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All Contents © 2019The Kiplinger Washington Editors
By Dan Burrows
| November 7, 2016
Chasing yield when looking for dividend stocks to buy is one the most dangerous things an investor can do. But it’s also more tempting than ever.
This prolonged period of ultra-low interest rates is almost forcing investors to take more risk than they otherwise would. That’s why it’s critical to find big, stable stocks that offer a better balance of risk and reward for income investors.
The S&P 500 Index abounds with generous dividend payers, but many of the high yields are a result of falling share prices and related investor concerns. In other words, the numbers are nice, but they’re far from secure.
That means you have to ratchet down your yield expectations … but not all the way.
Yes, the S&P 500’s dividend yield stands at just 2.15%, so the bar is low. But once you get past that mental roadblock, a number of names emerge as relatively high-paying, reliable dividend stocks to buy for equity income.
A history of rising dividends is of particular concern to any income investors who plans to stick around a while. These stocks fit that description. They also have the free cash flow generation to make good on the payouts quarter after quarter, year after year.
Lastly, except for one name, these stocks all yield 3% or more while offering acceptable risk. And if shareholders can stay patient long enough, they might even find themselves holding some total-return machines.
Without further ado, here are the top 10 S&P 500 dividend stocks to buy now:
Courtesy Merck & Co.
Merck & Co., Inc. (MRK) is quietly having a strong year. Indeed, market-crushing gains have pushed the dividend yield right around the 3% mark.
And yet, Merck still is worth your attention if you invest for income.
Like all big pharmaceutical companies, MRK uses mergers and acquisitions to replenish its pipeline with cost effectiveness. The strategy has so far been working. Merck has five drugs that currently are being reviewed by regulatory agencies, as well as 25 late-stage and 11 mid-stage programs.
For instance, Merck just let investors know that its bladder cancer immunotherapy, Keytruda, benefited urothelial cancer patients better than chemotherapy. As a result, an independent Data Monitoring Committee recommended the trial be stopped early.
Shares are up 16% so far this year, which outperforms the S&P 500 by about 11 percentage points. Throw in the dividend, and MRK — a component of the Dow Jones Industrial Average — looks good for better-than-average total returns.
Kārlis Dambrāns via Flickr
The rumors turned out to be true, and Qualcomm, Inc. (QCOM) just solved one of its biggest headaches.
The chipmaker has agreed to acquire NXP Semiconductors NV (NXPI) for $110 a share, or about $39 billion. That's more than worth it for what NXP brings to the table.
Sales of smartphones are slowing, and QCOM has high exposure to the Android phone market, which explains investors’ concerns with long-term growth prospects.
Qualcomm's new license deals with Chinese smartphone makers and the emergence of 5G technology put two legs on the stool. NXP would be the third as it affords diversification with exposure to the fast-growth automotive market. The stock yields 3.1%.
Courtesy General Electric
General Electric Company (GE) just beat Wall Street’s quarterly earnings estimate by a comfortable margin. However, top-line weakness and a cut to the revenue forecast pressured GE stock.
There’s no question that GE’s results are disappointing — but they’re also not unforgivable.
General Electric’s earnings underscore the difficulty of shedding the firm’s financial businesses at a time when the oil and gas industry is depressed. The transformation back to a pure-play industrial company was always going to be an long and messy process.
Macroeconomic headwinds are making it worse.
But GE stock bulls shouldn’t lose hope. The long-term strategy is sound. Another $4 billion in share buybacks and a generous dividend make it easier to wait out the course change. The stock yields 3.2%.
Mike Mozart via Flickr
Buy on the sound of cannons when there’s blood in the streets!
Or something like that.
Cliches aside, Wells Fargo & Co. (WFC) might not be the most popular name after its phony accounts scandal, but so what? It’s still a quality business with a quality stock that yields 3.4%.
Bank crises eventually blow over. This too shall pass. Shares in WFC went to $46 from $51 on the news. That has the dividend up to a very attractive level. True, banks are constrained when it comes to formulating their capital plans. But — again — the scandal doesn’t have anything to do with capital requirements.
