According to 2008 research by Stefan Nagel of Stanford GSB “investors are more likely to spend dividends and reinvest capital gains.” The basis of this behavior is elaborated by the theory of mental accounting, which was discussed by Richard Thaler in 1980. According to the theory, consumers don’t see capital gains and dividends as interchangeable. The idea is to consume income, not principal. And dividends are considered as a source of regular income. With this in mind, it explains the reason for investor attraction towards dividend stocks.
This discussion seems relevant for the near-term with the holiday season approaching. Some quality dividend stocks can boost investor income for holiday spending.
Additionally, dividend stocks are generally low-beta stocks. And with a Fed tapering round the corner, some volatility can be expected. So it would make sense to go overweight on low-beta stocks.
In turn, there are seven dividend stocks that look attractive to me for the near-term, as well as the long-term. Additionally, I believe that these stocks seem undervalued with upside potential. They are:
- Chevron (NYSE:CVX)
- Target Corporation (NYSE:TGT)
- JP Morgan Chase (NYSE:JPM)
- McDonald’s (NYSE:MCD)
- Altria Group (NYSE:MO)
- Apple (NASDAQ:AAPL)
- Lockheed Martin (NYSE:LMT)
Now, let’s dive in and take a closer look at each one.
Best Dividend Stocks to Buy for October: Chevron (CVX)
With Brent oil touching $80 per barrel, exposure to the oil and gas sector can be rewarding. With an annual dividend of $5.36 and a yield of 5.2%, CVX stock is among the top names to consider.
Besides the dividend factor, CVX stock has been sideways in the last six-months. At a forward price-earnings ratio (P/E) of 14.4, the stock looks poised for a break-out.
With low break-even assets, Chevron is also attractive from a dividend growth perspective. For the second quarter of 2021, the company reported operating cash flow of $7.1 billion. If oil sustains around $80 per barrel, Chevron is well-positioned to deliver annual operating cash flow in excess of $30 billion. This will help in boosting dividends.
Furthermore, Chevron has a strong balance sheet with a net-debt ratio of 21%. As oil trends higher, the company is likely to pursue aggressive exploration expenses.
It’s worth noting that in the last five-years, the company reported an average reserve replacement ratio of 99%. Therefore, with 84bboe of 6P resources, the company has a multi-year cash flow visibility.
Like most oil and gas majors, Chevron is also focused on boosting its renewable asset portfolio. Strong financial flexibility will help the company ramp-up capacity in renewable natural gas, diesel and aviation fuel, among others.
Target Corporation (TGT)
TGT stock has been in a correction and consolidation mode after touching highs of $267 in August 2021. Below $230 now, though, the stock seems attractive and has a healthy dividend yield of 1.53%.
It might also be a good time to remain invested in the stock with the holiday season approaching. Target has already been delivering strong quarterly numbers. For Q2 2021, the company reported comparable sales growth of 8.9%.
Digital sales, which continues to witness robust growth, is a key factor that has boosted comparable sales growth. Most retailers have been moving towards an omni-channel sales model. With that in mind, Target will continue to benefit from this shift.
The company business is also a cash cow. For the first half of 2021, the company reported operating cash flow of $3.4 billion. With sustained growth in comparable stores sales, Target is well-positioned for aggressive buybacks and possible dividend growth.
In March 2021, Target also announced an investment of $4 billion annually over the next few years. The investments will be for new store opening, store remodeling and more. Thus, these investments are likely to ensure that overall growth remains healthy.
Best Dividend Stocks to Buy for October: JP Morgan Chase (JPM)
As the economy continues to recover, banking stocks look attractive. At a forward P/E of 12.7, JPM stock is among the top names from the sector. Additionally, the stock offers an annual dividend of $4, which implies a yield of 2.4%.
For Q2 2021, JP Morgan reported non-interest income of $18.5 billion. For the period, net interest income was $12.9 billion. With economic recovery and the possibility of a first rate-hike in 2022, it’s likely that net interest income growth will accelerate. Once the core banking business gains traction, JPM stock is likely to have meaningful upside potential.
It’s worth noting that for Q2 2021, the company reported 45% growth in combined debit and credit card spend. Additionally, net charge-offs declined by 53% and is indicative of a healthy financial condition for customers. These indicators point to healthy core banking business in the coming quarters.
Furthermore, as financial markets remain firm, the investment banking and wealth management division is likely to deliver healthy numbers. Therefore, with a strong balance sheet and healthy cash flows, the bank is positioned to sustain dividends and pursue aggressive share repurchase.
