“What causes the out-performance of the prosaic old-style stocks over the more exciting trailblazers?” Wharton Business School professor Jeremy Siegel sought to answer that question some 15 years ago in his analysis of dividend stocks.
“The answer is simple,” Siegel wrote in The Future for Investors: Why the Tried and True Triumph Over the Bold and the New. “Although the earnings, sales and even market values of the new firms grew faster than those of the older firms, the price investors paid for these stocks was simply too high to generate good returns. These higher prices meant lower dividend yields and therefore fewer shares accumulated through reinvesting dividends.”
What’s his evidence? “From 1950 through 2003, IBM shares sold at an average price 26.76 times annual earnings, while Standard Oil traded at 12.97 times earnings. IBM’s dividend yield (annual dividends divided by share price) was 2.18%, while Standard Oil’s was 5.19%.”
That higher dividend yield allowed Standard Oil shareholders to accumulate many more shares, causing returns to snowball, according to a post on the business school’s blog. Siegel concluded that “dividends matter a lot,” an historical trend likely to hold true in the future as well.
But there’s more — dividend stocks provide portfolio diversification. In general, companies that pay robust dividends and have sustained dividend growth come from mature industries. These companies have a low beta with relatively stable cash flows. A balanced portfolio has a mix of high and low beta stocks. Dividend stocks provide that balance.
I also believe that broad market valuations are stretched. Even with a long-term bullish outlook, it makes sense to go overweight on low beta stocks that also provide robust dividends. The top stocks to buy in this article will include some quality low beta dividend stocks.
Let’s discuss the following dividend stocks.
- Chevron Corporation (NYSE:CVX)
- Costco Wholesale (NASDAQ:COST)
- Pfizer (NYSE:PFE)
- 3M Company (NYSE:MMM)
4 Top Dividend Stocks That’ll Pay You: Chevron Corporation (CVX)
Chevron is my top stock pick from the energy sector and is also among the top stock to buy for robust dividends. The stock currently has a dividend pay-out of $5.16 and a dividend yield of 7.28%.
I do agree that CVX stock has been depressed in-sync with lower oil prices. However, the worst seems to be over for the global economy. I expect oil to trend higher in the coming quarters. Investors can potentially benefit from stock upside coupled with dividends.
It’s worth mentioning here that Chevron has one of the strongest balance sheets in the industry. For the second quarter of 2020, the company reported a net-debt-ratio of 17%. In addition, the company reported a total liquidity buffer of $30 billion that includes cash, revolving facility and commercial paper.
Even from an asset perspective, the company has 71 billion barrels of oil equivalent (BBOE) of resources recorded under its 6P classification system. Once oil is above $60 per barrel, I expect production to increase. Cash flow growth will ensure sustained value creation for shareholders.
Overall, CVX stock is undervalued with a robust dividend pay-out that is sustainable. The energy sector has not participated in the market rally. It’s very likely that the coming quarters will be different and CVX stock can outperform.
Costco Wholesale (COST)
Costco is also among the top stocks to buy for healthy dividends and dividend growth. Currently, COST stock has an annual dividend pay-out of $2.80. Besides the robust pay-out, the shares have also gained 29.6% YTD compared to a 5.7% rise in the S&P 500 index.
Costco recently reported strong comparable sales growth of 15.5% for the month of September 2020, while e-commerce sales nearly double, with 90.3% growth. With the approaching holiday season, the company is well positioned to deliver strong numbers.
With swelling paid membership revenues and potential growth in China, I expect dividends to increase in the coming years. It’s worth noting that the company initiated dividends in May 2004 and over the years, the payout has grown at a CAGR of 13%. Even at 10% dividend growth in the coming years, COST stock is attractive.
In addition, COST stock has a low beta of 0.69, which makes it an attractive defensive stock. Talking about defensive stocks, retailing rival Walmart (NYSE:WMT) is also a good investment option with WMT stock having a beta of 0.28.
Recently, Jefferies called Costco a potential “post-pandemic winner” with a price target of $435. This would imply a 14.5% upside from current levels. Clearly, with dividend and stock upside visibility, the stock is among the top names to buy.
Pfizer stock is another quality dividend stock for the portfolio. PFE stock currently offers a dividend of $1.52, which translates into an attractive yield of 4.05%. Further, the stock has a low beta of 0.66.
It’s also worth noting that PFE stock has moved higher by just 3.7% in the last year. The vaccine for COVID-19 is a likely catalyst that can take the stock higher in the coming quarters.
Pfizer is likely to apply for emergency use of COVID-19 vaccine by late November 2020. If trial data is positive (likely to be reported soon), the stock can surge higher.
Pfizer has already entered in an agreement with the U.S. government for 600 million doses of the vaccine. The government would pay $1.95 billion for an initial 100 million doses. Agreement has also been reached with the U.K. for 30 million doses.
Besides the development on the novel coronavirus vaccine, Pfizer also has a deep pipeline of drugs. The segments include oncology, internal medicines and rare diseases, among others. This should ensure growth from new drugs and vaccines. With research and development expense for FY2020 likely to be in the range of $8.6 billion to $9.0 billion, the company’s investments will yield long-term results.
3M Company (MMM)
3M has been an under-performer having moved higher by just 4.0% in the last one year. However, MMM stock has a healthy dividend pay-out of $5.88, equating to a yield of 3.48%. Additionally, the stock trades at an attractive forward price-to-earnings-ratio of 20.3x.
One reason for the stock remaining sideways is weak global growth. However, as economies crawl back to normalcy, it’s likely that the company’s growth will gain traction.
It’s worth noting that for Q2 2020, the company’s sales growth was negative across also business segments. Sales for the months of July and August 2020 have already been encouraging. I would not be surprised if the stock moves higher in the coming quarters as industrial segment growth accelerates.
From a dividend perspective, 3M reported free cash flow of $1.5 billion for Q2 2020. Even in a challenging quarter, FCF was healthy. Therefore, sustaining dividends is not a challenge for the company.
Overall, MMM stock is another low beta stock — though at 0.97 somewhat close to the 1.0 threshold — that is in my list of top stocks to buy. The company has a robust dividend pay-out and stock is likely to trend higher.
On the date of publication, Faisal Humayun did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modeling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.