The Federal Reserve’s more dovish stance on interest rates means that investors starved for yield are going to have to wait a while longer for relief. And so the challenge remains when looking for dividend stocks to buy.
Since it’s impossible to reach for higher yields without taking on greater risk, dividend stocks don’t boast the kind of yields afforded by, say, junk bonds or master limited partnerships. What they do have is reliability and the potential for price appreciation, all while offering above-average yields.
Make no mistake, yields on dividend stocks are low even as companies are disbursing record levels of cash to shareholders though payouts and buybacks. True, the dividend yield on the S&P 500 Index is higher than it was a year ago — 2.19% vs. 1.98% — but it’s still kind of pathetic in a historical context. The long-term average yield for S&P 500 dividend stocks is 4.39%.
The stocks with the highest yields in the S&P 500 can be fairly generous, but most of these names are not dividend stocks you’d want to buy. The high yields are a product of share prices that have beaten down for a reason. In too many cases, these dividend stocks look poised for more downside or their dividends are in peril.
To split the difference, we look at the best S&P 500 dividend stocks based not just on yield, but on the strengths of their fundamentals and balance sheets. Yes, the yields may be less than spectacular, but the potential for superior total returns is arguably much higher. (Yields current as of June 22.)
Top S&P 500 Dividend Stocks to Buy #10: Procter & Gamble Co (PG)
PG Dividend Yield: 3.2%
Procter & Gamble Co (PG), a component of the Dow Jones Industrial Average, has paid rising dividends since the 19th century. That kind of track record means you can bank on those payouts — they’ll keep flowing no matter what.
Furthermore, PG is returning cash to shareholders through a large share repurchase program. All told, $18 billion per year in dividends and buybacks isn’t just a way to give cash back to stockholders, it also helps provide support for shares. Meanwhile, P&G is also cutting $10 billion in costs through 2016.
Shares are up a slightly market-beating 5.2% for the year-to-date now that PG stock finally has pulled out of its downtrend.
Top S&P 500 Dividend Stocks to Buy #9: Merck & Co., Inc. (MRK)
MRK Dividend Yield: 3.22%
Big pharmaceutical companies use mergers and acquisitions to fill their pipelines and cut costs. That strategy appears to be working for Merck & Co., Inc. (MRK).
Like Zetia, Merck’s $2.6 billion cholesterol drug, blockbuster drugs go off-patent and need to be replaced by other best-sellers. That’s why long-term investors can be comfortable with MRK. Merck 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 8% so far this year, which outperforms the S&P 500 by almost six percentage points. Throw in the dividend, and this Dow stock looks good for better-than-average total returns.
Top S&P 500 Dividend Stocks to Buy #8: Boeing Co (BA)
BA Dividend Yield: 3.3%
The market is rightly worried about some of Boeing Co’s (BA) headwinds, from company specific challenges to fears that the industry cycle could be turning against it.
On one front, it has to contend with Airbus (EADSY). The European competitor has beaten Boeing for two years in a row when it comes to backlog. To make matters worse, Airbus is getting a lift on the strong dollar and appears to have a hit with its A321neo jetliner.
Shares in this Dow component are down more than 8% for the year-to-date, and it wouldn’t be surprising to see more price pressure ahead. So why any bullishness on Boeing? BA is killing Airbus in orders this year and taking market share.
The valuation — BA trades at not quite 14 times forward earnings — along with a healthy 10% projected growth rate and generous dividend suggest BA will take off for patient investors.
Top S&P 500 Dividend Stocks to Buy #7: Pfizer Inc. (PFE)
PFE Dividend Yield: 3.5%
Like other big pharmas, Pfizer Inc. (PFE) relies on deals to grow. That’s why the failure of its $160 billion bid for Allergan plc Ordinary Shares (AGN) was a big blow to PFE.
Yet, the market quickly shrugged that off to send Pfizer to new year-to-date highs. It clearly didn’t like the price
And so now shares in the Dow stock are up nearly 8% in 2016 to outperform the S&P 500 by about six percentage points. The thing is we’re talking about dividend stocks here, so longer holding periods are implied. On that basis, you’ve got another blue-chip champion.
