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Dividend stocks often form the foundation of a great retirement portfolio. Dividend-paying companies usually have time-tested and profitable business models that act as beacons to attract income-seeking investors. Dividends can also help hedge against inevitable stock market corrections, as well as give you the opportunity to start a dividend reinvestment plan, or DRIP. DRIPs are a commonly used tool of money managers to build long-term wealth for their clients.
Unfortunately, not all dividend stocks are created equally. A falling stock price can boost a dividend yield but mask underlying problems, while other dividend stocks don't generate a worthwhile enough payout for income seekers.
With this in mind, we asked five of our Foolish contributors to name one dividend stock they believed could be worth buying in February. Rising to the top of the pack were a number of large brand-name companies: Macy's (M 1.73%), Consolidated Edison (ED 0.12%), Novo Nordisk (NVO 2.47%), Altria (MO 0.75%), McDonald's (MCD 0.50%).
A high-yield stock on the clearance rack
Sean Williams (Macy's): One high-yield dividend stock that's had a miserable go of things over the trailing-12-month period is department store giant Macy's. Macy's stock has fallen 24% over the trailing year as foot traffic into Macy's brick-and-mortar stores continues to decline, which is a direct result of the lower-cost and more convenient e-commerce shopping model. But, counting out Macy's after a bad year wouldn't be a smart move.
Image source: Mike Mozart, Flickr.
To begin with, Macy's is facing the facts and cutting a number of underperforming stores. After announcing a same-store sales decline of 2.1% during November and December, Macy's said it would be cutting about 10,000 jobs and closing 68 stores. These 68 stores are part of Macy's originally announced plan to close about 100 stores. Though the restructuring costs could be unpleasant for a few quarters, Macy's will be considerably leaner and have fewer expenses, allowing it to reinvest in its top-performing stores and to invest in digital marketing.
That brings me to the next point, digital marketing. Macy's actually wound up generating double-digit annual sales growth from both macys.com and bloomingdales.com during 2016, meaning its investments into e-commerce and mobile marketing should pay off in the years to come. Don't expect this transition to happen overnight, but also don't be surprised if by 2019 and 2020, Macy's growth engine has been completely reignited.
The final point is that Macy's looks to be attractive from a fundamental perspective. Macy's has been valued at an average of 7.9 times its cash flow per share over the past five years, but it's currently being valued at less than five times its future cash flow per share. Furthermore, it also has a forward P/E under 10. Patient income seekers could collect 5% annually while banking on a Macy's turnaround, which is why it's my dividend stock to consider buying in February.
This utility dividend stock's 8% drop offers a good entry point
Neha Chamaria (Consolidated Edison): When a stock that has rewarded investors with dividend increases for 42 straight years and offers 3.8% yield drops about 8%, you know it's time to pay attention. Consolidated Edison stock has been under pressure for about six months now, offering income investors the perfect opportunity to scoop up some shares while they're still weak.
Since demand for electricity and gas doesn't ebb and flow with the economy, Con Ed's business is insulated from wild swings. Today, Con Ed serves ten million customers in New York City and Westchester County. Moreover, the utility industry is highly regulated, and Con Ed's rates decoupled, which means the company knows in advance how much revenues it will generate. This "regulated" aspect of its business is largely why the company has been able to grow its earnings consistently and return them as higher dividends to shareholders year after year.
ED Dividend data by YCharts.
That dividend streak is unlikely to be broken unless we learn how to live without electricity and gas. While it enjoys stable revenues, Con Ed has strong plans in the pipeline to strengthen its network, expand its footprint, and tap non-utility avenues to boost income going forward. Some of its plans include ongoing investment of billions of dollars into renewable energy sources such as solar and wind and targeted $8.3 billion in replacement expenditures to upgrade its core network over the next two decades. I believe these investments should bolster Con Ed's position in the industry and expand its bottom line further, enabling the company to pay out higher dividends for years to come. Given the dividend growth potential and decent yield, this could be a good time for income investors to buy Con Ed.
