I’ve been a big believer in piling money into the best dividend stocks, then staying there for a long time. Perhaps because the start of my career coincided with the nasty 2000-02 bear market, I’ve always taken the view that capital gains can be ephemeral. But a regular dividend represents realized profit I could hang my hat on.
Or so I thought.
I learned a nasty lesson back in 2008, and it’s one I’ll never forget. I was invested fairly heavily in the iShares Select Dividend ETF (NYSEARCA:DVY) and feeling smug about it. Sure, the market could take a tumble, but my high-dividend stocks would weather the storm better than most, right?
Wrong. During the 2008 meltdown, DVY actually lost more than the S&P 500 despite, in theory, being a “safe” dividend-focused fund.
So, what happened?
It came down to diversification, or rather the lack of it. DVY allocated to the highest-yielding dividend stocks that met its criteria … which meant it was massively overweighted to the financial sector. You can imagine how that worked out for me.
Today, we’re going to approach dividend investing a little differently, picking a solid dividend stock from each of the S&P 500’s 10 industrial sectors. And while 10 stocks isn’t what I’d consider a fully diversified portfolio, this will give you a good head start.
The Best Dividend Stocks: Realty Income (O)
Sector: Real Estate
Dividend Yield: 4.5%
You could toss a dart at the stock page of the Wall Street Journal and have a good chance of hitting a very good dividend stock in the real estate sector. Real estate investment trusts (REITs) are some of the most reliable dividend payers out there, and many are on sale at the moment.
The inexorable rise of Amazon.com, Inc. (NASDAQ:AMZN) has made investors rightly wary of the retail sector… and of the landlords that serve them. But not all real estate is at risk of being made irrelevant by Jeff Bezos.
As an example, consider Realty Income Corp (NYSE:O), the “monthly dividend company.” Realty Income owns properties that, if not “Amazon-proof,” are at least “Amazon-resistant.” It tends to own pharmacies, gyms, movie theaters and other high-traffic properties.
Realty Income yields 4.5% and has raised its dividend for 78 consecutive quarters. That’s not too shabby.
The Best Dividend Stocks: International Paper (IP)
Dividend Yield: 3.4%
The materials sector is full of old-economy stocks that don’t make a lot of headlines these days. But many are very steady dividend stocks that also happen to benefit in unexpected ways from the rise of internet commerce.
As a case in point, consider International Paper Co (NYSE:IP).
You might think that a paper company would be the last stock to benefit from the rise of Amazon. But think about it: Everything shipped to your home has to be packaged, and International Paper is a world leader in packaging.
At current prices, IP yields an attractive 3.4%. And while the company had to cut its dividend during the 2008 meltdown, it has been aggressively raising it ever since 2010.
The Best Dividend Stocks: McDonald’s (MCD)
Sector: Consumer Discretionary
Dividend Yield: 2.5%
The consumer discretionary sector isn’t normally considered as a go-to destination for dividend stocks. Consumer discretionary companies tend to be fairly cyclical, making them a little less than ideal for investors seeking consistency above all else.
That said, there are some real income gems here, including fast-food giant McDonald’s Corporation (NYSE:MCD).
McDonald’s is anything if not a survivor. In an industry in which consumer tastes can be particularly fickle, McDonald’s has managed to stay relevant for more than half a century by regularly updating its menu and changing with the times. And again today, McDonald’s blazing new trails with ordering via mobile apps and other technology changes.
At 2.5%, McDonald’s stock doesn’t sport as high of a yield as it used to, but that’s because the stock price is up by more than half in just the past two years.
And I wouldn’t worry too much about the modest yield. McDonald’s has raised its dividend for 40 consecutive years and by an average of 22% per year over that time period. So whatever you lack in high yield today, you’ll likely make up in high dividend growth tomorrow.
The Best Dividend Stocks: Walmart (WMT)
Sector: Consumer Staples
Dividend Yield: 2.6%
Let’s now jump into consumer staples, a sector chock full of traditional dividend stocks. I’m actually wary of some of the most popular dividend payers, such as tobacco giants Philip Morris International Inc (NYSE:PM) and Altria Group Inc (NYSE:MO). Both are very expensive by the standards of the past 20 years, and demand for their primary product — cigarettes — is in terminal decline.
This might be something of a contrarian pick, but I’d recommend instead the shares of retail giant Wal-Mart Stores Inc (NYSE:WMT). Yes, I understand that traditional brick-and-mortar retail is dying a slow death. But Walmart is one of the few retailers out there that can reasonably expect to compete with Amazon, and WMT has made solid progress in building out its online infrastructure.
At current prices, Walmart yields a modest 2.6%. But this is a company that has raised its dividend for 44 consecutive years, and I don’t expect that chain to be broken any time soon.
The Best Dividend Stocks: Kinder Morgan (KMI)
Dividend Yield: 2.6%
The energy sector has been a good fishing pond for dividend stocks for a long time … that is, until about two years ago. The collapse in crude oil prices caused by a surge of American onshore production forced many energy companies to slash their dividends or, at the very least, refrain from raising them very aggressively.
As a case in point, consider pipeline giant Kinder Morgan Inc (NYSE:KMI).
Kinder Morgan was one of the biggest beneficiaries of the boom in onshore oil and gas production, but the company borrowed a little too aggressively and ended up having to cut its dividend by 75% at the end of 2015. But over the past year and a half, a humbler Kinder Morgan has been using its internally generated cash flows to strengthen its balance sheet and to continue building out its world-class infrastructure.
