The odds of a Federal Reserve rate hike in December are only going up, but even if the central bank pulls the trigger, dividend stocks will always remain in style.
True, they could come under price pressure because they compete with bonds for investor dollars, but they typically don’t stay down for long. It’s not like we’re looking at anything but the most minimal raise anyway.
So while interest rates will go up, they’ll still be pitifully low. That’s where superior dividend stocks come in. Names with solid track records of stable and in some rising dividends are under consideration for an equity income portfolio. If they can deliver above-average price appreciation too, so much the better.
Combine the two, and you’ve got a market-beating total return engine.
We searched the S&P 500 to find these types of stocks. Mind you, the benchmark index has a subpar dividend of its own, at just 2.2%. It’s easy to find stocks with higher yields, but then, a high yield can be a warning sign for a dividend payer. The highest-paying names in the S&P 500 all have issues that the market is rightly worried about.
So we looked for the happy middle ground, and that’s how we arrived at the following list of dividend stocks to buy now. They’re blue-chip picks with strong income streams, good (but not dangerously great) yields and market-beating price potential.
Top S&P 500 Dividend Stocks to Buy #10: Wells Fargo (WFC)
WFC Dividend Yield: 2.9%
If there’s a downside to the big price surge in Wells Fargo & Co (NYSE:WFC) stock since the presidential election, it’s that the dividend has fallen below 3% for new money. Just don’t forget that if a new administration removes a number of financial regulations, WFC will have more room to hike its payout.
Either way, WFC’s share price has recovered a good chunk of the selloff following its phony accounts scandal. Moreover, despite its issues, Wells Fargo remains a high-quality stock with heavy exposure to the U.S. economy. It’s the nation’s largest mortgage lender, after all.
That also means Wells is not dependent on Wall Street activities like investment banking and trading. That helps tamp down volatility in earnings.
Shares are closing in on breakeven for the year-to-date. Even with new restrictions placed on the bank, overwhelmingly positive sentiment on the financial sector should allow WFC to turn positive for 2016 soon.
Top S&P 500 Dividend Stocks to Buy #9: Merck (MRK)
MRK Dividend Yield: 3%
Merck & Co., Inc. (NYSE:MRK) is on fire this year — at least for a stodgy ol’ pharmaceutical giant.
MRK shares are up 18% for the year-to-date even after cooling off from all-time highs. Add in the dividend, and the total return easily tops 20%.
The price surge has tamped down the yield for new money, but MRK stock still looks to offer a market-beating combination of price appreciation and payouts.
The pharma outfit is facing some patent losses, but new drugs and acquisitions should make up for them. Lung-cancer drug Keytruda is a burgeoning blockbuster. Moreover, Merck has five drugs that currently are being reviewed by regulatory agencies, as well as 25 late-stage and 11 mid-stage programs.
If that’s not enough to give investors confidence, Morningstar notes that Merck holds a strong position in immuno-oncology, a diverse portfolio and the ability to further cut costs.
Top S&P 500 Dividend Stocks to Buy #8: Cisco Systems (CSCO)
CSCO Dividend Yield: 3.4%
Cisco Systems, Inc. (NASDAQ:CSCO) is a blue-chip dividend machine, but it offers more than just a steady stream of payouts. CSCO has reconfigured its business to cloud-based services, an area that promises tremendous growth.
True, it’s a long, painful and slow transition to cloud-based services and away from hardware. The arrow hasn’t always been pointed up, but Cisco has been regularly topping Wall Street’s earnings and revenue targets. And, as always, the market loves cost cuts, which CSCO continues to deliver.
Cisco has been a total-return machine so far this year, with price appreciation of nearly 11% on top of the healthy dividend.
Shares tumbled with the rest of the tech sector after the presidential election, and lousy guidance in its most recent earnings report hasn’t helped, either. But as a result, CSCO’s yield has swollen, and shares have reached a better entry point.
Top S&P 500 Dividend Stocks to Buy #7: International Paper (IP)
IP Dividend Yield: 3.8%
It’s as old-line economy as you can get, but paper products have a bright future in our increasingly digital economy. As the largest containerboard maker in the world, International Paper Co (NYSE:IP) is poised to benefit.
You can thank e-commerce for that. IP supplies 50% of Amazon.com, Inc.’s (NASDAQ:AMZN) need for cardboard boxes. Between AMZN and the rest of the e-commerce industry, the need for such products is in a secular uptrend.
Shares have shrugged off the pressures of slowing demand in China and a strong dollar to put up a year-to-date gain of 28%. And even then, IP stock still fetches only 12 times forward earnings. That’s not out of line for a company with a projected long-term compound annual growth rate of 7% and a dividend yield near 4%.
Top S&P 500 Dividend Stocks to Buy #6: Altria (MO)
MO Dividend Yield: 3.8%
Say what you will about tobacco companies, but they’re an attractive place to be if you’re looking for equity income.
