Since May, the markets are rallying and almost back to pre-COVID levels.
In parallel, the real economy is in shambles and many companies are either cutting dividends to preserve liquidity or declaring bankruptcy. Understandably, dividend-investors are concerned their income will be reduced or disappear for some time.
But worry not: There are still plenty of safe dividend stocks in this market.
Today, I want to share with you the dividend stocks I’m looking at this month.
1 – Utilities
Utilities companies are basically recession-proof businesses. No matter how bad the crisis gets, people will continue paying their electricity and water bills. If you’re looking for a safe long term investment to strengthen your long term portfolio, consider buying these stocks.
Duke Energy (NYSE: DUK) is an electricity power company who owns 58,200 megawatts of base-load and peak generation in the USA, which it distributes to 7.2 million customers. Financially, Duke is a behemoth and 2019 revenues passed the $25 billion mark. However, growth in this industry requires lots of outlay and Duke invested over $36 billion in Capex from 2016-2019, which was financed with debt, which swelled to $96 billion. The only way to sustain debt-fueled Capex spending is for Operating Cash Flow to increase Y/Y. In that regard, 2019 Operating Cash Flow increased 14% from 2018, up from an 8% increase the year prior. Indeed, 2019 revenues increased while cost of revenue decreased compared to the year prior. This suggests Duke is growing while rationalizing its expenses. In any case, Duke has investment grade credit rating from every rating agency. On May 7th, Duke declared a $0.945 quarterly dividend, in line with previous. The dividend yield of 4.71% and 9 years of consecutive dividend growth represents attractive value for money.
California Water Service Group (NYSE: CWT) is the third-largest publicly traded water utility in the United States, providing water and wastewater services to roughly two million people in more than 100 communities. It’s a “boring investment” if there ever was one: 16% average annual stock price appreciation since 2010, a forward dividend yield of 1.78%, a 5-year dividend growth rate of 4% and 53 years of consecutive dividend growth. This dividend king will not impress with its flashy tech or savvy marketing but it will consistently put money in your pocket. And that’s all a boring investment needs to do.
Dominion Energy (NYSE: D) provides electricity and natural gas to more than 10 American States. Its portfolio includes 27K megawatts of power generation, 9,7K km of electric transmission lines, 23K of natural gas pipelines and 34km² equivalent of natural gas and oil reserves. In other words, Dominion is a utilities/energy monster, and the numbers prove it: 2019 revenues are up 41% from 2016, operating cash flows increased 26% in the same period, management is consistently paying off the company’s debt – $12 billion of debt paid in 2019 – and every year the dividend increases. With a forward dividend yield of 4.63%, a 10-year dividend growth rate of 7% and 16 years of dividend growth, Dominion is a solid play.
2 – Energy Stocks
Recommending energy stocks is always controversial. Some people say oil’s dominance is over, others claim the current crisis will cause a wave of dividend cuts and the most pessimist foresee bankruptcies. Low oil prices will test the resilience of even the largest conglomerates but if you have a 5-10 year investment horizon then buying now may prove a wise decision.
Energy Transfer Equity (NYSE: ET). I’ve covered ET before and it remains a very interesting high yield dividend stock investors with a significant risk tolerance should check out. The company’s status as an MLP means it can avoid paying corporate taxes if it distributes the bulk of its free cash flow as dividends. ET is pursuing the risky strategy of taking on massive debt to simultaneously finance growth and pay a very high dividend. So far management has delivered: the long term debt is being paid off and Capex is being lowered to the desired $2.5 billion dollar mark which would guarantee dividend safety. Yes, the oil crisis is hurting all energy companies but ET is preserving liquidity by cutting its short term Capex and laying off 6% of its workforce. The price has dipped to roughly $7, which is strong buy territory.
