John Buckingham, principal and portfolio manager at Kovitz, which manages $7 billion in assets, Aliso Viejo, California. He is editor of The Prudent Speculator. ThePrudentSpeculator.com
Now that you can get a 5% yield on a short-term US Treasury bond, is it even worth considering dividend-paying stocks? Top asset manager John Buckingham says it is essential if you are a long-term investor. He believes dividend stocks are tailor-made for the post-pandemic era, which analysts say will be characterized by low stock market returns and very high inflation and market volatility.
Reasons: When your short-term Treasuries mature, you’ll have to reinvest at rates that could be far less attractive. A good dividend stock, on the other hand, can grow its payout year after year so you don’t lose purchasing power. In addition, dividend stocks tend to lead the stock market in periods of high inflation, and that’s when investors value those steady earnings and robust cash flows. Dividends have accounted for nearly 40% of stock market returns since the 1930s, but 54% during decades when inflation has been high. Finally, while share prices on dividend stocks may dip if we have a recession in the next year, dividend income will keep rolling in, and history suggests dividend-payers are likely to drop less in price than nondividend payers or the overall market.
Bottom Line Personal asked Buckingham how he picks dividend stocks and to name some of his favorites…
When focusing on dividend stocks, I look for four characteristics…
Bargain-basement prices. I want to buy at attractive valuations relative to a stock’s own long-term history and/or at a substantial discount to our fair-valuation target, which incorporates future growth estimates.
Safe, growing dividends. The company should pay a dividend yield substantially higher than that of the S&P 500 (recently around 1.6%). Its underlying free cash flow should be strong enough to raise its dividends regularly and prevent them from being cut even in rough economic times.
Long-term viability. The company should be among the leaders in its industry…have sustainable competitive advantages such as powerful brand recognition or patented technology…and have the ability to not only survive economic turmoil but to thrive on the other side of the business cycle.
Sector diversity. I don’t limit my holdings to traditional dividend-paying sectors such as telecommunications and utilities. Many consumer-goods, energy, financial-services, health-care and technology companies offer generous payouts as well.
The 10 stocks below meet all these criteria and have a recent average yield of 4.2%. They can work together as the income-producing part of a diversified portfolio…or you could choose some of them individually to increase stability and improve your income.
Amgen (AMGN) is one of the world’s largest biotech companies with a dividend payout that has risen more than 450% over the past decade. Its current stable of drugs include nine blockbuster products (at least $1 billion in annual sales) in numerous therapy areas such as immunology, bone health and oncology. Amgen also has newer growth products such as the asthma drug Tezspire, as well as 50 ongoing clinical trials. Recent yield: 3.57%.* Recent share price: $227.84.
CVS Health (CVS). About 85% of people in the US live within 10 miles of a CVS pharmacy, but its retail locations are just a small part of the overall ecosystem that the company is creating. CVS serves nearly 40 million customers through its Aetna division, a health insurance benefits manager…and it keeps expanding its primary-care options with major acquisitions, including Signify Health, a network of more than 10,000 clinicians that provide in-home visits. Recent yield: 3.55%. Recent share price: $71.17.
HF Sinclair (DINO) is a “downstream” energy powerhouse. It doesn’t produce crude oil. Instead its refineries around the US process about 700,000 barrels a day into gasoline, diesel fuel, asphalt and specialty lubricant products. Downstream companies tend to have fairly stable profit margins no matter how much oil prices fluctuate because they can raise their own prices when the cost of oil soars. Recent yield: 4.10%. Recent share price: $46.06.
Manpower Group (MAN) is one of the world’s largest staffing services companies—it places tens of thousands of temporary and permanent workers in 80 countries around the world each day. A persistently tight labor market in the US will benefit Manpower in the coming years, but its real strength, along with its geographic diversity, has been its ability to weather all types of economic cycles over its 70-year history. Recent yield: 3.71%. Recent share price: $85.28.
MetLife (MET) provides a variety of insurance and financial-services products, including life, health, dental and disability insurance and annuities in nearly 50 countries. In the US, it dominates the market for providing group benefits to large corporate employers. Rising interest rates eventually will boost MetLife’s investment portfolio where it puts to work billions of dollars in float from premiums collected. Recent yield: 3.79%. Recent share price: $59.
Nutrien Ltd. (NTR). The world’s largest fertilizer company produces more than 26 million metric tons of nitrogen, potash, phosphate and sulfate annually, all essential for soil fertility and crop productivity. The real opportunity is in “digital agriculture,” providing farmers with data collected from satellites and historical climate patterns for their land, allowing them to more accurately time purchases of seed, fertilizer and pesticide applications. Recent yield: 3.58%. Recent share price: $60.61.
PNC Financial Services (PNC). Stock in this major regional bank, which has more than $550 billion in assets, has suffered due to turmoil over a handful of other bank failures. The worries are overblown. PNC has done an excellent job of managing its balance sheet and has raised its dividend in each of the last 12 years, even during the 2020 pandemic, when many banks froze or reduced their payouts. PNC’s acquisition of the US banking division of Spanish lender BBVA gives it a strong presence in lucrative banking markets such as California, Florida and Texas. Recent yield: 4.86%. Recent share price: $127.16.
Qualcomm (QCOM) designs and manufactures wireless communications equipment and is a key contributor to the development of CDMA, a communications technology that is heavily used around the world. Although a cyclical slump in the smartphone and semiconductor markets has hurt Qualcomm’s margins, I expect an eventual surge in sales and profits driven by ongoing upgrades to the 5G mobile network and communications chips needed for advanced automobile technology. Recent yield: 2.72%. Recent share price: $123.40.
Verizon Communications (VZ) is best-known for its Fios Internet, its transition to a faster 5G wireless network and mobile phone sales. Its high-growth days are long gone, but Verizon’s brand reputation has helped it build a large and loyal customer base. Its 16-year streak of annual dividend hikes is the longest in the US telecom industry. Recent yield: 7.09%. Recent share price: $31.46.
Whirlpool Corp. (WHR). The 111-year-old company has seven appliance brands, including Whirlpool, Maytag, Amana and KitchenAid, that each generate more than $1 billion in annual sales. Its financial fortunes are tied to the state of the global economy, particularly the state of the housing market, which should continue to rise steadily over a long period. Recent yield: 4.77%. Recent share price: $151.70.