Why Investors Should Consider Quality Dividend Stocks

Why Investors Should Consider Quality Dividend Stocks

Investors can buy stocks that fall into a wide variety of categories. There are growth stocks, which represent companies that are quickly expanding their businesses and reporting high revenue and/or earnings-per-share growth. Then there are value stocks, typically those with low stock valuations, as measured by various ratios such as price-to-earnings or price-to-sales.

Finally, there are dividend stocks, which are companies that distribute cash to shareholders through periodic dividend payments. We believe investors looking for superior long-term returns should focus on the best dividend growth stocks, which are companies that offer the best of both worlds.

The best dividend growth stocks, such as the Dividend Aristocrats, pay dividends to shareholders with the added bonus of dividend growth each year. We believe investors looking to generate long-term wealth should consider the Dividend Aristocrats.

Dividend Aristocrats Overview

The Dividend Aristocrats are a group of 65 stocks that have increased their dividends for at least 25 years in a row. There are additional criteria that must be satisfied in order to become a Dividend Aristocrat. For example, a company must be in the S&P 500 Index, have a market capitalization of at least $3 billion, and its shares must have a daily average volume traded of at least $5 million.

The relative scarcity of the Dividend Aristocrats—which total 65 stocks out of more than 500 stocks in the S&P 500 Index—demonstrates the difficulty in raising dividends each year for over 25 consecutive years. Such a long period of time will inevitably include recessions, and a variety of other global issues to deal with. For a company to be able to raise its dividend through so many challenges, it must have a strong business model that generates steady profits year after year. It must also have long-term growth potential, and a shareholder-friendly management team that understands the importance of raising dividends each year.

Another advantage of the Dividend Aristocrats is that many of them have significantly higher yields than the broader market average. For instance, the S&P 500 Index as a whole currently has an average dividend yield of 1.5%. Meanwhile, the ProShares S&P 500 Dividend Aristocrats (NOBL), the major exchange-traded fund that tracks the Dividend Aristocrats, currently yields 2.2%.

Investors can purchase a basket of all Dividend Aristocrats with NOBL, or purchase the individual stocks, many of which have even higher yields than NOBL. For example, People’s United Financial (PBCT) is a Dividend Aristocrat from the banking industry, with a high dividend yield of 5.2%. AT&T (T) is a Dividend Aristocrat with an even higher yield of 7%. Our top-ranked Dividend Aristocrat has an even higher yield than People’s United or AT&T.

Our Top Dividend Aristocrat Today

Exxon Mobil (XOM) is our top-ranked Dividend Aristocrat, and it is also the highest-yielding Dividend Aristocrat with a 7.7% yield. While higher-yielding stocks are often accompanied by elevated levels of risk, there are multiple quality Dividend Aristocrats with high dividend yields above 5%.

In the case of Exxon Mobil, its abnormally high dividend yield is due to its plunging share price over the past few years alongside the drop in oil prices. The broader energy sector was under duress over the past few years, as a global supply glut put downward pressure on oil prices. Then, the coronavirus pandemic of 2020 had a major impact on global demand for oil, which served as an added headwind for oil stocks.

Exxon Mobil has deployed aggressive cost-cutting to preserve its dividend in the short-term. The company announced plans to cut its capital expenses 30% in 2020. It also announced it will cut 15% of its global workforce to further cut costs. Over the long-term, the company expects the global oil price to rebound as the global economy recovers from the coronavirus pandemic. It is also betting its future on growing its production, which will be possible due to the company’s premier assets.

The Permian will be a major growth driver, as the oil giant has about 10 billion barrels of oil equivalent in the area and expects to reach production of more than 1.0 million barrels per day in the area by 2025. Guyana, one of the most exciting growth projects in the energy sector, will be the other major growth driver of Exxon. The company has nearly tripled its estimated reserves in the area, from 3.2 billion barrels in early 2018 to nearly 9.0 billion barrels. Overall, Exxon Mobil expects to grow production by 25%, from 4 million barrels per day to 5 million barrels per day by 2025.

We expect Exxon Mobil to grow earnings-per-share by 8% per year over the next five years, driven by a higher oil price as well as rising production. Although we view the stock as slightly overvalued at the present time, with a fair value price of $42 versus a current price of $46, we still see the stock as generating strong total returns. In addition to earnings-per-share growth, future returns will be driven by the high dividend yield of 7.7%. Overall, we see the potential for total returns to reach nearly 14% per year over the next five years, a highly attractive expected return for a Dividend Aristocrat.

Final Thoughts

Investors should not overlook the value of dividends. While growth stocks tend to receive much of the coverage in the financial media, dividend stocks have been proven to build wealth for shareholder over the long run. According to Standard & Poor’s, dividends have accounted for approximately one-third of the stock market’s total return since 1926. We believe the highest-quality dividend growth stocks, such as the Dividend Aristocrats, can generate superior long-term total returns.

 

By Bob Ciura of Sure Dividend

Sure Dividend
Sure Dividend (https://www.suredividend.com/) is a newsletter and research service that focuses on finding high quality dividend growth stocks for the long run. The service tracks over 600 US stocks, assigning them dividend risk scores and conducting detailed fundamental analysis to pick out potential winners. Each month, The Sure Dividend Newsletter has 10 recommendations that you can use to build a diversified, dividend-paying portfolio.  https://www.suredividend.com/subscribe/