An active one like Altria Group Inc (NYSE:MO) is even more so.
MO doubled down on its sin-stock status after buying a big stake in Anheuser-Busch InBev SA NV (ADR) (NYSE:BUD), but it’s the juiced-up buyback program that makes MO look good for the foreseeable future.
BUD’s merger with SABMiller plc (OTCMKTS:SBMRF) gave MO a 9.6% stake in that company — and more than $5 billion in cash. That allowed MO to raise its share repurchase commitment to $3 billion from $1 billion through the second quarter of 2018.
A generous and dependable dividend combined with this financial engineering makes for a powerful total-return combination.
Top S&P 500 Dividend Stocks to Buy #5: Chevron (CVX)
CVX Dividend Yield: 3.9%
Like most of the rest of the energy sector, Chevron Corporation (NYSE:CVX) has been hit by low oil prices. Naturally, investors are nervous about cash flows and the stability of dividend payments.
They needn’t worry. Oil prices appear to have stabilized. CVX delivered Street-beating quarterly results last time around, driven by cost cuts that have more room to run. Capital spending and operating and administrative expenses have been reduced by more than $10 billion from the first nine months of 2015.
Besides, as an integrated energy major, Chevron’s downstream business offers a bit of a hedge against weakness in crude oil. Oil prices are cyclical — even if the cycles can take a painfully long time to turn.
That’s fine. Dividend stocks work best over the long haul anyway.
Top S&P 500 Dividend Stocks to Buy #4: General Motors (GM)
GM Dividend Yield: 4.6%
The market is rightly worried about General Motors Company (NYSE:GM) hitting the peak of the latest car-buying cycle, but it’s overdoing its concerns.
For one thing, even if U.S. car sales flatten out they’re going to do so at historically high levels.
And yet GM stock has been discounted for disaster. It really comes down to valuation with this name. General Motors has a forward price-to-earnings multiple of just 5.8. As one InvestorPlace commenter recently noted of GM stock, a P/E that low bakes in a lot of stupid.
As noted above, even if we are at a cyclical peak, no one expects demand to drive off a cliff. If U.S. sales cool off, they will be doing so from record levels. Perhaps that’s why analysts still expect GM to have a compound annual growth rate of more than 10%.
Top S&P 500 Dividend Stocks to Buy #3: Verizon (VZ)
VZ Dividend Yield: 4.8%
The utilities and telecommunications sectors are bastions of dividend stocks, but utilities look a bit pricey these days. Telcos, while getting stretched, are less so. That’s why No. 1 wireless carrier Verizon Communications Inc. (NYSE:VZ) is worth a closer look.
As much as traditional telecommunications is a poky business, VZ is making some interesting moves. Most famously it recently acquired the core properties of Yahoo! Inc. (NASDAQ:YHOO) to drive new revenue streams and position itself for the future. And a little further back, Verizon acquired AOL.
You might scoff at Verizon picking up has-been Internet properties, but they actually provide VZ with potential growth in digital content and advertising technology.
Sure, Verizon is boring, but it’s supposed to be. And it’s actually being pretty aggressive when it comes to digital media. So not only do you enjoy nearly 5% in yield, but you have the potential for decent price appreciation going forward.
Top S&P 500 Dividend Stocks to Buy #2: Ford (F)
F Dividend Yield: 5.1%
The basic investment thesis on Ford Motor Company (NYSE:F) is the same as it is for GM. The market is bearing down too hard on share price for an imminent deceleration in vehicle demand.
That makes Ford a cheap stock. Even better, it just got cheaper for a stupid reason.
Investors fled the name for fear that it made an enemy in President-elect Donald Trump. (Note to sellers: There was no feud to begin with.)
F stock is having a dismal year — it’s down more than 16% — but that only highlights the value proposition and raises the dividend yield for new investors.
At just 7 times forward earnings, Ford stock would appear to have baked in a lot of bad news already. As long as the dividend is safe — and there’s reason to believe it is — a patient investor will enjoy a generous dividend stream now and price appreciation later.
Top S&P 500 Dividend Stocks to Buy #1: AT&T (T)
T Dividend Yield: 5.2%
If you’re looking at the telecom sector for dividend stocks to buy now, you’ve got to go with AT&T Inc. (NYSE:T). It’s the king of blue-chip dividend payers. You can’t find another mega-cap that throws off dividends like AT&T.
Like its No. 1 competitor, T is dealing with the telco growth conundrum by branching out. That’s why it acquired DirecTV. And now, AT&T is going back to the M&A well.
Yes, T struck a deal to buy Time Warner Inc (NYSE:TWX). If federal regulators block the deal, they might be doing shareholders a favor. They probably won’t, though, which means you have to have a little faith in T’s digital mobile strategy. At least it’s not standing pat while VZ chugs ahead.
Either way, with gushers of free cash flow, the dividend is safe. Price appreciation has been adequate too as long as you think of this name as kind of like a bond in drag.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.