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All Contents © 2019The Kiplinger Washington Editors
By Charles Sizemore
| September 26, 2017
When you think of a “retirement” stock, certain things come to mind. Retirees need income, so their portfolios tend to be chock full of dividend stocks. They also tend to prefer stable, established companies over new and unproven up-and-comers. Growth is important, but safety and stability are more important. Leave the flashy growth stocks to the kids.
But while we tend to think of retiree stocks in this light, investors of all ages would be smart to take the same balanced approach. After all, value stocks have massively outperformed growth stocks over time, and dividend stocks outperform their non-dividend-paying peers … and with less volatility to boot.
The outperformance of dividend stocks is not random. Paying a dividend forces company management to be more disciplined. Every dollar paid out to investors is a dollar that isn’t retained in house, so management is forced to prioritize and, ideally, eliminate value-destroying empire building via acquisitions.
Furthermore, in investing you win by not losing. By limiting your portfolio to dividend stocks, you immediately exclude younger and unproven companies — or those most likely to spectacularly blow up.
The safest dividend is the one that was just hiked. If management was confident enough to raise the dividend, it generally means that company is bringing in ample cash for future dividends. So, by further limiting your list of dividend stocks to those with a good recent history of raising the payout, you better increase your odds for outperformance.
Here are five dividend stocks that would be every bit as appropriate for a young investor just starting to save as for a retiree living on the golf course.
Prices and data are from the original InvestorPlace story published on September 14, 2017. Click on ticker-symbol links in each slide for current prices and more.
Dividend yield: 1.6%
I’ll start with consumer electronics juggernaut Apple Inc. Most of the current buzz around Apple revolves around its release of the iPhone 8 and 8 Plus and the higher-priced iPhone X.
The market reaction was somewhat muted, in part due to a later-than-expected shipment date for the iPhone X. It also doesn’t help that many of the iPhone X’s new features (wireless charging, facial recognition, larger edge-to-edge screen, etc.) were liberally “borrowed” from Samsung (SSNLF) and other Android makers.
That’s OK. Apple’s products haven’t truly “wowed” us in years. At this stage, Apple’s priority is making its iOS ecosystem stickier and further monetizing its users via service subscriptions. This is something that Apple has been much more successful in implementing than Alphabet Inc. (GOOG, GOOGL) via its Android ecosystem. So, even if the recent product launch was something of a subdued affair, the Apple bull case is still very much intact.
Let’s talk dividends. At current prices, Apple yields a modest 1.6%. But while the raw yield might not get your blood pumping, consider that Apple has been aggressively raising its dividend since 2012. The dividend has grown by a cumulative two thirds over the past five years.
I have no idea if we’ll ever get the much-promised corporate tax reform this year, but if we do, I would expect to see an even larger jump in the dividend … and perhaps even a special dividend.
That should be equally attractive for a retiree or a young whippersnapper just starting their first job.
Dividend yield: 2.1%
Up next is Apple’s old rival from the PC era, Microsoft Corporation. It wasn’t that long ago that Microsoft looked like a has-been on the slow road to irrelevance. The company missed the mobile revolution completely, leaving Apple and Alphabet to make it a two-horse race. PC sales — which ultimately drive Windows licenses — have been in decline for years. With more and more computing happening on mobile devices, Microsoft appeared to be doomed.
But then, along came Satya Nadella, who upon taking over as CEO in 2014, refocused Microsoft as a cloud services company that is now rivaled by only Amazon.com, Inc.’s (AMZN) AWS.
That’s the beauty of Microsoft. Its businesses were strong enough to survive more than a decade of unimaginative leadership under Steve Ballmer.
Nothing is permanent in technology, of course. But some trends last at least as long as the average retirement. For example, the “PC era” as we think of it lasted a good 20 years. The “mobile era” has been going on for over a decade now and shows no sign of slowing down. I have no reason to believe that Microsoft’s cloud business doesn’t have a long, profitable life in front of it.
