- Devon Energy (DVN) – Play the higher energy prices with this producer
- Gilead Sciences (GILD) – Rich pipeline a catalyst beyond Covid-19 drugs
- Honda Motor (HMC) – Strong electric vehicle plans through the year 2040
- Manulife Financial (MFC) – Strong insurance business and cash flow growth
- Rio Tinto (RIO) – Rising metal prices to lift cash flow and dividend
- Southern Copper (SCCO) – Higher copper prices will increase profits
- Vale (VALE) – Strong iron ore prices will lead to higher dividends
Investors should not simply look judge dividend stocks by yield alone. A stock’s dividend yield doesn’t make it a safe income investment.
Companies that have a strong gross margin, manageable debt-to-equity and profitability will likely outperform the markets in uncertain times.
After the economy overheated, the Federal Reserve changed its economic policy. Not only will the Fed raise rates, but it will also withdraw the excess money supporting the stock market. The Fed policy risks tipping the economy into a recession.
To compensate for the lower expected stock market returns ahead, investors should consider dividend stocks paying 5% or more.
The cyclical sector has the strongest potential. Raw material prices show no signs of falling. Companies may raise the prices and expand profit margins.
Dividend Stocks to Buy: Devon Energy (DVN)
Devon Energy (NYSE:DVN) is in a good position to expand production to take advantage of soaring gas prices.
The government could ask Devon Energy and other firms to increase output. This would decrease the U.S. dependence on oil imports.
To increase production, Devon Energy needs to raise its drilling activity. After getting a drilling rig on site, it could start extracting the oil. This would increase its project costs by 15% in 2022 but would more than pay off.
Crude prices will likely keep rising throughout this year. The global economy is growing, which increases oil demand. Russia’s invasion of Ukraine forced Western countries to impose sanctions.
Furthermore, many of those countries are working to reduce their reliance on Russian energy. This puts upward pressure on oil prices.
To hedge against inflation, investors should consider establishing an overweight position in energy stocks. DVN stock is a good quality stock.
Gilead Sciences (GILD)
Gilead Sciences (NASDAQ:GILD) gets very little attention for its drug developments.
Investor sentiment depends on Gilead’s remdesivir, a drug treating patients infected with Covid.
Earlier this year, Gilead released data demonstrating the effectiveness of remdesivir against ten Covid-19 variants, including Omicron.
More recently, Gilead said that the Food and Drug Administration granted a label expansion for Yescarta, its first CAR T-cell therapy for treating relapsed or refractory large B-cell lymphoma. In 2021, Yescarta accounted for $406 million in sales in the U.S.
In March, Gilead reported phase-3 results of its TROPiCS-02 study. The study evaluated Trodelvy (sacituzumab govitecan-hziy) in patients with HR+/HER2- metastatic breast cancer.
The study met Gilead’s primary endpoint. GILD stock typically falls or does not react whenever it posts positive results. Still, GILD stock pays a dividend of close to 5%. Expect the yield to fall as the stock price resumes its uptrend.
Therefore, investors who buy the stock now secure a yield while earning capital gains for the long term.
Dividend Stocks to Buy: Honda Motor (HMC)
Honda Motor (NYSE:HMC) is expanding its growth ambitions in the electric vehicle market.
This will ensure the company remains relevant as consumers shift to EVs. In the next 10 years, Honda plans to spend around 8 trillion yen on research and development.
To accelerate its EV investments at low costs, Honda will partner with General Motors (NYSE:GM). The plan is to sell a $30,000 car with a 300 miles per charge range.
Honda needs GM’s battery technology, while GM needs to split its costs with a partner. The deal is a win-win for both companies.
Neither firm has a foothold in the EV market. It has a better chance of growing its market share and operating profitably through the partnership
Manulife Financial (MFC)
When it reported quarterly results in February, Manulife Financial (NYSE:MFC) also hiked its dividend by 18%. The insurance firm benefited from double-digit growth in annual premium equivalent (APE) sales.
Manulife benefited from scaling its business and growing across diverse markets in Asia. For example, in 2021, Manulife started a 16-year bancassurance partnership with VietinBank, the largest financial institution in Vietnam.
As a result, the firms offered a full suite of insurance, wealth and retirement products. Last year, Manulife posted a core return on equity of 13%. To sustain strong returns, expect the company to continue allocating its capital effectively.
In Canada, Manulife introduced personalized medicine. Its customers have access to advanced pharmacogenetics. That way, plan members and their health team will find the most effective medication to treat their condition.
On its conference call, President & Chief Executive Officer Rocco Gori said that the Federal Reserve’s rate hike would add $1.85 billion in embedded value to its fixed-income business.
Since higher rates are a tailwind for Manulife, investors should treat MFC stock as a hedge against the rate hike cycle.
Dividend Stocks to Buy: Rio Tinto (RIO)
Rio Tinto (NYSE:RIO) benefited from sanctions against Russia when it took full control of the Rusal Alumina partnership in Australia. Rio already owns 80% of the project. The firm will benefit from record prices of alumina.
On April 9, Rio Tinto established a funding plan for the completion of the Oyu Tolgoi underground project in Mongolia. This is a major milestone.
Once it completes development, Oyu Tolgoi will become one of the world’s largest copper mines. It also benefits the Mongolian economy.
In 2021, Rio Tinto posted a free cash flow of $17.7 billion. It earned $21.4 billion after paying taxes and government royalties worth $13 billion.
Rio also paid a special dividend, which represented a 79% payout. The miner’s strong cash flow suggests a strong dividend safety. It may potentially raise its dividend. The company’s management team is committed to growing and sustaining its portfolio. It is conscious of driving toward net-zero carbon emission.
Should metal prices remain high, RIO stock will continue on its sustained uptrend.
Southern Copper (SCCO)
Southern Copper (NYSE:SCCO) posted strong results in the fourth quarter, lifted by higher metal prices for its main products.
This is despite lower sales volumes at its Peruvian operations. The company completed its bi-annual maintenance in the period.
In the next 10 years, Southern Copper wants to become the top producer. It targets 1.8 million tons of copper production. Investors can collect a dividend worth $4 a share while waiting.
In addition, shareholders may ignore the near-term headwinds. For example, it faces some production disruption after protests in Peru. The company will eventually resolve the dispute but the uncertainty could pressure SCCO stock.
Investors should expect Southern’s cash flow growth momentum to accelerate. In 2021, it reported a historically high $4.29 billion in cash flow from operating activities.
This is a 54.2% year-over-year increase from 2020. Metal prices show no signs of slowing in their rise. Furthermore, the company is realizing efficiencies as it cuts costs.
Dividend Stocks to Buy: Vale (VALE)
Vale (NYSE:VALE) shares benefited from an increase in iron ore prices. The higher price realization will help Vale work down its net debt.
In the last quarter, Executive Vice President Finance & Investor Relations Gustavo Pimenta said that Vale wants to work with net debt of $15 billion.
Vale will continue to de-risk its business by rebalancing its portfolio. For example, it sold assets that cost $2 billion in cash annually. It is holding less risky assets. To enhance its EBITDA, Vale is buying back shares.
Vale is expanding its operating margins for its nickel business. After past investments, it will start realizing benefits from its sustaining capital.
In its copper business, Vale is growing its project pipeline with its copper deposits in Alemão. Its copper mines in Hu’u have over two billion tonnes at 0.83% copper and 0.48 gram per ton of gold.
Vale may realize a very high production potential. At 350,000 tons of copper and 220,000 ounces of gold, Vale will have the strong cash flow to fund a growing dividend.
On the date of publication, Chris Lau did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.