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3 Bargain Dividends Investors Should Buy Today

Investors should love dividends. I've applauded their value in the past, but rather than dive into why, this one simple graph should illustrate the key takeaway: Dividends are a catalyst for long-term wealth-building.

Source: Motley Fool staff's calculations.

Given how powerful dividends can be, picking up a high-yielding stock at a bargain is akin to finding an oilfield in your backyard, making you rich for years to come. Even after yesterday's nearly 3% run-up, the Dow Jones Industrial Average (INDEX: ^DJI  ) is still down almost 6% over the past month and more than 7% for the past six months.

Even the best stocks get dragged down in large market moves, so it's drops like this that get me excited about picking up high yielders on the cheap. But it's not just high yields that matter; otherwise, we'd all run out and buy Annaly Capital (NYSE: NLY  ) , but since it's down more than 12% for the year, there must be more to it than that.

Health-care rock star
My first pick for a high-yield dividend bargain is Johnson & Johnson (NYSE: JNJ  ) . The health-care giant yields an impressive 3.7%, well above the market average of 2%. You might be saying: "But aren't there cheaper stocks? What about the string of recent recalls? Aren't there better yields in this sector?" You'd be correct, somewhat. It's true that companies such as Abbott Labs and Merck edge out JNJ for dividend yield, but their P/E ratios are also higher. Eli Lilly is both cheaper and yields more, but it also has to worry about a looming patent cliff.

Instead, I like Johnson & Johnson because it's a model of stable shareholder returns. It has increased dividends consistently for 49 years, beating all but two companies in the Dow. And its recent Tylenol and Eprex recalls give investors a chance to benefit from others' overreaction. What's more, although consumers may know J&J as the maker of Tylenol and Band-Aids, the majority of its revenue comes from medical devices and diagnostics, meaning market reactions to consumer-facing products like this are usually overstated in terms of impact to the company. Johnson & Johnson also controls either the No. 1 or No. 2 spot for 70% of its products. That is brand strength you can bank on.

Furthermore, this product diversity helps insulate J&J from the depths of the patent cliff that threatens many of its competitors that rely on one or two blockbuster drugs. With a payout ratio at 54% (below the industry average of 69%), this $170 billion behemoth is likely to keep on rewarding shareholders above market rates for years to come.

Nerds rule
Have you heard the expression "Be nice to nerds, because one day you'll work for them"? That's not far from the truth, and Intel's (Nasdaq: INTC  ) position of dominance shows why. Intel has consistently out-innovated smaller rival AMD (NYSE: AMD  ) , effectively neutralizing most of its competition right there. As the world's largest semiconductor company, it has the money -- $15 billion in cash and short-term investments alone -- to continue delivering knock-out blows to the competition.

Compared with other chip makers such as NVIDIA (Nasdaq: NVDA  ) , trading at a P/E of 14.1, Intel's 10.1 P/E is pretty darn cheap. And how about that dividend? Well, it pays out a hearty 3.7%, has a highly sustainable payout ratio of 32%, and has been raised pretty regularly. Quarterly payments are now $0.21 a share, up from their humble beginnings of $0.003 per share at the end of 1992.

Some people are quick to discount Intel as the phrase "death of the PC" becomes more popular. Although Intel has admittedly been absent in the mobile revolution, its processors are still in need in developing economies such as China, Indonesia, and India, where PC sales are still growing.

The Marlboro Man comes bearing gifts
A lot of people don't like to invest in "sin stocks" -- I understand that. If that's the case, take these previous two recs and forget this last one. For those of you who savor the consistent high yield, though, there is no better industry than tobacco. And inside this sector, there is no better play than Philip Morris (NYSE: PM  ) . The cigarette maker, spun off from Altria (NYSE: MO  ) in 2008, yields a solid 4.2% and has the ingredients of a long-term winner.

Despite the recent spinoff, this stock has been litmus-tested. Between 1957 and 2007, the company was the highest-returning stock in the United States. Had you invested $1,000 in Philip Morris in 1957, it would have been worth $5.8 million in mid-2008. With a payout ratio of 54.5%, Philip Morris also has the most conservative payout ratio of its tobacco peer group.

