We all knew that 2017 would be a year full of surprises. With an unpredictable new president in the White House and the animal spirits returning to the stock market, it was a combustible mix. But despite the red-hot gains, a few dividend stocks remain astoundingly well-priced.
Perhaps the biggest surprise is that the market has been remarkably calm. The S&P 500 is up a respectable — but not particularly noteworthy — 5% year to date, and volatility has been in deepfreeze. Prior to this week, it had been 109 trading days since the S&P 500 had seen a decline of even 1%.
Put another way, the biggest surprise — in a year expected to be full of surprises — is the lack of surprise. This just goes to show that the market has a sense of humor.
But while the broader market has been exceptionally calm in 2017, there are definitely pockets of value forming, particularly in dividend stocks. Many of the dividend stocks that finished 2016 strongly have been taking their lumps in the first quarter. For instance …
- Signs that OPEC members are already reneging on their pledge to reduce production have sent the price of crude oil lower and roughed up several high-quality energy stocks.
- Automakers have also taken a particularly harsh beating, as 2017 auto sales look to be weaker than previously expected.
All of this creates potential opportunities for us in the second quarter, as falling prices send dividend yields higher. So today, we’re going to look at seven of the best dividend stocks to buy for the second quarter. I expect all to outpace the market.
But the beauty of a dividend strategy is that — even if we’re early — we’re getting paid handsomely to wait. In no particular order …
Oaktree Capital (OAK)
OAK Dividend Yield: 5.6%
The economy is looking pretty strong these days. Unemployment is low, business confidence is up. By most accounts, it’s looking pretty decent out there.
Of course, that can change in a hurry, and when it does it often catches investors by surprise.
If you think that maybe — just maybe — we could hit a rough patch in the next few quarters, you might want to take a good look at Oaktree Capital Group LLC (NYSE:OAK). Oaktree is an alternative investments manager that specializes in distressed debt. Well, with the economy strengthening, there isn’t a lot of distressed debt these days, so OAK has been mostly sitting on its hands and allowing its older funds to season.
But if we do finally get some turbulence in the debt markets, Oaktree has over $20 billion in cash ready to deploy. So in OAK, you get an attractive 5.6% dividend yield that effectively pays you to wait.
And when the turbulence finally arrives, Oaktree is likely to do well while most of the rest of your portfolio is sagging.
Main Street Capital (MAIN)
MAIN Dividend Yield: 6%
Investors haven’t quite known what to do with business development companies (BDCs) over the past year. Along with real estate investment trusts (REITs), mortgage REITs and most other high-yield dividend stocks, investors have been concerned that rising interest rates would be a major headwind.
Well, Main Street Capital Corporation (NYSE:MAIN) seems to be taking these worries in stride. Including dividends, the stock is up about 20% during the past year. And I expect more gains to come.
Main Street makes debt and equity investments in small and middle-market companies such as Ameritech College that might lack the size and scale to attract capital through the traditional debt or equity markets. A typical MAIN investment company might have annual sales of $10 million to $150 million.
Smaller companies, which lack the army of sophisticated tax lawyers employed by large multinationals, have the most to gain from federal tax reform. So, Trump’s proposed tax cuts should be a boon to Main Street’s portfolio companies.
Will those cuts be forthcoming in the second quarter?
Frankly, I have no idea. It seems like congress has its hands full with Obamacare reform at the moment, so tax cuts might have to wait. But I’m good with that. In Main Street, we get a great 6% yield and a payout that has been steadily hiked over the past six years.
Tax reform or not, we’re getting paid handsomely to see how this pans out.
Energy Transfer Equity LP (ETE)
ETE Distribution Yield: 6%
You might recall that I chose Energy Transfer Equity LP (NYSE:ETE) in the Best Stocks for 2016 contest … and won with a 53% return for the year. And it still remains one of the best dividend stocks to buy right now, though the story is a bit different from the first time I recommended it.
ETE is one of the largest pipeline operators in North America and is the general partner of Energy Transfer Partners LP (NYSE:ETP), Sunoco Logistics Partners LP (NYSE:SXL) and Sunoco LP (NYSE:SUN). Collectively, the Energy Transfer empire operates 71,000 miles of quality pipeline assets.
Energy Transfer has some reputational damage to repair after its botched attempt to acquire Williams Companies Inc (NYSE:WMB) last year and some questionable legal wrangling to then get out of the deal. It also enraged ETP unitholders by announcing a merger with SXL, something that many investors believe to be a stealth dividend cut.