Pfizer stock has more than doubled over the last five years after including dividends, beating the broader market by a wide margin.
Top S&P 500 Dividend Stocks to Buy #6: Cisco Systems, Inc. (CSCO)
CSCO Dividend Yield: 3.6%
Cisco Systems, Inc. (CSCO) — yet another Dow stock — has an attractive long-term strategy, which has included the acquisition of Jasper to build out its focus on the up-and-coming Internet of Things.
But the deal also includes growth on the enterprise side, serving 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 market-beating 6.1% YTD. The new opportunity could make analysts’ predicted growth rate too conservative, and that would lead to multiple expansion from the forward price-to-earnings ratio of less than 12.
Top S&P 500 Dividend Stocks to Buy #5: AbbVie Inc (ABBV)
ABBV Dividend Yield: 3.8%
Drug company AbbVie Inc. (ABBV) isn’t blowing anyone away with its 2016 performance — it’s trading pretty much in line with the market — but it’s unwise 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 return to its market-beating ways.
The dividend yield of 3.8% complements the long-term growth rate of more than 15% quite nicely. And, as with all healthcare sector names, it has power demographics at its back. Put it all together, you’ve got a total return winner.
Top S&P 500 Dividend Stocks to Buy #4: Verizon Communications Inc. (VZ)
VZ Dividend Yield: 4.2%
No discussion of top dividend stocks can fail to include a mega-telecommunications stock like Verizon Communications Inc. (VZ). There just aren’t that many big, quality stocks with yields above 4%.
Telecoms aren’t known for growth. Wireless is saturated, broadband isn’t what it used to be and the days of landlines have come and gone. VZ is grappling these challenges with a plan to leverage its vast network to deliver mobile and video advertising.
To that end, the company bought AOL and reports say it’s targeting Yahoo! Inc. (YHOO) pretty seriously.
If this Dow stock can carve out a new role in mobile, analysts might have to boost their growth forecasts.
Top S&P 500 Dividend Stocks to Buy #3: Ford Motor Company (F)
F Dividend Yield: 4.5%
We’ve argued many times that Ford Motor Company (F) is a bargain-busting buy without even touching on the fat dividend. And that alone makes a big part of the bull case.
Car sales slowed last month but that was expected. The weight on Ford stock is that the market thinks we’re at a cyclical top. Maybe so, but shares already reflect that concern.
Despite the May stumble, 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. Heck, Ford Vans had their best performance in 38 years.
And lest anyone worry about a slowdown in China — the world’s largest car market — F is motoring along there, too.
Top S&P 500 Dividend Stocks to Buy #2: AT&T Inc. (T)
T Dividend Yield: 4.6%
If you’re going to put VZ on this type of list, then you’ve got to put AT&T Inc. (T) here too. Indeed, the blue-chip telco is the dividend king of the blue-chip and benchmark indexes.
Like its No. 1 competitors, T dealing with the telco growth conundrum by branching out. That’s why it acquired DirecTV. We’ll see how that goes.
Then there’s the case that T is a great stock for playing defense. A five-year beta of 0.27, according to S&P Capital IQ, means it’s far less volatile than the S&P 500.
And while telecoms typically don’t put up growth, investors should salivate over the far better total returns over the long haul. AT&T has returned 155% over the past 10 years when dividends are included. That clobbers the broader market.
Top S&P 500 Dividend Stocks to Buy #1: General Motors Company (GM)
GM Dividend Yield: 5.2%
Like Ford, General Motors Company (GM) is overly discounted for the risks it carries — especially when you build in the cushion of the generous yield.
In the quarter just passed, 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.
Shares are laboring under the expectation that the car sales cycle has peaked, and that makes them a bargain. GM stock trades at only five times forward earnings. That’s well below its own five-year average and roughly two-thirds cheaper than the S&P 500, according to data from Thomson Reuters.
The market appears to be under-appreciating a long-term growth forecast of 14% per year.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.