OK, so it's done well in the past, but what about going forward? Well, with the spinoff three years ago, Philip Morris now focuses internationally, while Altria has taken the domestic business. This international focus brings an unbelievable opportunity with a combination of lower litigation risk and higher smoking rates. Combine that with the Marlboro brand's strength, and you've got a winner.

The stock may not seem cheap, with its P/E of 15, but it's priced lower than other cigarette manufacturers (with the exception of Lorillard). A sector like this that throws off high dividends and is relatively recession-resistant rarely can be picked up any cheaper than this. It's also important to remember that with PM you're buying future growth, and with a five-year PEG ratio of 1.13, it leads the industry in affordability.

There you have it -- three great dividend stocks across three industries that are trading at relative bargains. Of course, there are other amazing dividend opportunities out there as well. If you're interested in discovering more, I invite you to take a look at The Motley Fool's special free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." In it you'll find 11 unbeatable dividends (including one listed here), and another throwing off an impressive 9% yield. The report is free, and you can access it now.

Austin Smith owns no shares of companies mentioned here The Motley Fool owns shares of Abbott Laboratories, Johnson & Johnson, Intel, Annaly Capital Management, Philip Morris International, and Altria Group and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Philip Morris International, Johnson & Johnson, Intel, NVIDIA, and Abbott Laboratories, creating a bull call spread position in Intel, writing puts in NVIDIA, and creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (33) | Recommend This Article (65)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2011, at 5:59 PM, DJDynamicNC wrote:

    I just can't bring myself to profit off of tobacco. Otherwise, though, good (if oft-repeated) advice.

  • Report this Comment On November 29, 2011, at 6:14 PM, karlm1 wrote:

    DJ, at least you are not a hypocrite like the government is. If you look closely though most companies sell products that are not good for us or our environment.

  • Report this Comment On November 29, 2011, at 7:07 PM, TMFBWItime wrote:

    @ DjDynamic

    I know I must sound like a broken record, which is why I always hesitate to issue a dividend rec on a tobacco stock, but the truth is they've just returned so much to shareholders in the past, and will likely continue to do so.

    As for profiting off of tobacco, I haven't been able to take the plunge myself, but it sure is tempting.

    Fool on!

  • Report this Comment On November 29, 2011, at 7:49 PM, JBangin wrote:

    This is great example of the difference between business and personal. You would think most people would understand this by now, but they don't. There is absolutely no reason to feel bad owning supposed sin stocks. For one, this is business, you personal feelings toward anything, should be dumped. All these companies are, are numbers on paper, nothing more. Also, you aren't encouraging the use of these products by buying that stock, as the company, one they release the shares, gets nothing further from your purchase or un-purchase. I've had MO been my main holding for two year now, and it really is the perfect stock for any portfolio. I'm up 10% while the market is down 10% this year. You should be completely amoral in terms of what stocks you buy or don't.

  • Report this Comment On November 29, 2011, at 9:21 PM, omni7 wrote:

    Thought this good article was worth commenting on. I appreciate the continued coverage of tobacco stocks by MF. I bought MO twelve years ago and have added small amounts over the years when possible, usually on dips. After the spin-off of PM, I've added to that position too. One thing has been true for me about both stocks over these 12 years, and the point is this: Every single time I have added to my position the only regret I ever had was not buying more, each and every time. These stocks have not disappointed. They can be slow, but methodical about their march upward. My patience with them has been rewarded again and again. In the depths of the 2008-2009 crisis, I felt comfortable buying one stock, for sure, it was MO at about $15. Should have bought more!

    Happy investing!

  • Report this Comment On November 29, 2011, at 9:35 PM, Gottalose2win wrote:

    I couldn't agree more. Those that don't buy PM or MO are probably the same people that voted for Obama, Barney Frank, Nancy Pelosi or any other any other anti capitalism, freedom hating politician...what hypocrites.

    Buy the stock, enjoy the profits!

  • Report this Comment On November 29, 2011, at 10:28 PM, mongi wrote:

    I would not EVER by a tobacco stock--on moral grounds.

