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Dividend stocks are often the driving force of a well-rounded retirement portfolio.
They offer three key advantages that can be quite attractive to long-term investors. First, they are a sign of a company's proven long-term track record. A business wouldn't consider sharing its profits if the management team didn't believe those profits were sustainable. Second, dividend stocks can help to hedge against inevitable downturns in the stock market. Since 1950, the S&P 500 has had 35 separate stock market corrections of at least 10% when rounding to the nearest integer. While a dividend is unlikely to erase the paper losses created by a stock market downturn, it can help reduce investors' anxiety and mitigate some of their losses.
Last, dividend payments can be reinvested into more shares of stock. This is referred to as a dividend reinvestment plan, or Drip. Using a Drip can accelerate your capital gains by creating a virtuous cycle in which your holding in the company slowly grows, pushing your dividend higher and thus growing your reinvestment in the stock and so on. It's like kicking compound interest into a higher gear.
These top dividend stocks appear to be discounted
Despite the S&P 500's 9.5% yearly gain in 2016, quite a few top-notch dividend-paying stocks ended the year lower. In fact, a quick screen of stocks yielding at least 3% with a minimum market cap of $2 billion and a loss in value in 2016 of 5% or higher produced just over five dozen companies. Among them are three that stand out as top dividend stocks selling at discounts this winter.
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Teva Pharmaceutical Industries
One of the more attractive top dividend stocks this winter, and the only one of the three that's currently a holding in my personal portfolio, is branded and generic drug developer Teva Pharmaceutical Industries (TEVA -0.91%).
There's no way to sugarcoat it: Teva had a rough year. A lengthier-than-expected acquisition of Actavis from Allergan, a late-year earnings warning, and fears that lead branded drug Copaxone would be ravaged by generic competition sent Teva's stock down by 43% in 2016. While it wasn't a banner performance, there are a number of positives for Teva as we enter 2017.
To begin with, the Actavis acquisition is a transformation for Teva in that it now makes it the clear leader in generic drug development. Aside from the expectation that the synergies from the deal will lead to $1.4 billion in cost savings annually by 2019, having such a broad generic portfolio should give Teva better pricing power on its generic products. According to management, Teva anticipates to launch about 1,500 generic products worldwide in 2017.
Copaxone's patent loss has also largely been a non-event. Teva was able to use the legal process to keep generic competitors off the market long enough to reformulate its once-daily injectable multiple sclerosis drug to be taken three times weekly. As a more convenient formulation but maintaining the Copaxone brand name, Teva should be able to hang on to its core physicians and customers, losing little revenue in the process.
Looking ahead to 2017, Teva is valued at less than seven times its forecasted profits and is paying out a 3.2% yield. It's an attractive top dividend stock in the healthcare space.
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Xerox Corp.
Another top dividend stock that should have the attention of income and value investors is old-school technology giant Xerox (XRX).
Xerox's multiple attempts at a turnaround haven't been nearly as successful as management would have liked, and more recently a steady downturn in its largest revenue generator, its document and printing services, has further hampered its top and bottom lines. However, Xerox has one change on its near-term docket that could finally get the company steered in the right direction.
As announced in late Jan. 2016, Xerox is splitting into two separate companies. One, which will retain the Xerox name, will be comprised of its document services, such as printing and document digitization. The other, which will be known as Conduent, will cover its outsourcing businesses, such as human resources and accounting.
The document business may be struggling with declining revenues, but the separation of the two companies is expected to save a combined $2.4 billion over the next three years. This should help ebb some of the revenue decline in the legacy Xerox business. What's more, just as Wall Street witnessed with the HP split, the legacy business for Xerox is liable to offer a healthy 3% or so yield in order to attract long-term income-seeking investors. On the flip side, the outsourcing business offers a source of considerably faster-growth prospects, which should allow its software services to shine.
The combined Xerox is valued at less than eight times its forward profits and is yielding 3.6%. That's a pretty enticing value if you ask me.
2017 Ford F-150 Raptor. Image source: Ford Motor.
Ford Motor
One of Detroit's finest, Ford (F 0.04%), could also be worth a look. An earnings warning and expectations of an auto sales peak in 2017 or 2018 have some pundits bearish on Ford. Yet, the 8% decline in 2016 could mark the perfect time for investors to take a position.
Arguably the most attractive aspect of Ford is its growth potential in China. China is the world's largest auto market, yet it's still in its infancy, with a burgeoning middle class eager for the luxury of owning a car. In early December, Ford announced that its China sales, in combination with its joint venture, had surpassed 1 million vehicles in 2016 as of November. The company also noted that its November sales rose 17% to a monthly record of 124,113 vehicles, all while sales of its Ford Explorer rose 73%. China is still a prime opportunity for Ford to showcase its innovation in the years to come.
At the same time, Ford has and could continue to benefit from historically low lending rates and lower fuel prices. Even with the Federal Reserve hiking rates in December, it marks just two 25-basis-point increases over the past decade. Low lending rates make it easier for consumers to open up their wallet and buy new cars. Furthermore, low prices at the pump have made it more appealing to buy trucks and SUVs as opposed to sedans. These traditional gas hogs also bear higher margins for Ford.
With pundits probably taking too pessimistic a stance on Ford, I believe its forward P/E of seven and its nearly 5% dividend yield make it a top dividend stock to consider buying this winter.
