For investors who don't quite have the stomach for the volatile ups and downs of the market, buying and holding dividend stocks can be a great compromise. Dividend-paying companies are typically ones that are well entrenched in their respective markets and have enough excess cash to pay investors, so their stock prices don't move as wildly as more speculative small-cap stocks. Also, those dividends ensure a base rate of return for investors that can go a long way in making up for when the market hits a rough patch.
If that sounds appealing, then you should be looking at adding some dividend stocks to your portfolio. We asked several of our contributors to highlight a dividend stock they think investors should consider. Making the list were General Motors (GM -0.47%), Medtronic plc (MDT -0.21%), Total SA (TTE), McDonald's (MCD 1.70%), Ritchie Bros. Auctioneers (RBA -0.16%), and Activision Blizzard (ATVI). Here's a quick look at why they think you should consider these dividend stocks.
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Take advantage of Mr. Market's irrationality
Jamal Carnette, CFA (General Motors): When it comes to cheap companies, General Motors is in a class all by itself. Versus the S&P 500's valuation of 26 times earnings, General Motors' P/E ratio is 4. That's not a typo -- General Motors trades at four times earnings. Automakers overall trade at a discount to the market, with peers Ford and Toyota trading at valuations of 7 and 10 times earnings, respectfully, but General Motors' valuation is the most extreme of the bunch. Additionally, GM is paying investors a dividend yield of 4.4%, 130 basis points more than the 30-year U.S. Treasury bond.
Generally, when a blue-chip company trades at such a discount to the market and its peers, it signifies the market is unsure its returns can continue. All automakers have been the beneficiary of a tremendously strong U.S. auto market. Last year, 17.5 million vehicles were sold in the U.S., with highly profitable trucks and SUVs leading the way. For the auto industry, revenue, profits, and financing defaults are heavily tied to economic cycles. Simply put, a mild recession could lead to a high degree of profit deterioration.
Additionally, bullish macroeconomic conditions have risks as well: Sales mixes are tied to factors like gas prices and financing costs -- both of which rise during economic expansions. For example, rising gas prices generally dampen demand for profitable SUVs in favor of less-profitable cars. Simply put, there are risks for GM with any change in economic condition.
What's apparent is that the market is heavily betting that GM's last four quarters of strong returns are unsustainable. Perhaps that's true, as the conditions I note above are short-term risks to GM's bottom line. However, even if short-term economic conditions present headwinds for GM investors, long-term investors are getting a high-yielding blue-chip stock at a significant discount to the market. Value investors can take advantage of Mr. Market's current outlook on GM.
This medical device behemoth is a proven cash cow
George Budwell (Medtronic): If you're looking for a company with a proven track record when it comes to regular dividend increases and stable cash flow, medical device king Medtronic should definitely be on your radar. The company has increased its dividend for 39 years straight, earning its way into the exclusive realm of the so-called "Dividend Aristocrats."
Medtronic owes its impressive dividend history to its global footprint in the medical device industry, along with its ginormous product portfolio that ranges from pacemakers to insulin pumps -- and pretty much everything in between. In short, the company has a stake in nearly every conceivable medical device market at the moment, giving it the scale necessary to help shape the industry as a whole -- especially from a pricing standpoint.
Although the company's top line hasn't quite performed as expected in recent quarters, newer product launches over the last few months should help to boost its revenue moving forward. So, with a top-notch dividend program in place and a top line that's expected to pick up steam over the next year, Medtronic is certainly worth a deeper look from income-seeking investors right now.
Opportunities for an oil rebound and beyond
Tyler Crowe (Total): French oil giant Total has quite possibly set itself up as the best among the integrated oil and gas majors for the future of energy -- and I mean more than oil and gas. The company was lucky enough to be able to time its capital spending budget such that many of its major projects came on line in 2015 and 2016, so it can quickly wind down capital spending to adjust for today's lower oil and gas price environment. At the same time, it has focused its future oil and gas production around some select offshore finds, expanding its LNG footprint, and getting commission contracts with Middle Eastern companies that have lots of cheap, easy-to-access oil but little capital or technological know-how to develop it. This should provide a strong platform for growth for years to come.
