Until the recent volatility, banks and energy stocks were among the darlings of Wall Street’s passive income-seeking investors. However, economic realities have made many of these companies reevaluate the sustainability of their high payout yields. As a result, boards of a wide range of businesses have either slashed or fully eliminated dividends. Today I’ll take a closer look at seven of the best dividend stocks, most of which have rather high dividend yields.
The Federal Reserve has slashed interest rates to record low levels in recent months as part of its efforts to ease the economic effects of the novel coronavirus pandemic. Generating fixed income via dividend stocks becomes especially attractive in such a macroeconomic environment.
As the quarterly earnings season accelerates, increased choppiness in stock prices has unnerved many. However, seasoned investors realize that robust dividend-income shares can deliver strong results over time, especially if invested for the long-haul.
With passive income-yielding businesses, investors can potentially profit from both capital gains and regular payouts. Reinvesting dividends from high-yielding shares serves to compound returns. While it is tempting to take out this passive income and spend it, I’d argue that it is advantageous to reinvest dividends and delay withdrawals.
So how do you decide where to invest? Each portfolio has a different investment style and risk/return profile. When equity markets become mercurial, many investors go for defensive stocks. Such businesses are less prone to macroeconomic and credit cycles than others. These industries would include consumer staples, healthcare, utilities, and defense. However, businesses in other sectors also pay respectable dividends.
Seven of the best dividend stocks come from a range of industries. I believe they deserve your attention for including in a long-term portfolio.
- Altria Group (NYSE:MO)
- Enterprise Products Partners L.P. (NYSE:EPD)
- Interpublic Group of Companies (NYSE:IPG)
- iShares Russell 2000 ETF (NYSEARCA:IWM)
- Unum Group (NYSE:UNM)
- Vale (NYSE:VALE)
- Vodafone Group (NASDAQ:VOD)
Dividend Stocks: Altria Group (MO)
52 Week Range: $30.95-$52.45
Dividend Yield: 8.03%
Altria Group is one of the world’s largest tobacco and cigarette producers. It is also the parent company of Philip Morris USA, which owns Marlboro cigarettes. Other companies Altria owns are John Middleton, U.S. Smokeless Tobacco Company, Philip Morris Capital Corporation, and Michelle Wine Estates. Altria maintains stakes in Anheuser-Busch InBev (NYSE:BUD), Cronos Group (NASDAQ:CRON), and e-cigarette company JUUL Labs, too.
The company released its Q1 earnings report in late April. Revenue came at $6.359 billion, which marked a year-over-year (YoY) increase of 13%. One point of concern for investors was that the U.S. Federal Trade Commission decided to file an administrative complaint against Altria and JUUL to challenge Altria’s minority investment in JUUL. The company will likely defend the transaction.
CEO Billy Gifford said: “We had an excellent start to the year, growing our first-quarter adjusted diluted EPS by 18.5%, driven by the strength of our smokeable and oral tobacco products segments. Due to the uncertainties related to the impact of the COVID-19 pandemic on our diverse business model and economic recovery scenarios, we’re withdrawing our full-year 2020 adjusted diluted EPS guidance.”
Furthermore, the board rescinded Altria’s $1 billion share repurchase program that had a $500 million balance.
Year-to-date, MO stock is down about 16%. As a result, the hefty dividend yield stands at 8.03%. August 2019 marked the fiftieth year that Altria increased dividends. In April, Mr. Gifford highlighted, “Our dividend is important to our investors and it remains a top priority for us. Our objective continues to be a dividend payout ratio target of approximately 80% of adjusted diluted EPS.”
The company is expected to release its Q2 results on July 28. Shareholders are hoping for another dividend increase from the board. Long-term investors of dividend stocks may consider buying the dips.
