stocks: Starbucks (SBUX)
Sector: Consumer Discretionary
Dividend Yield: 1.5%
Speaking of coffee, when it comes to discretionary spending, we spend of it on a cup of joe. And that’s helping turn Starbucks (SBUX) into a dividend machine.
You might not believe it, but the profit margins on a $4 cup of coffee are pretty darn good. And while most headlines bemoan the slowdown in retail spending, SBUX hasn’t seemed to notice.
What investors should like about Starbucks is its loyalty program, which despite criticism over recent changes still is a whopping success. SBUX now has more money loaded onto its cards than many of the commercial banks operating in the United States. Customers loaded nearly $1.2 billion into their Starbucks cards during the first quarter.
That money isn’t sitting idle; it’s earning Starbucks some interest. Think of it like an insurance company’s “float.” And as more consumers keep on using their Starbucks cards, the SBUX should be able to generate more income this float.
Meanwhile, Starbucks is a dividend growth machine. The quarterly payout on SBUX shares has nearly tripled since 2011 to 20 cents per share. For context, that means anyone who bought in at various points that year when Starbucks traded at $20 per share is now yielding roughly 4%. So don’t let the current 1.5% yield dissuade you.
The 10 Best Dividend Stocks: General Electric (GE)
Dividend Yield: 3%
While everyone will credit Jack Welch with being General Electric Company’s (GE) “best” CEO … well, he did make a few missteps. He did load GE with tons of financial assets, real estate and loans that got the former dividend stalwart into trouble during the recession.
Ask anyone who held GE stock before 2009 how they felt when their dividend was cleaved from 31 cents per share to just a dime.
The upside is, General Electric has been making amends and cleaning house. Gone are all the toxic financial assets. What’s left is a heavy manufacturing giant leading the way in energy, automation and healthcare. And besides building giant turbines, GE has also expanded into complementary businesses such as grid software — higher-margin items that have helped General Electric’s profits of late.
Meanwhile, General Electric has rushed to get the dividend back to its pre-Great Recession level, with shares currently doling out 23 cents, good for a current yield of 3%.
The 10 Best Dividend Stocks: Becton Dickinson and Co (BDX)
Dividend Yield: 1.6%
When it comes to healthcare, the best dividend stocks are boring. Sure, biotech drugs can double overnight, but they can tank just as quickly — and typically those hot movers aren’t yielding anything anyway.
No, if you want payouts from healthcare, you want companies like Becton Dickinson and Co (BDX).
BDX is one of the world’s largest producers of needles, syringes and other sharps-related devices — things that can be found in doctor’s offices, hospitals and home care. Products like insulin needles and catheters are designed to be single-use items, so medical professionals and consumers constantly must replace them.
As a result, Becton Dickinson has plenty of demand, as evidenced by the nearly 33% growth in revenues to more than $10 billion last year.
BDX recently expanded into higher-margin medical devices with a few careful buyouts. Adding items like IV pumps to sharps businesses is a perfect complement to its current offerings.
Meanwhile, BDX has delivered more than 30% dividend growth over the past three years alone. So while Becton’s overall yield isn’t grand, its potential to expand — and the capital gains prospects — make it among the best dividend stocks in the space.
The 10 Best Dividend Stocks: Dow Chemical (DOW)
Dividend Yield: 3.5%*
When it comes to basic materials, there’s really only a handful of great dividend stocks, just thanks to the cyclical nature of the business.
Dow Chemical Co (DOW) — one of the largest producers of chemicals on the planet — is the best-of-breed pick here.
The story for Dow Chemical isn’t about its past, though, but its future. Dow is in the midst has plans to merge with rival E I Du Pont De Nemours And Co (DD), which you all know as DuPont. These firms announced plans to hook up last December, creating one of the largest chemicals complexes on the planet before splitting apart into three separate businesses — one for commodity chemicals, one for agricultural chemicals and seeds and one for specialty chemicals.
What investors will be left with is one boring business and two faster-moving ones.
Dividend investors should know that the combined steady commodity chem businesses should provide plenty of yield, while the agribusiness company should be faster in terms with dividend growth.
If the merger somehow doesn’t go through, DOW still yields a fine 3.5% on its own.
As of this writing, Aaron Levitt was long PSX and BDX.