I’m very comfortable owning a company with a checkered past if I understand the risk and am being fairly compensated for it. And in ETE, we are certainly being compensated for it. The MLP sports a distribution yield of 6%, and while distribution growth has been flat for the past year, this is a stock that regularly raises its payout at a double-digit clip.
Energy Transfer Equity’s stock price has sagged this quarter, which I would view as a major buying opportunity. With a pro-energy administration in power, ETE should have a very solid future in front of it.
Kinder Morgan (KMI)
KMI Dividend Yield: 2.3%
Along the same lines, I’d recommend rival pipeline giant Kinder Morgan Inc (NYSE:KMI).
Unlike ETE, which manages a sprawling empire of traditional MLPs, Kinder Morgan operates as a single corporation. That makes the company easier to understand and less problematic to hold in an IRA or other tax deferred account.
Kinder Morgan was a champion of dividend investors for years, regularly boosting its payouts by double digits per year. Alas, the company got a little ahead of itself and borrowed too aggressively going into the energy bust. So, KMI had to dramatically cut its dividend about 15 months ago, alienating some of the company’s biggest supporters.
Kinder Morgan will become a hiking champion among dividend stocks again. But investors seem to have gotten bored waiting for it, as the stock price has gone nowhere in months.
Use this lull as an opportunity to snag one of America’s finest pipeline operators and collect the 2.4% dividend while you wait. The dividend growth will return soon enough, and when it does you will have gotten your shares at a very respectable cost basis.
General Motors (GM)
GM Dividend Yield: 4.4%
Alas, I’m off to a lousy start, down about 1%. General Motors started the year strong on hopes that some of the pessimism on U.S. auto sales was overdone. But fears of rising interesting rates and cash-strapped auto borrowers seem to be overshadowing everything.
I’m well aware that the exceptionally strong auto sales of the past few years were unsustainable. I expect sales to be flattish for the next few years. But GM’s stock price doesn’t suggest flat auto sales; it suggests something closer to severe financial distress. As General Motors trades at a P/E ratio of 6 and a dividend yield of 4.4%, it would appear Wall Street was expecting the worst.
At these prices, GM’s sales don’t even have to be good to send the share price higher. They just have to avoid being terrible. And while we’re waiting for Wall Street to recognize that, we can collect a high and rising dividend.
F Dividend Yield: 5.2%
Along the same lines, Ford Motor Company (NYSE:F) is an absolute steal among dividend stocks right now.
Ford trades for 7 times expected 2017 earnings and sports a dividend yield of over 5%. At these prices, Wall Street is expecting a lot to go wrong. If reality proved to be even slightly less bad, then Ford shareholders should be very pleasantly surprised.
And I have every reason to believe that auto sales will be a lot less cyclical in the coming years. One of the results of the Great Recession was that Americans put off a lot of large purchases like autos for as long as possible, opting to stretch out the useful life for a couple extra years. As a result, the average age of American cars on the road is now 12 years old.
Now, cars are built better these days and last longer than they used to. But after 12 years, they still start looking a little rough. Barring a major recession, I expect auto sales to remain strong as Americans finally trade up and out of their aging jalopies.
That bodes well for Ford and GM.
AAPL Dividend Yield: 1.6%
And finally, I’ll leave you with one last dividend dynamo: consumer electronics leader Apple Inc. (NASDAQ:AAPL).
After a rough 2015, Apple really started to show signs of life halfway through last year. Since then, the stock is up by more than 40%, and I expect more gains to come.
We’ll start with valuation. Apple trades for 17 times earnings, which is a massive discount to the S&P 500’s P/E ratio of 26. Now, I fully understand that AAPL is no longer the high-growth stock it used to be. Those days are over. But even if Apple has sluggish growth prospects for the foreseeable future, I have a difficult time seeing why the stock would trade at such a deep discount to the broader stock market. It’s not as if the average S&P 500 stock is growing particularly fast right now.
Slow growth is the norm.
Meanwhile, Apple’s massive cash hoard just continues to grow. As of its last quarterly report, it was nearly $250 billion, the vast majority of which was offshore. If maybe — just maybe — Trump is able to follow through with his pledge to lower corporate taxes, you could see a large chunk of that money returning stateside in the form of share buybacks or special dividends.
But even if that tax reform never happens, Apple is still one of the best dividend stocks to buy for its future prospects. Although it yields a modest 1.62%, Apple has been raising its dividend at 10% per year. That’s not too shabby.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long AAPL, ETE, F, GM, KMI, MAIN and OAK.