With the Fed raising rates, income-seeking investors are rejoicing. They can finally earn a relatively decent income from more traditional means like CDs, money market funds and even treasury bonds. But that doesn’t mean income investors should give up on the dividend stocks that have served them well over the last decade or so. On the contrary, dividend stocks can do something a CD or bond can’t do –grow their income over time.
More importantly, dividend stocks can grow that income at rates faster than the Federal Reserve is dishing out. In fact, the long-term historical growth rate for dividends in the S&P 500 is around 5% per year.
With that in mind, income investors would be silly to ignore dividend stocks from their portfolios in order to scoop-up static CD yields. The truth is, dividend stocks should to be a cornerstone of any income portfolio.
But which stocks have the goods to keep on paying year in and year out? Here are five dividend stocks investors should gobble up today — even as the Fed raises rate.
Quest Diagnostics (DGX)
Dividend Yield: 1.86%
I’ll admit it. A 1.86% yield is basically what you can get from a CD these days. But would a CD be growing that payout by an average of 21% over the last five years? Because that’s just what you get from Quest Diagnostics (NYSE:DGX).
We’ve all had blood work or similar tests done by our doctors. Most of the time, that test is performed at an off-site testing facility. Odds are, that work was done by Quest through its network of 2,200 patient service centers. 30% of all American’s use Quest’s system each year.
As many hospitals and physicians look to lower their own costs, the rise in hiring out a firm like Quest is growing as well. Even better is the firm has partnered directly with health insurers. By cutting an insurer a break, this ensures a steady stream of patients into DGX’s offices. That’s great news for DGX’s bottom line as many of these testing services come with cheap fixed-costs and high margins.
But the story isn’t ending there.
Quest has moved into offering higher-valued testing. Cancer screenings, genetic testing and personalized medicine come with much higher margins than a standard cholesterol test. This should help continue keeping the stream of cash flowing into Quest’s coffers over the long term. That’s evident by DGX’s recent 14% jump in its year-over-year earnings.
Cummins Inc. (CMI)
Dividend Yield: 3.10%
The only time people ever really think about Cummins Inc. (NYSE:CMI) is when they recognize the logo on the back of a truck. In reality, the company is a powerhouse in the world of engines and industrial generators. The fact that it’s underloved and trading at a P/E of just 10 leads to a wonderful opportunity for dividend investors.
The firm is by the biggest single player in both the medium-duty and heavy-duty engine market in North America. Those engines find their way into everything from passenger trucks to utility-scale generators and mega-sized construction equipment. Increasingly, CMI has expanded into emerging markets to help fuel plenty of revenue growth. For all of 2018, Cummins expects to see a huge 17% boost to its year-over-year sales driven by gains outside the U.S.
Now, I know what you’re thinking: “But what about Tesla (NASDAQ:TSLA) and electric vehicles!!”
CMI is already thinking ahead.
The firm has two new electric-powered options hitting the market in 2019 and 2020, while continuing to spend plenty of R&D on electrified drivetrains. Meanwhile, Cummins continues to make natural gas power engines and aftermarket emissions control equipment for current diesel engines. Given its long history of success, odds are great that Cummins will keep it’s crown when the future gets here.
Given that, CMI’s repeat performance of its 550% dividend growth over the last decade seems very likely as well. When it comes to dividend stocks, CMI maybe one of the best often-ignored choices out there.
Dividend Yield: 1.61%
9.5%, 7.7% and 8.3%. That’s the amount Microsoft (NASDAQ:MSFT) has raised its dividend in each of the last three years respectively. The reason for that is clear. CEO Satya Nadella has the golden touch.
After floundering in the post-tech boom/bust world, Nadella came in, remade Mr. Softy into a lean machine and took the software company to the cloud. Azure and Dynamics 365 continue to rack-up more and more enterprise customers as they grow by double-digits. This allowed MSFT to realize a whopping $110 billion in total revenue for the full year. More than $23 billion of that came from the cloud. What’s great is that margins are nearly 60% for those cloud-derived sales. That’s some hefty cash flow generation ability from an old school tech company.
What’s also impressive is that MSFT continues to find other ways to grow as well. That includes turning its Xbox Live customers into SaaS customers via subscription and advancing new hardware in its Surface line-up. A modular PC/Home Hub, anyone?
All of this translates into plenty of cash flows and hoarding of money. MSFT already boosts one of the largest cash hoards on the planet. And it continues to tap that hoard to reward Bill Gates and the rest of us shareholders. As far as dividend stocks go, Mr. Softy has the goods to provide income for decades more.
PNC Financial Services (PNC)
Dividend Yield: 2.75%
PNC Financial Services (NYSE:PNC) doesn’t necessarily have the name recognition as Wells Fargo (NYSE:WFC) or J.P. Morgan (NYSE:JPM). But it certainly deserves to be up in there with its rivals — especially when comparing it other dividend stocks. The former regional bank managed to get through the recession unscathed and in fact, it used the downturn to its advantage. PNC used the downturn to snag-up struggling rivals to grow its footprint and deposit base by an insane amount.
Today, PNC is the 9th largest bank by assets and the 5th largest when looking at deposits. Oh yeah, and PNC owns 22% of investment manager powerhouse BlackRock (NYSE:BLK).
Thanks to rising rates, PNC has seen better profits over the last few quarters as net interest margins have expanded. Loan growth remains steady and firm has nearly $20 billion in cash parked at the Fed. The good times at PNC have allowed it to repurchase over $823 million worth of its shares and boost its dividend by 27% to an all-time high of 95 cents per share.
The real win is that PNC continues to bet big on technology. The bank’s award winning Virtual Wallet app/mobile banking suite as well as other tech initiatives have continued to improve operating margins and drive younger customers into the bank. Ultimately, that will continue to increase its deposit base and pay bigger dividends down the road.
For those investors looking for a dividend stock financial play, it may make a ton of sense to avoid the bigger banks and bet on PNC.
NextEra Energy Inc (NEE)
Dividend Yield: 2.70%
Thanks to their steady fixed costs and stable cash flows, utilities have long been a great place to find high yields. But with the Fed’s raising rates, many utilities have sold off hard over the last few months. But not NextEra Energy Inc (NYSE:NEE). In fact, it’s surged higher — because a ton of growth comes with its 2.8% dividend yield.
NextEra is one of the nation’s largest utilities and features assets across the country and Canada. This huge base of customers continues to provide the firm with a steady diet of cash flows. And increasingly those cash flows are coming from a hefty dose of renewable energy. NextEra is the largest owner of wind turbines and solar panels in the U.S. and has profited from various credits for operating renewable energy.
The combination of its renewable energy and its key operating area of the southeast, NEE has managed to become a dividend machine. Since 2005, NEE has managed to grow its payout by more than 212%. And thanks to the Republican Tax plan, NEE domestic focus should help it realize several more key tax benefits over the next few years. A lower rate and ability to expense capital improvements upfront will only allow it keep more profits.
And given its history, NextEra will share those with its investors. When it comes to utilities, NEE is royalty among dividend stocks.
As of this writing, Aaron Levitt held no position in any of the stocks mentioned