  • Report this Comment On November 29, 2011, at 11:37 PM, mm5525 wrote:

    Philip Morris International (the actual name of the company now) has been on a tear the past two trading sessions. With doves like Yellen talking QE3 and a potential solution to the Euro crisis at least being banted about, the future looks great for my "mothership" #1 holding. Not so sure I think it's cheap here since I bought it back in 2010 in the mid 40s, but I am glad other people think it's cheap, and I suppose it's cheap here when we all see PM at $100+ in a year or two. Smoke 'em if you got 'em Indonesia. PM has enjoyed tremendous growth in the Asia Pac region, and every time the company says anything publically, they're raising their own EPS guidance almost every time. While it is not prudent to expect such rapid dividend growth y/y, you can expect PM's brass to raise their dividend every 3Q for the October payout. PM has been a flat-out monster performer in tough market conditions overall.

  • Report this Comment On November 29, 2011, at 11:48 PM, GrumpyGopher wrote:

    One of the cornerstones of my retirement portfolio, along with PG, SO, COP, KMR and I still have hope for GE.

    I am a non-smoker who didn't invest in this for a decade. Then I took the emotion out and looked at the facts.

  • Report this Comment On November 30, 2011, at 10:19 AM, karlm1 wrote:

    JNJ- Tylenol,MCD- Burgers and fries, BP-Enough said,KO- Sugar Diabetes, PEP- Same thing plus fat and Cancer, KFT- Mac & Cheese. Elitist comes to mind.

  • Report this Comment On November 30, 2011, at 5:53 PM, Chontichajim wrote:

    I will buy any other sin stock or pollution stock, but still draw the line at something with no purpose other than to cause life taking addiction such as tobacco or cocain (if it could be invested in legally).

    INTC must be in every portfolio, might even add it to my grandson's. I already have too many Pharmas to buy JNJ without selling one, but I do like Kimberly Clark, and PG for steady dividend on things people will always buy.

  • Report this Comment On November 30, 2011, at 6:09 PM, rgperrin wrote:

    Everywhere, tobacco is under seize. Philip Morris is the best of the lot, but, long term, all tobacco stocks are what traders call "worry stocks."

  • Report this Comment On November 30, 2011, at 6:30 PM, WesleyCharles wrote:

    It took me a few years to appreciate the DRIP approach -- many are out there

    KMB is my favorite

  • Report this Comment On November 30, 2011, at 7:01 PM, Boomerchef wrote:

    There is no difference between the "old dope peddler" and the modern tobacco company. Would you support your local dope peddler giving out free samples to your kids?

    I'm writing this from a hospital bed after a lung biopsy, my just rewards for 40 years of smoking, back in the days when it was glamorous.

    I can't sleep nights knowing the roof over my head and the food in my fridge is provided by creating addicts who will possibly hooked to oxygen, 24/7as I am.

  • Report this Comment On November 30, 2011, at 7:17 PM, ryanalexanderson wrote:

    I agree with the people who disassociate buying sin stocks with the sin itself.

    You want a win/win scenario? Buy the sin stock, go to the shareholder meetings, and be an activist shareholder. Awesome, isn't it? You get the dividend, make the moral stance, and - bonus - remind management that shareholders exist and need to be listened to.

    And you'll make more of an impact on the company than being an anonymous person who invested elsewhere.

  • Report this Comment On November 30, 2011, at 10:48 PM, mike2153 wrote:

    I wish I could bury my guilt like these guys.

  • Report this Comment On December 01, 2011, at 4:39 AM, mm5525 wrote:

    This is an investing website. If you choose not to invest on moral grounds, fine. However, like pointed out above, when you take your emotions out of the equation, there are very few competitors in the tobacco industry, and people make a choice to smoke. No one is forced to smoke. It is a legal product. Tobacco taxes do a lot of good for municipalities worldwide. There are deep moats in the tobacco industry not found in other industries. Cigarettes cost virtually pennies to make and are sold at massive profit margins. The business model has not really changed in decades. Try finding that in fields such as technology, health care, or retail where profit margins are constantly squeezed, more and more competitors are always breathing down your neck, and the climate/technology changes literally overnight. Who uses a VCR anymore? Look how blood sugars are checked now compared to 20 years ago. Look at RIMM's fall from grace when they were once on top. What happened to Blockbuster Video thanks to NFLX? How's that MSFT or CSCO stock treating you once they faded from glory? How about that Borders stock you still own? Look at what AMZN did to them. Then look at a cigarette and tell me how that's changed in 50 years.