Enterprise Product Partners L.P. (EPD)
52 Week Range: $10.27-$30.86
Dividend (Distribution) Yield: 9.81%
Houston-based Enterprise Product Partners is an oil and gas company specializing in midstream energy services and crude oil pipelines. The group, whose history goes to late 196os, operates over 50,000 miles worth of pipes across North America. It is one of the global leaders in natural gas liquid extraction. EPD is also number 89 on the Fortune 500 list.
The group released its Q1 earnings report in late April. Net income attributable to limited partners came at $1.4 billion, or 61 cents per unit on a fully diluted basis. A year ago, the numbers had been $1.3 billion, or 57 cents per unit on a fully diluted basis. Total debt principal outstanding on March 31 was $29.9 billion. Given the uncertainty regarding the effects of the pandemic, management reduced 2020 sustaining capital expenditures $100 million, from $400 million to $300 million.
On July 7, the board declared the quarterly cash distribution to be paid to its limited partners with respect to the second quarter of 2020 of 44.5 cents per common unit, or $1.78 per unit on an annualized basis. Investors should note that the company declares distributions and not dividends, because the company is a master limited partnership (MLPs). The yield currently stands at 9.81%.
The company is expected to release its next quarterly report on July 29.
Interpublic Group of Companies (IPG)
52 Week Range: $11.63-$25.20
Dividend Yield: 5.50%
New York-based Interpublic Group of Companies is an advertising conglomerate. It owns several leading advertising companies including Acxiom, Craft, FCB and MullenLowe Group. Alongside competitors Omnicom Group (NYSE:OMC), Publicis, and WPP (NYSE:WPP), it is considered among the “Big Four” of advertising companies.
In late April, the company released its Q1 earnings report. It reported net revenue of $1.97 billion, a decrease of 1.6% from a year ago period. Operating income in the first quarter was $75.9 million, compared to $50.2 million in 2019. The U.S. brings in about 60% of revenues. The rest of the world contributes the remaining 40%. During the conference call, management highlighted the near-term challenges presented by the pandemic, emphasizing various cost-cutting measures it was taking.
On May 21, the board declared a quarterly dividend of 25.5 cents per share, payable on June 15, to holders of record at the close of business on June 1. The next ex-dividend date is expected in late August.
The group will release earnings for the second quarter ended June 30 on the morning of July 29. The current yield stands at 5.50%. As we approach this fall’s Presidential Election, ad spending in the coming weeks is likely to grow. Therefore, the Street would be interested to know management’s outlook for the rest of the year.
iShares Russell 2000 ETF (IWM)
52-week range: $95.69-$170.56
Dividend Yield: 1.39%
Expense Ratio: 0.19% per year, or $19 on a $10,000 investment
My next choice is not a stock but an exchange-traded fund (ETF) whose benchmark index is the Russell 2000. An ETF typically tracks an index. As one cannot directly invest in an index, an exchange-traded fund enables market participants to gain exposure to companies in the index.
Numerous academic researchers and industry practitioners highlight that small-cap stocks can increase portfolio diversification and boost potential returns over time. Therefore, IWM may enable investors to both participate in the growth potential of small-cap stocks and at the same time earn dividend income.
With its 2,000 companies, the iShares Russell 2000 ETF covers literally all industries. Novavax (NASDAQ:NVAX), LHC Group (NASDAQ:LHCG), Deckers Outdoor (NYSE:DECK), BJ’s Wholesale Club (NYSE:BJ) and Helen of Troy’s (NASDAQ:HELE) are among the top holdings many InvestorPlace.com readers will likely recognize.
Year-to-date (YTD), IWM is down about 12%. Put another way, in recent weeks, small-caps have been lagging large-caps. Over the long-run, small-cap stocks and small-cap ETFs often outperform their large-cap counterparts. However, they are typically more volatile than large-cap stocks.
The fund’s trailing price-earnings (P/E) of 14.16 and price-to-book ratio (P/B) of 1.67 may appeal to value-seeking investors. Many analysts may argue that valuations typically have limited short-term predictive power. But over the long-run, they possibly matter more. These two metrics, as well as the dividend yield of 1.39%, should potentially put IWM on many investors’ watch list.