Total SA (NYSE: TOT). This oil supermajor’s dividend yield is currently 7.66%, which is insane. Recent dividend history is choppy but Total is in a better financial position now than it was 10 years ago: it reduced its operating costs from $9.9/barrel to $5.4/barrel and expects its growth projects to generate significant returns in coming years. Given the strength of the Balance Sheet and future growth prospects, I believe the dividend is safe. To be clear, this is a defensive dividend stock, not a growth stock. Don’t buy it if you expect significant capital gains. This is a stock to buy and DRIP your dividends for rapid compounding.
BP (NYSE: BP). Another oil supermajor with an attractive 11% dividend yied. Is his a value trap? I don’t think so. BP’s Balance Sheet is strong and the company recently issued $12 billion in hybrid debt. I’m slightly worried about the sale of its petrochem business to Ineos for $5 billion but this could be a liquidity raise to 1) preserve the dividend and 2) invest in renewables the U.K. government is pushing for. Will BP succeed in transitioning from petroleum to renewables? Only time will tell, but its close ties to the UK government and the fact that pensioners rely on its dividend for retirement income mean BP will be around for many years to come. I don’t expect any dividend cuts in the foreseeable future and, at current price, BP is a buy.
Canadian Natural Resources (NYSE: CNQ). One of the best of breed Canadian energy companies. The Saudis know this and purchased shares in March. CNQ has investment-grade credit ratings, $1 billion of cash on hand, a $1 billion credit facility it can tap into if needed and is reducing Capex by more than $1 billion through 2021 to preserve liquidity and guarantee dividend payments. This is a great company and the 7% dividend yield is too good to turn down.
3 – Industrials
H.B. Fuller (NYSE: FUL) is one of the world’s leading adhesives companies. It has $1 billion in cash on its balance sheet and roughly $500M in receivables, which guarantees the $32M quarterly dividend payments for a long time. S&P Global Ratings recently downgraded H.B. Fuller from “BB+” to “BB” with an outlook negative but the company has access ample liquidity, including a $400M revolving credit facility that allows for a $300 million increase if needed. In addition, it has flexibility in its debt covenants if the economic outlook becomes catastrophic. Further, H.B. Fuller is reducing both Capex and Opex to reduce its debt by $200M this year. The 1.46% yield, 25.89% payout ratio and 5-year growth rate of 6.66% appear modest until you factor in the incredible 50 consecutive years of dividend growth. In April, in the midst of dividend cuts and much investor panic, H.B. Fuller raised its dividend by 1.6% and then beat Q2 earnings in June. This dividend king has nothing to prove and ho hums its way along while everyone else is figuring out how to raise liquidity to preserve their dividend growh records.
Dover Corporation (NYSE: DOV) manufactures industrial products and employs more than 26,000 people worldwide. Its business is divided into three segments: Engineered Systems, Fluids and Refrigeration and Food Equipment. Don’t be fooled by the dry terminology: Dover is a growing business who has been kind to its shareholders: In the last 10 years, the stock price has appreciated more than 200%, the company repurchased more than $1 billion of its common stock since 2016 and paid $283 million in dividends every year for the past three years. Not bad. On May 7th, Dover declared a quarterly dividend of $0.49 per share, in line with previous. The 2% yield is low but 17 years of consecutive dividend growth, the 40% payout ratio and the 5-year dividend growth rate of 9.17% suggest this stock should be on all income-investors’ watchlist.
4 – FINANCIALS
Financial stocks are plummeting because the Federal Reserve released the results of its stress test for 2020 and is requiring that big banks “suspend share repurchases during the third quarter of this year and limit dividend distributions to the levels banks paid out in the second quarter“. The Fed will regularly monitor banks’ capital levels so dividend payments may be limited further depending on each bank’s earnings.
Many investors see this as a good reason to stay away from financial stocks.
Big banks are central to the economy and these measures guarantee their solvency and long term survival. By limiting buybacks and dividend payments, the Fed is encouraging the banks to pump money into the credit markets to help distressed industries survive the challenging economic conditions. Obviously, banks are notorious for underfinancing the real economy in times of crisis and this time could be a repeat of 2008. They may use their liquidity to buy assets and become even richer.
That’s great news for patient investors.
The next few quarters could be a good opportunity to open long term positions or average down your cost basis.
