The Top 5 Dividend Stocks
There is just one way to guarantee that you make money with your investments: buy stocks that pay dividends.
Buying dividend stocks is what investing is really all about. If you buy a growth stock ("growth" being a nice name for a stock that doesn't pay a dividend), you are really just speculating that the stock price will go up and you will make some money. And while that's better than a 50/50 proposition — because stock prices do tend to rise over time — it's no guarantee. Hence the term "speculation"...
With dividend stocks, you get a guarantee. Because when you buy a dividend stock, you are buying a share of the company's profits. What's more, the amount of the dividend will rise over time as the company makes more money.
Dividend investing has a reputation of being boring. And I guess if you think sitting back and watching the money roll in is boring, well, you've got some issues that I can't help you with.
Personally, I don't find dividend investing boring in the least. In fact, discovering a sweet dividend stock can be even more exciting, because they are supposed to be boring. Like the data center REIT I recommended to my Wealth Advisory subscribers a while back. Nobody was talking much about data centers at the time. But my research into Internet traffic growth led me to believe that data centers would be huge winners...
So that data center REIT I recommended is up 165%. That's pretty damn exciting...
More recently, I was looking into mobile Internet infrastructure (i.e., smartphone data/Internet), and, lo and behold, I found a fantastic REIT that owns cell towers, fiber loops, and some data center stuff. The stock was selling for around $16 a share, and the dividend was a lofty 15%.
Now, usually a dividend that big is a warning sign. When you see dividend yields listed with a stock, the yield is based on trailing dividends — the money that's already been paid out to shareholders. So the yield you see listed often won't tell you that there's already been a dividend cut, and it's more difficult to figure out if there will be a dividend cut.
Either way, the big yield you think you're getting isn't really there, or won't be in the future.
So anyway, I dug into that $16 stock paying 15%, and what I found was, well, exciting. That dividend was completely covered by one big contract the company had. And the potential for the company to sign more deals with new companies meant that the already big dividend could get even bigger! So I recommended it to Wealth Advisory subscribers, too. And we've got 91% gains since February.
While those gains are fantastic, the best part of this particular investment came when Mad Money's Jim Cramer panned the stock because of the big dividend. He said:
It's got too high of a yield. It makes me want to worry that it shouldn't be a red-flag situation. They shouldn't be that big. If the company wants to come on and talk about it, that's fine. But it's not my cup of tea.
Of course, he hadn't done the research to know what was really going on. And he probably turned some of his viewers off to a great investment. And now I see that George Soros has picked up 730,000 shares of this company. So yeah, both the stock price and the dividend are going higher...
What's Better Than an Aristocrat?
Do you know what a dividend aristocrat is? It's an affectionate way to refer to the relatively few companies that have raised dividends every year for 50 years running. Historically, these are the best dividend stocks ever. It's companies like Johnson & Johnson (NYSE: JNJ), General Electric (NYSE: GE), or Abbott Labs (NYSE: ABT).
There's even an ETF for solid dividend payers, called the ProShares S&P 500 Dividend Aristocrats ETF (NYSE: NOBL). But here's the thing: NOBL pays 1.78% a year. That's not very much. And many of the traditional aristocrats only pay between 2% and 3% a year, too. And they're not going to be making huge increases to their payments, because these are mature companies that can't grow 10–20% a year anymore.
I'd rather find the solid companies that have 10–20% growth ahead of them for the next decade or two. And they're out there.
So, just in case you don't have enough top five lists, here are my top five dividend stocks for the next 10 years...
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Top 5 Dividend Stocks
1. Bank of America (NYSE: BAC): BofA trades below tangible book value. Tangible book value is a "bricks and mortar" valuation — simply what the business is worth. It's too cheap. BofA aced the 2016 bank stress tests (it raised its dividend by 50% as I expected), and second-quarter earnings were great. BofA was paying $2.56 a year before the financial crisis. It currently pays $0.30. There is upside to above $20 from current prices.
2. Disney (NYSE: DIS): Disney under $100 is a very good bet. It has been consolidating between $95 and $100 since February. It just opened Disneyland in China, which should be a major catalyst. Over the next couple of months, we'll be hearing about attendance. Good numbers will push DIS into the $100s. Plus, DIS is due for a dividend hike. There is upside to $130.
3. Starbucks (NASDAQ: SBUX): Starbucks is one of the best-run companies in the world. I really can’t say enough good things. I mean, there’s more money on SBUX gift cards than there is on deposit at some publicly traded banks (more than a billion dollars). As the company expands its food offerings, there is 20% a year growth potential. And this dividend is going higher. There is upside to $85.
4. Nokia (NYSE: NOK): Mobile data is among the most solid trends these days. Cisco and Ericsson are seen as the leaders, but the merger with Alcatel-Lucent makes NOK the biggest mobile network company. Analysts are upgrading it. At 17, the forward P/E is a little high. It's because earnings estimates have been lowered. Of course, that sets the stage for NOK to beat expectations. There is upside to $10.
5. Realty Income Corp (NYSE: O): Realty Income is among the premier REITs on the market and makes a great addition to any income portfolio. The dividend is paid monthly,
which makes for faster compounding (4.6% a year for the last 20 years — with consecutive hikes for 19 straight). The yield is currently 3.6%. There is upside for the stock to $80.
Okay, there you have it — my five favorite dividend stocks. And if you want to know what I'm recommending to my Wealth Advisory subscribers, you can check it out here.
Until next time,
Until next time,
An 18-year veteran of the newsletter business, Briton Ryle is the editor of The Wealth Advisory income stock newsletter, with a focus on top-quality dividend growth stocks and REITs. Briton also manages the Real Income Trader advisory service, where his readers take regular cash payouts using a low-risk covered call option strategy. He also contributes a weekly column to the Wealth Daily e-letter. To learn more about Briton, click here.