McDonald’s (MCD)
Recently, McDonald’s hiked quarterly dividends to $1.38 per share. With a dividend yield of 2.26%, MCD stock would be in my list of top dividend stocks to buy for October.
Market sentiments might be slightly jittery with factors like a possible Fed tapering, valuation concerns and an Evergrande driven crisis. MCD stock, with a low-beta, is worth considering for capital preservation.
For Q2 2021, McDonald’s reported a 40.5% increase in global comparable sales on a year-over-year (YOY) basis. Strong growth was largely due to the negative impact of the pandemic in the prior year quarter. However, even on a two-year basis, global comparable sales have increased by 6.9%. In the U.S. comparable store sales growth was driven by a larger ticket size coupled with menu price increases.
It’s also worth noting that for the first half of 2021, the company reported digital system-wide sales of $8 billion in its top six markets. YOY, digital channel sales increased by 70%. The company is building a marketing team focused on boosting digital sales and global app usage. Focus on omni-channel sales is likely to ensure that comparable store sales remain strong.
Overall, MCD stock looks attractive with robust free cash flows. And with further market penetration, increase in digital sales and menu innovation, cash flows are likely to swell.
Best Dividend Stocks to Buy for October: Altria Group (MO)
MO stock is another name that has seen a recent dividend increase. With an annualized dividend of $3.60, the stock has an attractive yield of 7.4%. Even with the company undergoing business transformation, dividends are sustainable in the coming years.
MO stock has been relatively depressed and trades at a forward P/E of 10.22. Uncertainty related to Juul Labs is one reason for the stock remaining subdued. Altria has 35% stake in Juul.
Additionally, the company also has 45% stake in Cronos (NASDAQ:CRON), which was acquired for a consideration of $1.8 billion. At a current market capitalization of Cronos, the stock is valued at only $945 million.
Even with these headwinds, MO stock seems to have bottomed out. A favorable judgement by the U.S. Food and Drug Administration (FDA) on e-cigarettes is a potential catalyst. Possibility of federal level legalization of cannabis in the U.S. is another stock upside catalyst.
From a cash flow perspective, the combustible cigarette division continues to deliver results. Altria has also been expanding presence in the non-combustible segment. However, a meaningful cash flow impact from the non-combustible segment is still few years away.
Collectively, even with some concerns, MO stock would be in my list of top dividend stocks. Current level of dividend is sustainable in the coming years.
Apple (AAPL)
I believe that AAPL stock is a quality dividend growth stock. Considering the company’s cash flow potential, investors are likely to benefit through sustained dividend growth and aggressive share repurchase.
It’s also worth noting that YTD, AAPL stock has trended higher by just 6.6%. It was recently reported that iPhone 13 has seen five million pre-orders in China. Strong global sale for the new iPhone is a stock upside catalyst. Additionally, the new product launch also includes iPad mini and ninth-generation iPad.
Apple also seems increasingly diversified. For Q3 2021, the company reported healthy sales growth from the services, wearable and home accessories segment. iPhone remains the cash flow driver.
However, over the next five years, the company is likely to have more than one cash cow. The company’s potential entry into the electric vehicle industry is also a possible game-changer.
From a dividend perspective, operating cash flow for the first nine months of 2021 was $83.8 million. With more than $100 billion in annualized cash flow visibility, there is ample headroom to increase dividends.
Overall, AAPL stock is worth holding for income investors. Innovation will continue to drive growth and value creation.
Best Dividend Stocks to Buy for October: Lockheed Martin (LMT)
LMT stock looks like another dividend growth stock. Recently, the company increased quarterly dividends by 8% to $2.8. A low-beta stock with a dividend yield of 3.2% seems very attractive.
After making highs of $397 in May 2021, LMT stock has also seen some correction. At current levels of $345, the stock trades at a forward P/E of 12.2. In turn, I see potential for stock upside in the coming months besides robust dividends.
In terms of revenue visibility, Lockheed Martin has an order backlog of over $140 billion. The company expects operating cash flow to sustain around $9 billion over the next few years. It’s also worth noting that even with the pandemic, global defense spending has increased. The sector is immune to economic shocks and that makes LMT stock worth holding for the long-term.
Another factor that’s likely to support growth is the company’s growth is international contracts. Lockheed has seen contract inflow from U.S. allies. With most NATO countries still short of the defense spending target, there is visibility for international order inflow.
Overall, LMT stock would be in my list of top dividend stocks for the near-term and also for the core income investor portfolio.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector.
