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All Contents © 2018The Kiplinger Washington Editors
By Tom Petruno, Contributing Writer
| Originally published December 31, 2015
After a bull-market run of nearly seven years, picking winning stocks in 2016 may be about choosing reliability over flash. That could mean that dividend-paying stocks of established companies will be the market's leaders.
To find some great dividend-stock ideas, we first looked for companies whose businesses seemed poised for decent sales and earnings growth, even in a still-challenging U.S. economy.
Next, we looked for dedication to rising dividend payments. Though many companies pledge periodic stock buybacks as a way to return capital to investors, dividend payments are commitments—and increasing that commitment says a lot about executives' confidence.
Finally, we sought stocks that appeared ready to deliver a good total return—meaning share-price appreciation plus dividend income. Investors who seek high yield alone often sacrifice share-price growth and dividend growth over time.
Stocks are listed alphabetically. Prices and related data are as of December 18. Unless otherwise indicated, price-earnings ratios are based on estimated 2016 earnings.
Share price: $55.74
Market capitalization: $91 billion
Annual dividend rate per share: $2.28
Dividend yield: 4.1%
Price-earnings ratio: 11
Drug giant AbbVie (ABBV) is a bet on potential new blockbuster treatments for cancer and other serious diseases.
The company has seen revenue soar from $14 billion in 2009 to an estimated $23 billion in 2015, fueled largely by the success of its drug Humira, used to treat rheumatoid arthritis, plaque psoriasis and other chronic conditions. AbbVie also has a hit with blood-cancer treatment Imbruvica, which the firm acquired when it bought Pharmacyclics last May. Earnings are expected to reach a record $5.01 per share in 2016, up 17% from 2015.
But investors' concerns about long-term growth, after Humira loses U.S. patent protection late in 2016, have kept AbbVie's share price low relative to earnings since its spin-off from Abbott Laboratories in 2013. With a price-earnings ratio of 11, AbbVie looks like a bargain compared with the overall market; Standard & Poor’s 500-stock index sells for 16 times estimated 2016 profits.
Investment research firm Cowen & Co. thinks AbbVie is overly bullish in its growth projections. AbbVie expects total revenue of $37 billion in 2020 as new drugs in its pipeline come to market. Cowen believes $33 billion is more realistic. Even so, Cowen says the market isn't giving the stock proper credit for AbbVie's future earnings power.
To attract investors until new drugs can do the talking, AbbVie is using cold, hard cash: Its annualized dividend of $2.28 per share equates to a meaty yield of 4.1% at the current share price, and the company says it maintains a "strong commitment to returning cash through a growing dividend." The most recent hike: a 12% increase payable in February 2016.
SEE ALSO: The Next Great Dividend Stocks of the S&P 500
Share price: $158.80
Market capitalization: $120 billion
Annual dividend rate per share: $4.00
Dividend yield: 2.5%
Price-earnings ratio: 15
Amgen (AMGN), like rival AbbVie, is a major drug company with a two-pronged strategy for attracting and keeping investors.
One is to stress the potential new drug stars in its research pipeline. The other is to commit to rewarding shareholders with generous dividend increases. Amgen was one of the top biotech stocks of the 1990s on the strength of its treatments for red and white blood-cell deficiencies. In the past few years the company has enjoyed a renaissance fueled by the success of new drugs, including bone-loss treatment Prolia, blood-cancer drug Kyprolis and cholesterol-lowering Repatha. Analysts project that Amgen will earn a record $10.65 per share in 2015 on revenue of $22.3 billion.
Earnings growth in 2016 is expected to be relatively modest, however, in part because some of Amgen's oldest drugs will face new competition. Amgen, in turn, plans an assault of its own on the popular drugs of some of its rivals, via so-called biosimilars—treatments that have the same effects as older drugs but, unlike generic medications, aren't exact copies. In November, Amgen filed for U.S. approval of its first biosimilar, which would take on AbbVie's blockbuster drug Humira.
In the meantime, Amgen is making clear that it will continue to share more profit with investors through rising dividends—funded by strong cash flow, tight expense controls and low-cost long-term borrowing. Amgen says its payout will jump 27% in March, to an annual rate of $4 per share. That means a yield of 2.5% at the current stock price, compared with 2.1% for the S&P 500. And it brings Amgen's total dividend increase since 2011 to a whopping 257%.
Share price: $139.58
Market capitalization: $94 billion
Annual dividend rate per share: $4.36
Dividend yield: 3.1%
Price-earnings ratio: 15
For dividend investors, "follow the money" often is good basic advice. In the case of aerospace leader Boeing (BA), the money to follow is the torrent of orders that have poured in for the company's passenger jets in recent years.