Forget the headlines right now. When you can get one of the nation’s top banks on sale, you go for it.
Kojach via Flickr
Shares in mega-pharmaceutical company Pfizer Inc. (PFE) have been in a downtrend since midsummer. That’s bad for current shareholders, but for new money, you have to like the 3.7% dividend yield.
Pfizer has a strong pipeline with 92 clinical studies under way. Furthermore, a mergers and acquisitions bender promises long-term price appreciation to go along with a steady dividend stream. In this year alone, PFE bought Medivation for $14 billion and Anacor Pharmaceuticals for $5.2 billion.
The first deal beefs up PFE’s oncology portfolio in a big way. It already has a hit with Ibrance, a breast cancer drug on the cusp of becoming a blockbuster, and MDVN complements that nicely.
As for Anacor Pharmaceuticals, PFE got its hands on crisaborole — a non-steroid eczema treatment that is being studied for efficacy against psoriasis.
M.O. Stevens via Wikipedia
International Paper Co. (IP) is the largest containerboard maker in the world. And lest you think there’s no growth in this old-line industry, IP supplies 50% of Amazon.com, Inc.’s (AMZN) need for cardboard boxes.
Shares have shrugged off the pressures of slowing demand in China and a strong dollar to put up a year-to-date gain of 25%.
And even then, IP stock still fetches only 12 times forward earnings. It yields 3.9%
Listen, it’s easy to dismiss International Paper as an out-of-favor materials or commodities name, but it really does stand apart. After all, it’s generating tremendous growth out of supplying the e-commerce industry with packaging, and the segment is still a relatively part of IP’s top line.
Peyri Herrera via Flickr
Altria Group Inc. (MO) doubled down on its sin-stock status after buying a big stake in Anheuser-Busch InBev SA NV (BUD), but it’s the juiced-up buyback program that makes MO look good for the foreseeable future.
The closing of BUD’s merger with SABMiller plc (SBMRF) gave MO a 9.6% stake in the smoking and wine behemoth. The windfall makes Altria the single largest shareholder in Anheuser-Busch. The company also received more than $5 billion in cash from the completion of the deal. That allowed MO to raise its share repurchase commitment to $3 billion from $1 billion through the second quarter of 2018.
With Altria’s dividend at around 4%, the financial engineering and payout makes for a powerful total-return combination.
swong95765 via Flickr
OK, the rationale for this one is pretty simple.
Oil prices appear to have stabilized. As an integrated energy major, Chevron Corporation’s (CVX) downstream business offer a bit of a hedge against weakness in crude oil anyway. Oil prices are cyclical — even if the cycles can take a painfully long time to turn.
Oh, and the dividend yield of 4.2% looks generous in today’s low-rate environment.
Courtesy General Motors
The market is rightly worried about General Motors Company (GM) hitting the peak of the latest car-buying cycle, but it’s overdoing its concerns. It feels like GM stock has been discounted for a worst-case scenario, if not more.
It really comes down to valuation.
GM has a forward price-to-earnings multiple of just 5.6. As one commenter noted of GM stock, a P/E that low bakes in a lot of stupid. The dividend yield is 4.8%.
And even if we are at the cyclical peak, no one expects demand to drive off a cliff. If U.S. sales cool off, they will be doing so from record levels. Perhaps that’s why analysts still expect GM to have a compound annual growth rate of more than 10%.
If you’re looking at dividend stocks, then you can’t ignore the telecommunications sector. Once you do, you’ve got to put AT&T Inc. (T) on the list too.
Indeed, the blue-chip telco is the dividend king of the blue-chip and benchmark indices, with a 5% yield.
Like its No. 1 competitors, T dealing with the telco growth conundrum by branching out. That’s why it acquired DirecTV. And now, AT&T is going back to the M&A well by offering to buy Time Warner Inc. (TWX).
The theory at work here — putting a content company together with a distributor — was a disaster the last time TWX tried it. Anyone remember AOL? But to be fair, that was a long time ago. Digital mobile everything wasn’t even a dream at that point.
Maybe this time it really is different.
This article is from Dan Burrows of InvestorPlace. As of this writing, he held none of the aforementioned securities.
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