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All Contents © 2017The Kiplinger Washington Editors
By Dan Burrows
| November 2016
The surprising result of the presidential election has large implications for dividend stocks. First, let’s stipulate this: As an asset class, stocks that pay dividends always look good. Yes, they compete with fixed income for investors’ favor. True, like bonds, their prices come under pressure when interest rate rise. But whether it’s an up market or a down market, there’s always a place for dividend investing.
The yields on dividend stocks rise when their share prices become depressed. That’s an opportunity to chase extra yield. Besides, the best dividend-paying stocks do their most good when they are held for long periods of time. Ideally, the holding period includes many dividend hikes and market cycles.
On the other side of the coin, if the market is rising — that’s obviously good for all equities. The bottom line is that dividends are always appropriate for long-term investors.
That said, investors need to be cognizant of which way the political winds are blowing. The ascension of Donald Trump to the presidency of the U.S. promises to usher in big changes for a swath of industries. That means certain dividend stocks stand to benefit on a price basis more than others. If they throw off healthy dividends as well, then the total return equation is complete! It’s also important to remember that rising profits allow companies to give more cash back to shareholders.
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Dividend yield: 4%
The pharmaceutical sector is heaving a sigh of relief. There’s little wonder why. Hillary Clinton said her administration would clamp down on rising drug prices. That means a number of pharma stocks with strong yields now look even better for 2017.
AbbVie Inc. (ABBV) stock is shooting higher in response to the election. The dividend only pads that lead. Slow-but-steady growth is a basic part of the equation.
On the downside, we don’t know how a Trump administration will view mergers and acquisitions, which are a vital part of the industry. AbbVie successfully completed the acquisition of Stemcentrx in June, which bolsters its portfolio of oncology treatments. The ability to make similar moves going forward is now less certain.
Be that as it may, AbbVie looks like a tremendous dividend name. It’s only been around since 2013, and yet its payout has grown by more than 40% in that short time.
swong95765 via Flickr (Modified)
This one is a bit more complicated. Chevron Corporation (CVX) and other energy names will benefit from a pro-fossil fuel policy. Recession or trade wars, however, will sap demand for oil.
For now, though, oil prices appear to have stabilized. As an integrated energy major, Chevron’s downstream business offers a bit of a hedge against weakness in crude oil anyway.
Oil prices are cyclical — even if the cycles can take a painfully long time to turn. And a dividend yield of more than 4% is mighty attractive in an ultra-low interest rate environment.
Perhaps best of all, patient investors — that is, buy-and-hold types — can look forward to a steady drumbeat of payout hikes. Through thick-and-thin energy markets, CVX has raised its dividend for 30 consecutive years.
Courtesy General Electric
Dividend yield: 3%
As long as international trade policy doesn’t go off the rails, General Electric Company‘s (GE) long-term strategy sounds too good to ignore.
But investors will need to remain patient. General Electric’s earnings underscore the difficulty of shedding the firm’s financial businesses at a time when the oil and gas industry is depressed. Much to the delight of investors, GE addressed that problem in a big way.
GE is putting a lot of distance between it and the oil and gas business by merging it with Baker Hughes Incorporated (BHI). That helps mitigate some of the macroeconomic risk from the industry.
The transformation back to a pure-play industrial company was always going to be a long and messy process. Macro headwinds are making it worse, but don’t forget that they’re cyclical, too.
Dividend yield: 2.8%
Merck & Co., Inc. (MRK) was an attractive dividend name even before the latest developments. Indeed, it is having an outstanding year, with gains more than 20%. If there’s a downside to that, price appreciation has lowered the yield on the dividend to right around the 3% mark.
Like all Big Pharma companies, MRK uses mergers and acquisitions to replenish its pipeline with cost effectiveness. We’ll see what happens with a new administration, but as a strategy it’s working well. Merck has five drugs that are currently in review by regulatory agencies, as well as 25 late-stage and 11 mid-stage programs.
Take price appreciation, throw in the dividend and MRK — a component of the Dow Jones Industrial Average — looks good for better-than-average total returns.
Dividend yield: 3.6%
Pfizer Inc. (PFE) is another pharma giant that also happens to be a Dow component. Shares weren’t having a very good year — up until Wednesday. Now, sentiment couldn’t be higher.
In addition to the outsized yield, PFE has fundamental reasons to become a part of your equity income portfolio. It has a strong pipeline with 94 clinical studies under way. Furthermore, a buyout bender — which have already been concluded — promises long-term price appreciation to go along with a steady dividend stream. In this year alone, PFE bought Medivation Inc. for $14 billion and Anacor Pharmaceuticals Inc. for $5.2 billion.
The first deal beefs up PFE’s oncology portfolio in a big way. With Anacor Pharmaceuticals, PFE got its hands on crisaborole — a non-steroid eczema treatment that is being studied for efficacy against psoriasis.
Mike Mozart via Flickr (Modified)
Wells Fargo & Co. (WFC) was a buy even before the outcome of the election. No, it might not be the most popular name after its phony accounts scandal, but that actually works in a value investor’s favor. It’s still a quality business with a quality stock.
Bank crises eventually blow over. This, too, shall pass. Shares in WFC went to $46 from $51 on the news. That has the dividend up to a very attractive level. A knock on banks is that they’re constrained when it comes to formulating their capital plans. In 2017, stress test have targets on their backs.
Indeed, all regs are. Perhaps banks will be allowed to return to proprietary trading as well. And any that lightens capital requirements delivers a boost to the bottom line.
Dividend yield: 4.9%
The telecommunications sector is a haven for equity income investors. You can’t begin any discussion of dividend stocks without considering names like Verizon Communications Inc. (VZ).
Verizon is boring, but it’s supposed to be. As much as traditional telecommunications is a poky business, VZ is making some interesting moves. Most notably, it struck a deal to acquire the core properties of Yahoo! Inc. (YHOO) to drive new revenue streams and position itself for the future. Just last year it bought AOL.
You might scoff at Verizon picking up has-been internet properties, but they actually provide VZ with potential growth in digital content and advertising technology. Main rival AT&T Inc. (T) offers a superior yield, but its deal to buy DirecTV is in question under a Trump presidency.
This article is from Dan Burrows of InvestorPlace. A
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