The Fed has spoken. It’s March 18 statement was one of the most anticipated in history, as investors had come to fear that rate hikes could start as soon as June. But after the Federal Reserve downgraded its expectations for inflation going forward, Fed watchers concluded that September would be the earliest that hiking would begin, and even then it would proceed at a much slower pace than previously feared.
As a dividend investor, I care about this a lot less than you might think. In my world, debating the precise date of the Fed’s policy shift is no more productive than arguing over how many angels can balance on the head of a pin.
Think about it. Starting at a base of 0%-0.25%, the target Fed funds rate would have to jump by a pretty wide margin before cash and short-term bonds become an even semi-competitive asset class again.
Meanwhile, even in a broadly overpriced U.S. market, we can still find solid deals on dividend paying stocks. If bought at a reasonable price, a good dividend stock offers both a competitive current yield and a strong probability of dividend growth. Whether the Fed starts hiking rates in June, September or never, a good dividend-paying stock will continue to chug along, paying its dividend every quarter and ideally raising it at least once per year.
Here are five can’t miss dividend stocks to buy, regardless of what the Fed decides to do next:
Kinder Morgan Inc
Oil and gas pipeline operator Kinder Morgan Inc (KMI) is one of my very favorite dividend stocks.
This is a company run by one of the smartest men in the energy industry—Richard Kinder—whose interests also happen to be perfectly aligned with his shareholders. Richard Kinder receives no salary for his work as Chairman and CEO. His only compensation comes from the dividends he receives as a KMI shareholder. Though as the owner of 233 million shares, Mr. Kinder is doing just fine. He dividend income is about $400 million per year. All the same, Mr. Kinder has every incentive to keep the dividend checks coming . . . and growing.
At current prices, Kinder Morgan sports a dividend yield of 4.4%, and during last year’s reorganization, management wrote that it expected to see dividend growth of at least 10% per year through 2020. Assuming you hold the stock through 2020, you’d be looking at 61% cumulative dividend growth. That would give you a yield on cost of 7.0% five years from now. Not too shabby.
Oh, remember what I said about Mr. Kinder having a lot of skin in the game? Well, he just upped it. On March 15, Kinder bought 100,000 shares for just shy of $4 million. In the past two years, Kinder has purchased 2.3 million shares worth almost $100 million.
General Electric Company
Outside of the global banks, few companies have lost more reputational capital over the past decade thanGeneral Electric Company (GE). The 2008 meltdown forced GE to eat some serious humble pie and rebuild itself as a true industrial conglomerate. Before the crisis, its GE Capital unit had grown so large that General Electric had essentially become a high-risk hedge fund that also happened to build stuff. That didn’t end well, as GE had to run to Warren Buffett hat-in-hand for an emergency loan when the credit markets imploded.
GE Capital’s balance sheet has now been shrunk by about half, and by the end of this year General Electric hopes to get no more than 30% of its earnings from financial services.
Investors have mostly yawned at General Electric, considering it too boring in its current form to warrant an investment. But this indifference has created a reasonably good value. GE trades for 16.8 times earnings and yields 3.5% in dividends.
GE slashed its dividend in 2009, but it quickly started raising it again in 2010 and hasn’t stopped since. The annualized dividend growth rate over the past three years was 13.4%. Not too shabby!
In General Electric, we get a moderately priced stock paying a high and growing dividend that has been off most investors’ radars for years. That’s a dividend stock you don’t want to miss.
McDonald’s Corporation
As a result, McDonald’s results have been sagging. The company reported absolutely abysmal sales last month, with domestic sales falling 4%.
But the thing is, McDonald’s has been here before. The chain had gotten stale in the 1990s before retooling itself for a fantastic run in the 2000s. This is a company that has proven itself capable of adapting to the times. (Related: See McDonald’s Is the Microsoft of Burger Joints.)
And I’m willing to buy McDonald’s, when it is out of fashion, because it was also a company that takes its commitment to shareholders very seriously. McDonald’s has raised its dividends for 38 consecutive years and pays a current dividend yield of 3.5%.
McDonald’s dividend growth numbers are almost ridiculous. After growing its dividend at a 23% annual clip over the past 10 years, long-term investors who held for that entire period now enjoy a yield on their original cost of 27.1%.
The rate of dividend growth has slowed in recent years, and I don’t expect to see annualized growth anywhere near those historical levels again. But they show that McDonald’s is committed to its shareholders, and I have no doubt that management will find a way to continue growing the dividend in the years ahead. And frankly, the 3.5% current dividend yield is a lot higher than what you’ll get in most other “income” securities.
Realty Income Corporation
I own shares of Realty Income (O) in a dividend reinvestment plan that I will never sell.
Realty Income is one of my very favorite long-term stocks precisely because it is one of the most predictable. Realty Income doesn’t really “do” anything. It simply buys quality free-standing retail properties that, as a general rule, are already throwing off healthy cash flows and then converts those cash flows into monthly dividends for its shareholders. And as a triple-net landlord, Realty Income doesn’t have to worry about leaky toilets or peeling paint. All maintenance, insurance and taxes are the tenants’ responsibility.
Over the past 10 years, Realty Income has raised its dividend at a 5% annual clip. That’s very solid for a company whose business model is about as exciting as watching an English cricket match on TV. But the consistency goes beyond that. With January’s dividend hike, Realty Income has boosted its monthly dividend 79 times in the past 20 years and in 70 consecutive quarters.
At current prices, Realty Income yields 4.4%. Buy it, instruct your broker to reinvest the dividends, and sock it in a drawer for the next 20 years
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Apple Inc
Next up is Apple Inc (AAPL), a company that you might not normally consider a “dividend stock,” per se, due to its modest dividend yield. At current prices, Apple only yields 1.5%.
But given the rate of dividend growth I expect, I’m ok with that.
After a 17-year hiatus, Apple reinstated its dividend in 2012 at $0.379 per share, quarterly. In less than a year and a half, it has raised it 24% to $0.470. And with a payout ratio of just 25%–and with an earnings stream that just continues to grow—I expect plenty more where that came from.
Let’s look at Apple’s cash position. Apple has a cash hoard of $178 billion. But most of this cash is sitting offshore, outside of the reach of the U.S. taxman. For this reason, investors have treated it as if it doesn’t exist on the assumption it will never be repatriated.
This is a mistake. The optimist in me believes that U.S. corporations will get some sort of tax amnesty within the next few years. But even if they don’t, and you assume that all of Apple’s cash was taxed at the full 35% corporate tax rate—which is a ridiculously conservative assumption—Apple would still have $116 billion in cash. That’s enough to pay off its existing long-term debts three times over. It would also be enough to continue paying dividends at the current rate for the next 10 years.
Apple may not be a high yielder today. But it’s still a no-brainer to own in a portfolio of dividend stocks.
Disclosures: Long KMI, GE, MCD, O, AAPL
By Charles Lewis Sizemore, CFA, .
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