With interest rates stuck near historic lows, it’s a great time to consider dividend stocks.
A year ago, the Effective Federal Funds Rate was 1.55%. Today, it’s below 0.10%.
You probably already know the reason for the collapse in interest rates. The Federal Reserve slashed rates to combat the coronavirus pandemic. And they’ve remained near zero… with no sign of a rebound.
The Fed’s actions stabilized financial markets, but have hurt investors looking for income.
Fed Chair Jerome Powell and Treasury Secretary Janet Powell have said they’re committed to keeping rates low for at least the next few years. As a result, investors need to look for income outside of traditional fixed income investments, like bonds.
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Today, I’ll explain dividend stocks and why they’re a great way to generate income. And I’ll tell you about three of my favorite dividend stocks that offer yields above 3%… and the potential for capital appreciation.
What is a dividend?
When you’re a shareholder of a company, you’re entitled to a share of that company’s profits. The simplest way for a company to share its profits is by paying regular dividends to its investors.
For example, Coca-Cola (KO) pays a quarterly dividend of $0.41. For every share of Coca-Cola you own, you’ll collect $1.64 of dividend income this year (four payments of $0.41). To determine your payment, all you need to do is multiply the dividend by the number of shares you own. For instance, if you own 1,000 shares, you’ll get $1,640 for the year.
You can receive your dividend payment via a check or a payment to your brokerage account. You also have the option of reinvesting the dividends back into the company’s stock. That means your dividend payment will be used to immediately buy more shares at the current price.
Dividend stocks are companies that pay out regular dividends. They’re typically mature businesses that generate consistent profits.
What is a dividend yield?
The dividend yield is a ratio that tells you how big a company’s dividend payment is. It’s easy to calculate. You simply divide the annual dividend by the current stock price.
Let’s stick with Coca-Cola for this example. As I mentioned above, the company pays $1.64 in annual dividends for each share. The stock was recently trading around $49, which means its dividend yield is 3.35%. So if you buy shares of Coca-Cola today, you can expect to make more than 3% on your investment… even if the stock stays flat over the next year.
Why invest in dividend stocks?
As I mentioned earlier, dividend stocks are usually connected to solid, profitable businesses. In a down market (or when volatility ramps up), they’re usually less volatile than non-dividend-paying stocks.
Dividend stocks can generate solid returns even in a tough environment, when it’s difficult to achieve capital gains because the market is down.
And they’re a fantastic option when interest rates are very low… like right now.
Falling interest rates affected the entire bond spectrum. For instance, the 30-year Treasury rate is currently at 1.85% and the 10-year treasury rate is at 1.05%. These are pitifully low yields for income investors. Corporate and municipal bonds offer higher yields, but most funds are paying annual yields well under 3%.
It’s a difficult situation for retirees, who depend on income for retirement. It’s also a tough environment for risk-averse investors who want a balance of capital appreciation and income.
The best solution is to invest in quality dividend stocks. Some offer attractive yields in addition to the potential for price appreciation.
Here are three companies with strong fundamentals and dividend yields over 3%:
Sunoco is the biggest fuel distributor in the United States. It sells motor fuel to convenience stores, fuel dealers, and commercial customers using a distribution network that spans across 30 states.
The company generates steady cash flows by distributing a range of fuel brands to more than 10,000 convenience stores under long-term distribution contracts. Sunoco is also a potential recovery play in the post-COVID environment. As the coronavirus vaccine rolls out this year, the company should benefit from rising fuel demand as folks start to travel again.
Its strong cash flow allows Sunoco to pay a high dividend yield of 10.7%. The company is in solid financial shape. Its current ratio is currently 1.0, which indicates it has enough liquidity to handle short-term obligations. And analysts are forecasting a big rebound in Sunoco’s earnings. Consensus estimates show Sunoco is expected to grow its earnings 146.6% next quarter and 102.7% next year.
Sunoco is a great pick to benefit as the energy sector rebounds in 2021.
Newell Brands (NWL)
Newell Brands is a global consumer goods company. The company sells products ranging from pens and glue to food processors and camping equipment. Its major brands include Paper Mate, Sharpie, Elmer’s, Oster, Rubbermaid, Sunbeam, FoodSaver, Coleman, Yankee Candle, and many more.
Newell has beaten analysts’ earnings estimates in each of the last five quarters. Sales are growing nicely, driven by strong consumption patterns, improving margins, and robust cash flow. In its most recent quarter, Newell saw solid sales growth in its Appliances & Cookware segment, its Home & Outdoor Living segment, and its Commercial Solution segment.
A key driver for Newell’s growth has been its e-commerce business, which increased 40% year-over-year in the most recent quarter. Earnings are expected to grow 33% next quarter.
Shares of Newell sport a 3.6% dividend yield right now. Not bad for a consumer stock with strong growth potential.
Genuine Parts Company (GPC)
Genuine Parts sells automotive and industrial components through a network of 9,800 stores worldwide. Its largest segment is its Automotive Parts business, which makes replacement parts for cars and trucks, small engines, farm equipment, and heavy-duty machinery.
In recent years, the company expanded its product offerings and geographic footprint by acquiring smaller competitors. Going forward, the company is in a good position to grow earnings organically. Consensus estimates show that analysts expect earnings growth above 20% next quarter. The company’s ecommerce initiatives have also helped boost sales during the pandemic.
Genuine Parts has a long history of dividend payouts. It’s one of a handful of stocks that qualify as a dividend aristocrat—a company that has increased its dividend every year for at least 25 consecutive years.
The stock has a dividend yield above 3% currently. And the company has increased its dividend an average of 5.1% over the past five years. If you’re looking for a sure thing in dividend income, Genuine Parts fits the bill.
If you’re looking to generate income this year, your best bet is to invest in dividend stocks.
These three names are all excellent picks to start a portfolio that will generate steady income for years.
As the Fed keeps interest rates near zero, dividend stocks are one of the best ways to keep your portfolio stable. Plus, you get the added benefit of capital appreciation in a surging bull market.
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In the year since we’ve launched the newsletter, Genia has already helped subscribers collect double- and even triple-digit gains on dividend stocks.
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