And in the meantime, Microsoft will continue to be a dividend-paying machine. Over the past 10 years, Microsoft has grown its dividend at a 15.7% annual clip. And any shares of Microsoft you might have bought a decade ago now trade at a yield on cost of nearly 7%. (Yield on cost is today’s dividend divided by your original purchase price.) That’s something that should be exciting for any investor, regardless of their stage of life.
Dividend yield: 7.9%
What if you could get a high dividend yield and high dividend growth in the same stock?
Well, that’s not easy to do these days. But Omega Healthcare Investors Inc. manages to do it like clockwork. Omega has raised its dividend every year since 2003… and for 20 consecutive quarters. Over the past 10 years, the REIT has raised its dividend at an annualized clip of 9.5% per year.
It also yields a sweet 7.9% at current prices.
That’s something of an anomaly in today’s market. High-yielding stocks tend to be slow-growth behemoths. So, how does Omega manage it?
The high growth is easy enough to understand. OHI is a landlord specializing in skilled nursing and senior living facilities, and America is an aging country. And when you consider that the baby boomers are just now entering the stage of life where senior care is a need, there’s a lot more growth where that came from.
As for the high yield, this is a valuation issue. The market is extremely wary of any company that depends on reimbursement from Medicare or Medicaid, as — in case you hadn’t noticed — our government is broke and looking to cut corners. So, Mr. Market has pushed down the stock prices of many skilled nursing REITs, which pushes their yields higher.
But here’s the thing: Remember that Omega is a landlord, not an operating business. So, if Uncle Sam crimps the profits of some of Omega’s tenants, that’s not really an issue for OHI stock. So long as their tenants are able to make the rent payment, Omega has nothing to worry about. And while our government is capable of any number of questionable decisions, I don’t see them putting the nursing home industry out of business at exactly the time when it is needed the most.
Dividend yield: 6.4%
If you liked the tale of the tortoise and the hare, you’ll love oil and gas pipeline operator Enterprise Products Partners L.P. In an industry dominated by shoot-from-the-hip cowboy capitalists, Enterprise Products is the proverbial tortoise that beats the hare.
Think back to the crude oil rout in 2015. In the chaos that ensued, Kinder Morgan Inc (KMI) had to slash its dividend and Energy Transfer Equity LP (ETE) had to worm its way out of a merger with Williams Companies Inc. (WMB) that left both companies battered. Yet Enterprise Products kept right on trucking. By keeping its debt load manageable and by not overpromising on dividends, EPD managed to win by not losing.
Let’s take a look at EPD’s distributions. (MLPs like Enterprise pay “distributions” and not “dividends.”)
Over the past year, EPD raised its distribution by a little over 5%. Over the past three years, EPD raised its distribution by a little over 5% annually. Over the past five years, EPD raised its distribution by a little over 5% annually. And over the past 10 years, EPD raised its distribution by a little over 5% annually.
You see a pattern here?
Between the current yield of 6.4% and a little over 5% per year in growth, you should be looking at total returns of 11%-12% per year. That’s fantastic in retirement … and even better compounded over an investment lifetime.
Dividend yield: 2.2%
And I’ll wrap this up with a collection of high-growth dividend stocks rather than a single name. I consider the Vanguard Dividend Appreciation ETF to be a solid option both as a one-stop shop for dividend growth and as a pre-scrubbed list for individual dividends.
To be included in the Vanguard Dividend Appreciation ETF, a stock must be a bona fide dividend achiever. This means it has to have raised its dividend for a minimum of ten consecutive years.
In my view, ten years is a long enough timeframe to have included a full economic cycle — a boom, a bust, and everything in between — but it’s still short enough to include relatively young companies. You’re not stuck with a collection of stodgy, old has-beens, as you might be with the Dividend Aristocrats, which require 25 consecutive years of dividend hikes.
At current prices, VIG yields around 2.2%, more or less in line with the S&P 500. But by excluding non-dividend payers (or dividend cutters), it eliminates a lot of the laggards. The largest holding is a familiar name: none other than Microsoft, which makes up a little more than 4% of the portfolio.
This article is from Charles Sizemore of InvestorPlace. As of this writing, he was long AAPL, OHI, EPD, KMI, ETE and VIG.
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