What is even more interesting about Total, though, is that it is starting to develop a portfolio of alternative energy assets that will help it transition beyond oil and gas when the time comes. It currently owns a 65% equity stake in solar panel manufacturer and developer SunPower (NASDAQ: SPWR), and it has started to buy and finance the development of major solar projects worldwide. While this remains a very, very small part of the business, the combination of this with the higher-return oil and gas business provides a great incubator for this long-term strategy.
While that's all well and good for investors with a very long-term investment horizon, buying Total today looks like a great dividend opportunity. Total's stock currently yields 5.7%, and management has gone to great lengths to preserve that dividend throughout the oil downturn. As the oil market recovers, Total should be well positioned to take advantage.
Big changes driving growth
Tim Green (McDonald's): Global fast-food giant McDonald's has now reported five quarters in a row of comparable sales growth, a feat made more impressive by the trouble many other restaurant chains are having attracting diners. Profits are rising, driven by higher sales and the company's refranchising efforts, and the stock is up more than 20% since the middle of 2015.
This strong performance should give dividend investors comfort. McDonald's pays out the majority of its earnings in the form of dividends to shareholders, so any earnings weakness could spell trouble. Analysts expect McDonald's to produce $5.69 per share in earnings this year, putting the payout ratio at 66%.
Dividend growth is going to require earnings growth, so the company's string of solid results is good sign for dividend investors. All-day breakfast has been one major growth driver, with the company using its popular breakfast menu to bring in customers throughout the day. Other big changes may be coming soon; McDonald's is reportedly testing table service at some of its restaurants in California. That would be a dramatic change if implemented, but it shows the company is willing to adapt in order to remain relevant.
McDonald's stock carries a dividend yield of 3.15%. That's certainly not the highest yield in the restaurant sector, but the company is now performing better than many of its peers. McDonald's will need to better appeal to younger consumers in order to keep its momentum going, but it appears to be on the right track.
Acquisition machine
Daniel Miller (Ritchie Bros. Auctioneers): I've been bullish on Ritchie Bros. Auctioneers for about two years now, and that continues to be true amid the company's recent acquisitions. If you aren't familiar with RBA, it's the world's largest seller of used heavy equipment, and it does its business through in-person and online auctions.
One of the company's biggest competitive advantages is that it operates in a fragmented industry, and because of its massive size and brand, it can attract more sellers because it reaches more buyers. This network effect is massively valuable, and it's impossible for competitors to match anytime soon. This advantage has enabled the company to consistently increase its top and bottom lines.
RBA Dividend data by YCharts.
RBA continues to build on that advantage by acquiring key competitors, including IronPlanet. That acquisition introduced RBA to a valuable partnership with Caterpillar, and gave it a leading position in online auctions -- the latter was something RBA had been focusing on intently. Just last month, RBA also announced it has acquired Kramer Auctions, a leading Canadian agricultural auction company with strong customer relationships up north.
Lastly, the average age of equipment coming to auctions is beginning to decline, which should equate to higher prices and revenue going forward. All in all, RBA seems well positioned to dominate the auction market, and its dividend will pay investors $0.68 per share annually, a dividend yield of 1.8%. Despite the smaller yield, investors should be reassured that it will consistently move higher -- RBA has increased its annual dividend each year since it began issuing one in 2003.
Game on
Steve Symington (Activision Blizzard): Activision Blizzard's latest quarterly report last month showed the video game giant is as strong as ever. Its newest franchise, Overwatch, already boasted over 20 million players just four months after its launch, making it Blizzard's fastest-ever game to reach the lofty milestone. And gamers continue to show enthusiasm for the company's established cash cows: 3.3 million copies of World of Warcraft: Legion sold the first day of its launch, there are record monthly active users and growing average revenue per user for the Call of Duty franchise, and mobile gross bookings and revenue per paying user from King Digital, which Activision acquired for $5.9 billion earlier this year, are climbing.
What's more, Activision anticipates sustained momentum from its other growth initiatives, including integration of in-game advertising and e-sports. In particular, regarding the latter, Activision estimates that over 225 million people watched competitive gaming events last year. And most recently, its Major League Gaming partnership with Facebook (NASDAQ: FB) grew views 67% sequentially, to 50 million last quarter.
Combine that with strong cash flow generation, a solid balance sheet, a healthy dividend yielding 0.7% with a payout ratio of just 22.6% as of this writing, and with shares trading at just 16.5 times next year's estimated earnings, I think Activision investors are poised for more market-beating gains going forward.