By investment research firm Morningstar's count, Boeing has a backlog of more than 5,600 plane orders, or about seven years of production, as airlines worldwide have lined up to expand and upgrade their fleets. Boeing also has a large defense business. But commercial jets are the company's bread and butter. Of course, there is always a risk that an economic shock could trigger a rash of canceled jet orders, which is one reason investors have historically been leery about paying too high a price for Boeing stock relative to earnings. Even so, the surge in the jet business has driven a doubling of the share price since 2012—twice the gain of the average blue chip.
Boeing's rising fortunes also have meant a dividend windfall for shareholders. The company has boosted the payout 160% just since 2011. The most recent increase, a 20% hike announced on December 14, was bigger than many analysts had anticipated. At $4.36 per share, the new annualized dividend amounts to about 46% of Boeing's 2016 estimated earnings of $9.43 per share. CEO Dennis Muilenburg says the increase reflected "confidence in our team and long-term market outlook." And based on the company's earnings trajectory, shareholders have good reason to expect bigger dividends to come in the next few years.
Share price: $56.40
Market capitalization: $138 billion
Annual dividend rate per share: $1.00
Dividend yield: 1.7%
Growth at Comcast (CMCSA) has exploded since 2008, in part thanks to its takeover of NBC Universal in 2009.
Already the nation's largest cable TV company, Comcast gained the NBC and Telemundo networks, Universal Pictures studios, and the Universal theme parks. The company is expected to post revenue of $74 billion in 2015, and analysts on average project earnings of $3.29 per share. Since 2009, the stock has tripled, and the company has increased its dividend faster than earnings have grown, to the current annual payout rate of $1 per share. Although the stock's yield is a relatively modest 1.7%, Comcast's long-term dividend growth prospects make the stock one of the favorite income picks of Charles Carlson, a money manager and publisher of the Big Safe Dividends Web site.
Carlson says investors who focus on the threat of more cable TV viewers "cutting the cord" with Comcast (and other cable firms) may miss the other shift under way: Comcast is adding far more Internet-service subscribers than it's losing on the cable side. And the firm has sought to slow cable defections with its lauded X1 platform, which allows cable clients to link their TVs, computers and smartphones. Nearly 25% of Comcast's cable clients have adopted X1 since its launch in mid 2012. With its cable, Internet and phone services, plus the TV networks, studios and parks, "The company is really a juggernaut when it comes to cash flow," Carlson says. And that's what feeds rising dividends.
SEE ALSO: Don't Cut the Cord on These TV and Cable Stocks
Share price: $130.29
Market capitalization: $165 billion
Annual dividend rate per share: $2.36
Dividend yield: 1.8%
Price-earnings ratio: 21 (based on estimated earnings per share for the fiscal year that ends in January 2017)
Home Depot (HD) has been one of Wall Street's biggest stars since the bull market began, with shares of the home-improvement retailer soaring from about $20 early in 2009 to a recent high of $135.
Part of that performance stems from the housing market's recovery from its historic crash. As the industry's largest player, with $83 billion in annual sales, Home Depot naturally stood to gain from a rebound in new-home construction and from rising resales, which fueled home-improvement spending. But Home Depot's profit surge—from $1.34 per share in the fiscal year that ended in January 2009 to an estimated $5.34 in the year that ends in January 2016—has also been driven by a restructuring that slashed costs by streamlining the firm's distribution system, says investment research firm Morningstar.The upshot is that Home Depot's sharply improved profit margins are likely to be sustainable, Morningstar says.
Unusual for a growth business, Home Depot has also emphasized dividend returns, boosting its annual payout rate from 90 cents per share in 2009 to the current $2.36, a 162% increase in six years. The company says its target over time is to pay out 50% of its profits as dividends. This year, Home Depot is expected to distribute about 44% of its profits, so the retailer has room to keep raising the dividend. That could add an element of stability to the stock in the face of its rich valuation: The shares now are priced at about 21 times next year's estimated earnings, compared with a P/E of 16 for the S&P 500.
SEE ALSO: Kiplinger's Economic Outlook: Home Sales
Share price: $64.40
Market capitalization: $237 billion
Annual dividend rate per share: $1.76
Dividend yield: 2.7%
Price-earnings ratio: 10
Recommending big bank stocks as investments comes with a special caveat: Seven years after the financial system meltdown, the banks remain under tight regulatory scrutiny. So they aren't in charge of their own destinies when it comes to deciding whether to take more risk for potentially higher return.
Still, JPMorgan Chase (JPM), with $2.4 trillion in assets, is on track to generate record profit this year from its vast operations in consumer and business banking, investment banking, and money management. Analysts on average expect earnings of $5.93 per share in 2015, with profits inching up 5%, to $6.22 per share, in 2016. Depending on future moves by the Federal Reserve, which on December 16 hiked short-term interest rates for the first time in nine years, JPMorgan's 2016 profit outlook could perk up: Rising rates help banks because they're quick to boost loan rates but slow to lift deposit rates.