The top-dog in diabetes is on sale
Brian Feroldi (Novo Nordisk): Diabetes is a chronic disease that affects more than 400 million people around the world. Sadly, this number continues to creep higher every year, which is why current estimates call for more than 600 million people to be diagnosed by 2040.
Given that backdrop, you'd think shares of Novo Nordisk would be constantly hitting new highs. However, Novo's share price has been slammed over the past six months, falling by more than 38% from its summertime highs. That has pushed its dividend yield up to nearly 4%.
Why have shares imploded? Novo said it's dealing with pricing pressure from insurers in the U.S. That has forced the company to give pricing concessions in exchange for continued reimbursement access. As a result, management made the unpopular decision to drop its long-term operating profit growth target from 10% down to 5%.
While I'm not thrilled with the guidance cut, investors should remember that Novo remains highly profitable and is still the top dog in this disease state. In addition, newer drugs like Victoza, Tresiba, and Ryzodeg are growing rapidly, which is helping to offset the weakness in its legacy insulin sales. While the company's near-term growth prospects are a bit murky, I think it's a safe bet to assume this company will remain a leader in this indication for decades to come. With shares currently trading at a big discount, I think it's a great time for income investors to give this company's stock a closer look.
This tobacco giant's shareholders would benefit from a Trump tax cut
Jamal Carnette, CFA: (Altria): After initial exuberance about President Trump's proposed policies pushed the Dow Jones Industrial Average to an eyelash within 20,000, the stock market has taken a short pause as many participants appear to be less bullish of his policies. Specifically, the proposed "border adjustment" tax has been decried by retailers and apparel manufacturers like Dow components like Nike and Walmart. One area of consistency in Trump's tax plans, though, has been a broad-based rate cut from 35% to 15%-20%. Cutting the top rate also has agreement from the GOP-led House and Senate, and even some buy-in from Democrats.
Image source: Getty Images.
While the tax-rate cut may not advantage all companies because of their effective rates being lower than 20%, Altria's effective rate is approximately 35%. Altria appears to be a true winner from lower statutory rates. Fortunately for income-hungry shareholders, Altria has a policy of returning 80% of its adjusted earnings per share in dividends. The end effect of a corporate tax cut for Altria shareholders should be an instant dividend boost for a company already yielding 3.5%.
However, investors should not buy Altria simply for governmental action -- the company has done quite well in its absence...and even in spite of it. As Wharton professor Jeremy Siegel noted in 2015, Altria has been the best-performing stock since 1968, averaging an annualized return of approximately 21% per year, including dividends. During this period, though, the smoking rate dropped from approximately 40% to 17%, thanks in part to the government's aggressive "war on smoking" campaign. If Altria can perform in that environment, long-term dividend investors should be comfortable owning the name.
Serving up 41 years of dividend growth
Steve Symington (McDonald's): Shares of McDonald's are up around 9% over the past three months, thanks in part to its excellent third-quarter results in October. But as the stock pulled back slightly following its fourth-quarter results on Jan. 23, 2017, McDonald's is now trading roughly even over the past year.
Image source: McDonald's.
More specifically, McDonald's just achieved its sixth straight quarter of positive comparable sales, with global comps climbing 2.7% driven by positive results in its international lead, high growth, and foundational segments. But fourth-quarter comps also fell 1.3% in the U.S., albeit against a tough comparison with its wildly successful launch of all-day breakfast in the same year-ago period.
Going forward, McDonald's should benefit from its ongoing plan to refranchise more than 4,000 locations by the end of 2018, which should serve to boost profitability by reducing general and administrative costs by a whopping $500 million. Meanwhile, McDonald's also raised its dividend by 6% starting in the fourth quarter, marking 41 consecutive years of increased payouts and further cementing its enviable status as a dividend aristocrat. For investors who buy now and let the power of compounding do its work in the coming years, I think this temporary lull represents a great opportunity for patient investors to open or add to their positions.
