Back in March, I produced an article recommending 10 stocks to buy for an income-generating portfolio. These were dividend stocks that didn’t just produce income; they also had an opportunity to deliver capital appreciation.
How have they done?
Not so well, I’m afraid. However, I’m confident that we’ll all be having a good laugh about the entire subject five years from now. Until then, I thought I’d give the whole dividend stocks and income generation idea a slightly different angle.
How so, you ask?
I’ve decided to recommend seven stocks that have a market capitalization of at least $2 billion. The twist is that I’ll create a dividend yield ladder in the process.
So to make things a little simpler, I’m going to pick one stock with a dividend yield around 1.5% (between 1-2%), a second stock with a yield around 2.5%, and so on.
If you’ve followed my writing over the years, you know everything I recommend is for the long haul. None of these stocks are quick pump-and-dump schemes.
The great thing about total return is sometimes dividends play a big part in the result and sometimes it’s the capital appreciation that makes all the difference. Here are 7 dividend stocks to buy for big returns in your bank account:
- Tractor Supply (NASDAQ:TSCO)
- Intel (NASDAQ:INTC)
- 3M (NYSE:MMM)
- Apollo Global Management (NYSE:APO)
- AbbVie (NYSE:ABBV)
- Bank of Nova Scotia (NYSE:BNS)
- Simon Property Group (NYSE:SPG)
At the end of the day, it’s all about total return.
Dividend Stocks To Buy: Tractor Supply (TSCO)
Dividend Yield: 1.1%
Tractor Supply has been one of my favorite stocks over the past decade. I can’t recall exactly when I first recommended TSCO stock; I’m confident I wrote something as far back as 2012, but I’ve been unable to locate it.
Therefore, let’s take a quick look back to March 18, 2015. Tractor Supply was one of three new stocks added to the S&P 500 index. TSCO stock is up 70% since then. That’s compared to a paltry 25% return for the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
Fast forward to October 2020. Tractor Supply’s dividend yield is a little more than 1%. I know I said that I would try to get as close to 1.5% as possible — the midpoint between 1% and 2% — but like in sports drafts, you go for quality over quantity.
In the latest quarter, Tractor Supply had same-store sales growth of 30.5% thanks to triple-digit sales growth from its e-commerce business with a 56% increase in operating income.
The 1% dividend yield won’t make you rich, but it’s nice to have while you wait for TSCO’s next leg up.
Dividend Yield: 2.4%
Talk about depressing.
While Nvidia (NASDAQ:NVDA) has announced a $40 billion takeover of UK-based chipmaker Arm Holdings, and Advanced Micro Devices (NASDAQ:AMD) is in negotiations to buy Xilinx (NASDAQ:XLNX) for $30 billion, Intel’s $15 billion acquisition of Mobileye in 2017 is looking mighty puny right about now.
However, Intel’s free cash flow makes it far more attractive than investors are willing to admit. As I said in September, Intel had an FCF yield of 9.3%, almost seven times Nvidia’s.
In these times, when businesses and consumers are struggling to keep their heads above water, free cash flow is a vital aspect of a successful business operation. Intel might not be growing like either Nvidia or AMD, but it’s still got many irons in the fire, not the least of which is Mobileye’s autonomous driving technology.
Yielding 2.4% at the moment, Intel’s best offense might be its defense, represented by a healthy dividend yield.
Long-term, I doubt you’ll remember whether you hesitated buying INTC stock because its growth wasn’t sufficient.
In the meantime, get paid 2.4% interest on your cash. How many savings accounts can claim this kind of interest rate?
Dividend Yield: 3.4%
There is no question that 3M has seen better days when it comes to capital appreciation. Over the past three years, it’s got an annualized total return of -5.1%, 18 percentage points worse than the entire U.S. market, even including the dividend yield.
In August, I put together a list of 20 stocks to buy if you’re still betting on America to thrive. One of them was 3M. At the time, it was yielding 3.6%, so MMM stock has gained slightly in the seven weeks since.
My main argument back in August was that 3M was an excellent buy under $145. At the time, it was trading around $164.
Recently, my InvestorPlace colleague, Josh Enomoto, included 3M in a group of seven value stocks to buy in an overvalued market. On October 15, Enomoto wrote:
“MMM stock has generally treaded higher since the March doldrums. In my opinion, it could go higher still. What we have to remember is that based on longstanding social consequences from the 1918 flu, we could see lingering behavioral changes in the new normal.”
He was talking about the company’s stranglehold on medical-quality respirator masks through its N95 brand. Of course, we know that 3M is so much more than N95 masks.
My feeling is that 3M represents the sweet spot between healthy dividend yield and future capital appreciation potential. I’m not saying you’re going to get rich with 3M, but I definitely feel you’ll do alright in a low-interest-rate environment as we have now.