Even if their earnings growth is limited, the big banks have something else to offer: rising dividends, which have been held back since 2008 as regulators have forced bankers to keep larger capital cushions. JPMorgan CEO Jamie Dimon said earlier this year that his long-term goal was for the bank to pay out about 50% of earnings as dividends—up from 30% now. That kind of move certainly will take time. But Charles Carlson, a money manager and publisher of the Big Safe Dividends Web site, notes that JPMorgan boosted its dividend 10% last July, and he expects a similar increase in 2016. With a 2.7% dividend yield and a P/E of just 10, the stock is worth a good look by value investors, he says.
Share price: $54.13
Market capitalization: $432 billion
Annual dividend rate per share: $1.44
Price-earnings ratio: 20 (based on estimated earnings per share for the fiscal year that ends June 2016)
For much of the past decade, many investors all but gave up on Microsoft (MSFT), expecting the software titan to slowly fade away as mobile devices eclipsed the personal computer.
But over the past three years, Wall Street seems to have renewed its faith in Microsoft, concluding that the company will remain a relevant player in tech. Under new CEO Satya Nadella, who took over in February 2014 from Steven Ballmer, Microsoft has shown more evidence that it is making the transition from a PC-centered world to the era of mobile communications and the cloud (that is, delivering software and data storage via the Internet).
The stock has traded near record highs since the company issued its last earnings report in October, which beat estimates amid a jump in business purchases of cloud-computing services. What's more, Microsoft reported better-than-expected results from the PC side, thanks in part to the launch of the Windows 10 operating system. Huge challenges remain, but as Nadella remakes Microsoft he has the luxury of robust finances, including a hoard of $99 billion in cash and securities—and massive ongoing cash flow from the company's Windows franchise. Microsoft has been using more of that cash to directly reward shareholders: The company has hiked its dividend 177% since 2009. The most recent increase, paid on December 10, boosted the dividend by 16%, to an annual rate of $1.44 per share.
SEE ALSO: Earn Big Dividends From These 5 Big Tech Stocks
Share price: $45.64
Market capitalization: $17 billion
Annual dividend rate per share: $1.12
Price-earnings ratio: 16
Nielsen (NLSN) has tracked consumers' media-watching and product-buying preferences over the past 92 years, becoming a household name in the process.
But as a public company it's a relatively fresh face: The business was spun off from Dun & Bradstreet in 2011, and the shares have nearly doubled since then. Nielsen, which tracks consumers worldwide, is expected to post revenue of $6.2 billion in 2015 and earn $2.61 per share. In 2016, analysts on average expect profit of $2.88 per share, an increase of 10%, as Nielsen's ratings system continues to dominate as the "currency" upon which many advertisers base their ad-buying decisions—not just with old media, such as TV, but increasingly with booming new media, such as video on mobile devices.
Nielsen has been paying dividends only since 2013, but it has already raised the annual payout 75% since then, to the current $1.12 per share. Brokerage Goldman Sachs thinks the company has the wherewithal to boost the dividend to $1.40 in 2016 and $1.61 in 2017, fueled by rising cash flow generated from annual revenue growth of about 5%, excluding currency fluctuations. Although Nielsen has a large debt load, Goldman says the company's preeminent role in the ratings business provides financial comfort. The brokerage says Nielsen's competitive position relative to its rivals is one of the strongest of any company in the S&P 500.
Share price: $50.24
Market capitalization: $16 billion
Annual dividend rate per share: $1.98
Dividend yield: 3.9%
Price-earnings ratio: 17
Dividend hunters who prefer relatively low-risk stocks often gravitate toward electric and gas utilities. But the appeal of those companies varies widely.
Many are growing slowly. Others face government regulators who can be hostile to investors. Kelley Wright, managing editor of the dividend-focused newsletter Investment Quality Trends, says one utility idea worth considering is WEC Energy Group (WEC). The company was formed when Wisconsin Energy bought Integrys Energy in June, creating a holding company with six electric and gas utilities serving Wisconsin, Illinois, Michigan and Minnesota. Wisconsin Energy's executives have long had a reputation for driving both share price appreciation and healthy dividend growth. The merger gives those execs new growth opportunities across the merged entities' Midwest base, says investment research firm Morningstar. One potential area for growth: converting more Midwest propane users to natural gas.
WEC Energy recently announced its first dividend increase for the combined company: The payout will rise 8.2%, to an annualized $1.98 per share, on March 1, 2016, giving the stock a 3.9% yield at its current price. Longer-term, the company says it aims to generate annual earnings growth of 5% to 7%, and it expects to pay out 65% to 70% of profit as dividends. Morningstar says those goals should lead to "above average" dividend growth.
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