The hot new investment theme isn’t socially nuanced crypto space finance or metaverse charging networks for virtual vehicles. It’s dividends—cash payments to shareholders.
This year, U.S. equity dividend mutual funds added cash from investors during 14 out of 15 weeks. The ProShares Dividend Aristocrats exchange-traded fund (NOBL), which tracks an index of longtime payout growers, has managed a 6% return over the past six months, while the S&P 500 (.SPX) has lost 3%.
That’s what the next decade could look like, according to BofA Securities. Its strategists say that the S&P 500 is poised for minimal price returns from here, and that dividends could make a big difference. Since 1936, they’ve made up more than one-third of total returns. Unlike fixed bond payments, dividends can keep up with inflation. Payouts as a percentage of profits are near record lows, suggesting ample potential for dividend hikes. There are plenty of choices for dividend growth funds, including the Vanguard Dividend Appreciation (VIG), and iShares Core Dividend Growth (DGRO) ETFs.
To choose individual stocks, look for strong balance sheets, consistent free cash flows, and management teams committed to providing attractive yields, says Austin Graff, a portfolio manager at Texas-based Titleist Asset Management. It runs a new fund called TrueShares Low Volatility Equity Income ETF (DIVZ), which costs 0.65% a year and recently had a weighted average dividend yield of 3.6%. Among Graff’s favorite stocks are JPMorgan Chase (JPM), yielding 3%; Philip Morris International (PM), 4.8%, and Johnson & Johnson (JNJ), 2.5%.
To find more dividend growers, Barron’s used an approach inspired by the Federal Reserve’s so-called dot plot, or path of expected interest rate hikes. We screened the S&P 500 for companies that analysts predict will increase payments nicely in the years ahead. Here are six.
Broadcom (AVGO) has a history of rolling up chip makers, and more recently, enterprise software companies. It tends to pay sensible prices for deals, cut corporate overhead, put companies on a common sales platform, and use its heft to fund product development. The stock has returned more than 2,000% over the past decade. That might not seem like the description of an income investment, but the shares pay 2.8%. With free cash flow approaching 7% of the company’s market value, payments appear well-covered. Broadcom announced a 14% payment boost in December.
Caterpillar (CAT) has paid a dividend since 1925 and raised it for 28 consecutive years. Inflation and the war in Ukraine increased the cost of steel and other materials for Cat’s drilling, mining, and construction machines. But the world is ravenous for the work the machines perform. One example: Europe is stuck with inflated prices for natural gas, while America produces the stuff relatively cheaply, so there’s a scramble to build liquefaction facilities to ship gas overseas. UBS (UBS) reckons that six cents of each dollar spent on those facilities will go for construction machines.
CVS Health (CVS) is slated to report quarterly financial results on May 4. After last quarter’s report, its shares dipped 5%. So maybe wait and see this time around. Over the past three years, the stock has returned 120%, nearly double the S&P 500’s return. Management has a long-term plan to drive more visits for routine healthcare visits to its in-store clinics. This year, Wall Street expects healthy profit growth from the CVS’s health plans and pharmacy benefits units. In February, the company announced a 10% payment increase, its first since buying insurer Aetna in 2018.
Fifth Third Bancorp (FITB) held out longer than most banks in investing its excess cash amid rising interest rates. This past week, it reported quarterly financial results, which showed that it had put a fresh $13 billion to work. That leaves $15 billion, about two-thirds of which is earmarked for securities purchases and lending. The result is a healthy outlook for net interest income. The report was well-received by investors; the shares gained 4%. In September, Fifth Third announced an 11% dividend increase, and Wall Street expects faster growth in the years ahead.
Warren Buffett’s Berkshire Hathaway (BRK/B) recently announced a big new stake in HP Inc. (HPQ), the personal computer and printer maker. HP’s recent gains have been fueled by cost-cutting, stock buybacks, and demand for home office equipment during the pandemic. The pending purchase of Poly, formerly called Plantronics, will take it further into hybrid work with video cameras, headsets, and conference room gear. The company announced a 29% dividend increase last October. With a free cash yield around 12%, opportunities for buybacks, deals, and bigger dividends abound.
Merck’s (MRK) Keytruda drug for cancer is becoming a revenue powerhouse. It’s expected to bring in nearly $20 billion this year, rising to over $30 billion in five years. The shares sell for only 12 times earnings, in part because Merck will lose patent exclusivity on Keytruda starting in 2028. Fixes include acquisitions and new drug development. Last year, the company bought Acceleron Pharma to bolster its cardiovascular drug pipeline. It told analysts that it’s pursuing eight potential drug approvals there through 2030. The company announced a 6% dividend boost last November.
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