The Bank of New York Mellon (NYSE: BK). The Fed’s stress test reveals that even in a worst case scenario, the Bank of NY Mellon will generate $4.4 billion in net income before taxes in Q1 2022 so dividend payments would not be threatened. The dividend growth history is sketchy but it yields a solid 3.4%. Also, from 2016-2019, Mellon spend $11.4 billion on stock buybacks and they should continue this policy once Fed limitations are removed. Lastly, with a 5-year average ROE of 9.73% and a current Price/Book ratio of 0.86, the stock appears undervalued. In my opinion, this is a very underrated stock.
Northern Trust Corporation (Nasdaq: NTRS). Another bank the Fed projects will generate positive net income in 2022 even in the worst case scenario. The Price/Book ratio of 1.59 is slightly higher than most banks but the 5-year average ROE of 13.12% is higher than the industry average. From 2016-2019 total Y/Y revenues increased at an average annual rate of 9% and 2019 Net Income is up 44.5% from 2016. With a dividend yield of 3.67%, 9 years of dividend growth and a 10-year growth rate of 8.79% , this is an interesting stock to consider.
State Street Corporation (NYSE: STT). The third bank the Fed projects will have positive net income in 2022. The Price/Book ratio of 1 suggests perfect valuation at the current price. The 5-year average ROE of 10.75% is below the industry average but still respectable. Dividend yield of 3.4% and 10 years of dividend growth is great. A boring albeit steady stock.
Cincinnati Financial (NYSE: CINF). Is CINF the king of dividend kings? 59 years of dividend growth is hard to compete with. I covered this stock in a previous article and I believe it is still undervalued. In 5 years time, you’ll look back on this purchase fondly.
5 – Consumer Staples
Everyone must eat.
Like utilities, consumer staples is a relatively recession-proof industry that allows you to sleep well at night.
Tyson Foods (NYSE: TSN) is the world’s second largest processor and marketer of chicken, beef, and pork and annually exports the largest percentage of beef out of the United States. It operates major food brands, including Jimmy Dean, Hillshire Farm, Ball Park, Wright Brand, Aidells, and State Fair. The coronavirus hit Tyson particularly hard and it was forced to shut down some plants due to outbreaks. However, strong consumer demand in the retail sector boosted sales. The year ahead will be rough but the company has the financial firepower to weather this storm and pay out the $1.68 per share dividend – a 2.81% yield – in the meantime. The dividend has never been cut and it’s growing at a 10-year average annual rate of 25%. The stock appears undervalued at current levels.
Is Coca-Cola (NYSE: KO) the poster child of a sleep well at night stock? 57 years of consecutive dividend growth, forward dividend yield of 3.67%, 10-year dividend growth rate of 6.91% and 25% upside to return to pre-coronavirus levels is an enticing proposition. read my full takedown here. Undervalued.
Lancaster Colony Corp. (Nasdaq: LANC). Lancaster Colony is a manufacturer and marketer of specialty food products for the retail and foodservice markets. It owns brands such as Marzetti, New York Brand Bakery, Sister Schubert’s and Flatout. With 2019 revenues exceeding $1.3 billion, Free Cash Flow of $120+ million, Debt/Equity ratio of only 0.25 and an average annual capital return of 18% since 2010, this is a steady eddy dividend stock low-risk investors will love. At $150+ per share, the dividend yields a modest 2% but that’s the price to pay for a stellar 56-years of consecutive dividend growth.
6 – Real Estate Investment Trust
REITS are difficult to recomment because of the uncertainty surrounding the retail industry.
Nevertheless, there is one REIT who stands high above all others.
Realty Income (NYSE: O) is possibly the most discussed REIT of the past few months. So much so that I wrote an article on March 19th recommending investors buy the stock. 80%+ rent collection during the pandemic speaks volumes and the 0.2% dividend raise in June means this dividend aristocrat has no intention of breaking its 26 years dividend growth record. Sub-$60 is still a good entry price.
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DISCLAIMER: This is not financial advice. Do your own research before investing in any asset.