KMI yields 2.6%, which is a little less than the 3.8% being paid today by diversified oil major Exxon Mobil Corporation (NYSE:XOM). But once Kinder Morgan starts growing its dividend again — and I expect that it will within the next nine to 12 months — I expect its dividend growth to vastly outpace that of Exxon.
The Best Dividend Stocks: JPMorgan Chase (JPM)
Dividend Yield: 2.3%
Ah, financials … I started this piece with a story on how the financial sector wrecked my dividend portfolio back in 2008. Well, thankfully, a lot has happened in the nine years that have passed. The large banks have been massively de-risked and deleveraged.
I’m no glassy-eyed Dr. Pangloss. I know that, if history is any guide, banks will find new and creative ways to take obscene amounts of risk. It’s a matter of when, not if.
But I’m also relatively confident that the better-run operators will be safe for the time being. It will probably be another decade before they find a way to creatively blow themselves up again.
In the meantime, JPMorgan Chase & Co. (NYSE:JPM) is probably your best bet for a safe and growing dividend. At current prices, JPM yields a respectable 2.3%. That’s not exceptionally high by any stretch of the imagination, but it puts JPM among the highest dividend yielders among major banks. And since 2012, JPM has raised its dividend by fully 73%.
The Best Dividend Stocks: Johnson & Johnson (JNJ)
Dividend Yield: 2.6%
Healthcare has traditionally been a reliable sector for dividend stocks. And with America’s aging demographics, you would expect the sector to have decades of strong growth in front of it.
All the same, I’m wary of the sector today. The Affordable Care Act (aka Obamacare) has a very uncertain future. Even if the republican plans to repeal it leave most of its core features intact, the uncontrolled surge in insurance premiums tell me that something has to give. And social media has made it difficult for Big Pharma companies to raise drug prices without risking a major backlash.
Frankly, I wouldn’t want for me retirement to depend on a dividend that could potentially get voted or regulated away. To the extent I invested in healthcare at all, I would want to stick with the largest and most diversified companies in the space, such as bluest of blue chips Johnson & Johnson (NYSE:JNJ).
JNJ is one of only two companies in America that sports a AAA credit rating. Its yield, at 2.6%, isn’t exceptionally high. But this is also a company that has raised its dividend for 55 consecutive years, and I don’t expect that to change anytime soon.
The Best Dividend Stocks: General Electric (GE)
Dividend Yield: 3.4%
Industrials, like consumer discretionaries, tend to be cyclical, making them a little less than ideal as dividend stocks. But there are definitely some worthy names in this sector to consider.
My pick today is General Electric Company (NYSE:GE).
GE is a remarkable survivor. More than a century old, General Electric has watched America evolve from a budding industrial power to a service economy and then again into an information economy.
The company has taken its lumps along the way, of course. GE bet big on financial services to the point being more of a bank than an industrial company by the early 2000s. Of course, the 2008 meltdown put a quick end to that and forced GE to return to its industrial roots.
Today, GE is a safer, more conservative company, but it’s also a world leader in infrastructure, power systems, renewable energy, aviation and healthcare. More importantly, it has a new leader — John Flannery — who has the potential to turn around General Electric’s more recent underperformance.
At current prices, GE yields 3.4%, making it one of the highest-yielding dividend stocks in the S&P 500.
The Best Dividend Stocks: Apple (AAPL)
Dividend Yield: 1.8%
Technology may not be the highest-yielding sector in the S&P 500, but tech stocks are some of the most aggressive dividend raisers and have been ever since Microsoft Corporation (NASDAQ:MSFT) started the trend with a special dividend back in 2003.
Microsoft has since grown to become one of the most generous dividend growers in America, and I believe the company is worth serious consideration in a dividend portfolio.
But today, I’d recommend you go with Apple Inc. (NASDAQ:AAPL). Though it only yields 1.7%, Apple has been a veritable dividend-raising machine, raising its dividend at a 10% annual clip for the past three years. Apples has also been extremely aggressive in repurchasing its shares, buying back 5.4% of its shares annually over the past three years.
Apple has been slapped around for a couple trading days as investors worry about slowing iPhone growth. I’d recommend using this mild pullback (and any others) as an opportunity to accumulate more shares.
The Best Dividend Stocks: Duke Energy (DUK)
Dividend Yield: 4%
And finally, we get to utilities, one of the sectors most often associated with dividend stocks.
Because of their stability and predictability, utilities are natural dividend payers … or at least they used to be. New battery and solar panel technology coming from Tesla Inc (NASDAQ:TSLA) founder Elon Musk is changing the competitive landscape for the utilities sector. Longer-term, affordable and efficient solar energy is a major competitive threat to traditional electric utilities, but in the meantime, investors can enjoy reasonably good yields from Duke Energy Corp (NYSE:DUK) and other competitors in this space.
Duke Energy yields a respectable 4% at current prices, and has raised its dividend for the past 10 years running. I’m not expecting aggressive dividend growth from Duke or from any of its peers in the near future. I’d say growth of around 2% per year is a reasonable estimate.
Still, that’s enough to keep up with inflation, and a 4% yield is nothing to laugh it in today’s low-yield world.
Charles Sizemore is the principal of Sizemore Capital, a wealth management firm in Dallas, Texas. As of this writing, he was long AAPL, KMI and O.