For market participants who appreciate the risk/return profile of small-cap dividend stocks, IWM may be appropriate. And the dividend yield is the icing on the cake.
Unum Group (UNM)
52 Week Range: $9.58-$33.35
Dividend Yield: 6.29%
Tennessee-based Unum Group is a provider of financial protection benefits, including disability, life, accident, critical illness, cancer, dental, and vision coverage. Its operations mainly cover the U.S., U.K., and Poland. In addition to the Unum brand in these countries, the group also has another well-known brand, Colonial Life, which is one of the leading providers of voluntary worksite benefits in the U.S. The company is also number 273 on the Fortune 500 company list.
2019 was profitable for Unum. It ended the year with net income of $1.1 billion and a strong after-tax adjusted operating income of $1.14 billion, based on total revenues of $12 billion.
In early May, the company released its Q1 earnings. After-tax adjusted operating income was $274.1 million compared to $280.3 million ($1.31 per diluted common share) in the first quarter of 2019. It translated into an EPS of $1.35, which missed analysts’ estimates. A year ago, EPS was $1.31.
CEO Richard McKenney said: “While our first quarter results were solid, the emergence of the COVID-19 pandemic and resulting economic contraction have created uncertainty for both businesses and individuals worldwide.” The company suspended its financial guidance for the remainder of 2020.
On July 17, the board declared a quarterly dividend of 28.5 cents per share on its common stock to be paid on August 21 to stockholders of record on July 31. The current dividend yield stands at 6.29%.
The company is expected to report earnings next on July 29. As a result, UNM stock, which is down about 38% year-to-date, may be volatile around then.
Vale (VALE)
52 Week Range: $6.49-$14.05
Dividend Yield: 3.08%
Next up on this list of dividend stocks is Vale. Rio de Janeiro-based Vale is a global ore giant. It produces iron ore and iron ore pellets, key raw materials for steel-making. And steel has many industrial uses found in household items, bridges, buildings, and cars to name a few. In fact, iron ore is the most used metal globally.
Rocks in Brazil’s northern Carajas region have the highest ore concentration globally, over 65%. As a result, Vale’s operations in its home country are low-cost. When iron ore prices are high, then the company typically has a good-to-great quarter. Iron ore contributes to about 75% of sales.
It is also important to note that Vale produces nickel, crucial metal for energy storage, and copper, a conductor of electricity.
In late April, the group released Q1 results. Vale’s income was $239 million. The previous quarter, it was a loss of $1.562 billion. The company also generated $380 million in free cash flow from operations, $947 million lower than in 4Q19. Management noted that in Q1 financial results were heavily impacted by the depreciation of the Brazilian real, in comparison to the previous quarter.
Considering the uncertainties and potential impact of COVID-19 on operations, the company revised (i.e., lowered) production guidance for its businesses. YTD, VALE stock is down about 14%. The group will release Q2 results in the coming days. Investors may consider buying the dips.
Vodafone Group (VOD)
52 Week Range: $11.46-$21.72
Dividend Yield: 6.30%
U.K.-based Vodafone is one of largest telecommunications companies in the world. It is a market leader in its core U.K. and European markets. Over the past several years, the company suffered from declining growth. However, it started Q2 on better footing as service revenue turned positive. The current work-from-home trend has increased demand for its services.
As part of plans to strengthen its balance sheet, the group has been cutting costs aggressively. Acquisitions made in the past decade have created a large debt burden and investors would like to see that number decrease consistently. In fact, in May 2019, it had decreased its dividend. Therefore, I believe its current yield of around 6% is well-covered.
Since March, many dividend stocks, including Vodafone, have had impressive run-ups in price. Yet VOD shares continue to trade close to a five-year low. In case of further weakness in share price, I believe the company would become attractive from a risk/return profile.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.