Apollo Global Management (APO)
Dividend Yield: 4.8%
If you’re not familiar with Apollo Global Management, it’s a New York-based alternative investment manager founded by legendary investor Leon Black. With $414 billion in assets under management, it invests in alternative credit, private equity, real assets, and other investment assets.
Apollo recently joined the special purpose acquisition company (SPAC) phenomenon by selling 75 million units at $10 a unit. Apollo Strategic Growth Capital (NYSE:APSG.U) plans to use the $750 million in gross proceeds to find a target business to merge with.
Normally, I’m not a fan of such an open-ended SPAC target criterion. However, it’s invested in more than 150 companies since its inception in 1990. In 2017, it raised $24.7 billion for its fourth private equity fund.
It knows how to find businesses to buy that will deliver for shareholders. While there’s no question, the risks involved in owning an alternative asset manager are higher than owning 3M.
Down 16.1% year to date through October 15 (including dividends), Apollo’s dividend yield is 27% less than its five-year average of 6.6%. In terms of finding underappreciated value dividend plays, that’s a perfect scenario for making long-term money.
Dividend Yield: 5.5%
If not for the drug company’s healthy dividend, AbbVie stock would be down on the year. As it stands, it’s got a total return of 1.6%, well below the 10.3% total return for the U.S. markets as a whole.
InvestorPlace contributor Bob Ciura recently recommended AbbVie as one of five high-yield stocks to buy.
Despite being in the process of losing patent exclusivity on Humira, its major revenue generator (50% of revenue), Ciura believes that some of the moves made to prepare for a hit to sales in 2023 when the U.S. patent exclusivity expires will reap benefits down the road:
“Growth from new products led to a strong performance in the second quarter. Revenue of $10.4 billion increased 26% year-over-year, while adjusted earnings-per-share increased 4% year-over-year to $2.34 for the quarter. The $63 billion acquisition of Allergan will also boost AbbVie’s future growth. Allergan is a leader in aesthetics products such as Botox. The combined company will have annual revenues of nearly $50 billion.”
The higher one moves up the yield ladder, the greater the risks generally become. While AbbVie isn’t perfect, at a 5.5% dividend yield, I’m willing to overlook its warts.
Bank of Nova Scotia (BNS)
Dividend Yield: 6.4%
Bank of Nova is one of Canada’s five big banks. For years, they’ve been the poster children for dividend stocks, paying considerably more than the big American banks. Over the past five years, its average dividend yield was 4.6%. By comparison, Bank of America (NYSE:BAC), Warren Buffett’s favorite bank, has delivered an average dividend yield of 1.7%.
Remember, however, that investing is all about total return. In that regard, Bank of America’s annualized total return of 10.6% was three times the Bank of Nova Scotia’s return.
The bank’s been hit by a double whammy in recent quarters: Not only has its international operations lost their pizzaz, but it’s also had to ramp up its provisions for credit losses, creating a lot of uncertainty at a time when Covid-19 has made it tough for banks on both sides of the border to make money.
“A challenging quarter for Bank of Nova Scotia on multiple fronts,” wrote Credit Suisse analyst Mike Rizvanovic in an August 25 report to clients.
“We are most concerned about the medium-term prospects for the bank’s International business, which we believe could see materially suppressed earnings power in a low-rate environment.”
Like the rest of the Canadian bank stocks, BNS got ahead of itself in 2018, trading into the mid-$60s, a level it only hit once before in June 2014.
Bank of Nova Scotia will be around for another 100 years. Buy in the low $40’s or high $30’s, get paid more than 6% in dividends, and sell when it reaches the $60’s at some point in the next 3 to 5 years.
Income investors ought to be all over this stock.
Simon Property Group (SPG)
Dividend Yield: 8.0%
On the surface, this last dividend pick probably appears to be the riskiest of the bunch. I mean, come on. Retail malls were dying before Covid-19. The pandemic has all but crushed their fortunes, including those of Simon, the world’s largest mall owner.
Down 53.3% on the year, I’m definitely going with a glass-half-full philosophy on this one. However, I’m not the only one who thinks it’s a diamond in the rough.
“Think about what Simon is doing right now: They are running a mall company, enforcing rent contracts, buying bankrupt retailers, litigating Taubman … [and] they have the financial ability to do all that and still pay a $1.30-per-share dividend,” said Piper Sandler analyst Alexander Goldfarb. “You do the math and go, ‘Wow, that’s a pretty amazing entity.’”
I couldn’t agree more.
Despite all that’s happened, Simon still makes money. In the trailing 12 months, it had free cash flow of $1.9 billion, more than the $1.6 billion or so it will pay out in dividends over the next 12 months.
As 8% yields go, it’s one of the best, if not the best.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.