    I respect those who choose not to invest in tobacco stocks. Hopefully you will respect why many of us choose to do so partly for the reasons listed above. I'm here to make money. I'm not here to preach my personal ideological judgments and scrutinize legitimate investments other investors make.

  • Report this Comment On December 01, 2011, at 7:34 AM, burlybull1 wrote:

    To those defending your ownership position of tobacco stocks: "methinks thou dost protest too much"

    I too have been tempted and have read the pros and cons many times. If tobacco stocks were never purchased the first time the companies would not have grown or thrived so well.

    The oft quoted "you are known by those you associate with" seems to apply here.

    This discourse has at least helped me to decide. I would rather receive a few less dollars and have a clearer conscience as I go through life. I can at least try not to be a hypocrite.

    As far as attending tobacco stockholder meetings and protesting the selling of tobacco products...what??? Sounds like conscience salve.

  • Report this Comment On December 01, 2011, at 4:09 PM, BxBruce007 wrote:

    Gottalose2win wrote: "I couldn't agree more. Those that don't buy PM or MO are probably the same people that voted for Obama, Barney Frank, Nancy Pelosi or any other any other anti capitalism, freedom hating politician...what hypocrites."

    Always some idiot has to come along and drag politics into an interesting investment discussion. Your opinions are unwelcome and, even more bizarre. You and Larry Kudlow need to buy a nice little cabin somewhere and leave the rest of us to make decisions based on reality.

    PS Long MO, PM and INTC.

  • Report this Comment On December 01, 2011, at 4:51 PM, Hawmps wrote:

    I understand some people's perspective of why they will not own a tobacco stock; my mother is one that also will not own a tobacco stock. I don't share the same perspective. Although I do not own a tobacco stock (also a non-smoker) I do not see any moral qualms, or whatever you want to call it, with owning this type of asset. The argument that tobacco use (choice) causes health problems which could lead to death is obviously valid, but how many people would refuse to own other company assets that have and do cause harm to people. Examples include: Pharmaceuticals, Chemicals, and Energy. Prescription drugs kill more and more people every year (significantly more than illicit drugs). Chemcal companies pollute air and ground water creating super fund sites, 3-eyed frogs (<-- yes they do exist), and have caused cancer from polluting ground water. Energy companies pollute ground water with cancer causing pathgens with some of their commodity extraction techniques.

    The point of my rant here is... there are plenty of other industries that are causing a lot of problems and pain for a profit and yet tobacco is always the bad guy. Tobacco use is a choice, (so is owning a tobacco stock) people CAN quit using it, and it says right on the box that it is not good for you. I don't remember MO or PM taking a bailout either.

    I have MO and UVV on my watch list... contemplating one for an IRA DRIP portfolio.

  • Report this Comment On December 01, 2011, at 9:46 PM, singlefinglide wrote:

    I look at it this way - people are going to use tobacco products, those people are going to have an increased risk of health related issues, they are going to get older, go on Medicare, and cost me more of my tax payer dollars. You say profit from tobacco, I say from a non-smokers perspective, I am simply trying to recoup some of my losses.

  • Report this Comment On December 02, 2011, at 12:31 PM, CasperGhosts wrote:

    This may sound like a foolish question, but I’m new to investing and would like to know…

    I’ve got several of Tom and David’s ‘core’ stocks. Some of these pay meager dividends and some pay none at all. Why would I buy stocks which pay higher dividends with lower growth?

    For example (and morals aside), PM pays a lower dividend than the expected growth of my current portfolio. Why would I invest in, say, PM?

  • Report this Comment On December 02, 2011, at 1:38 PM, mm5525 wrote:

    Since you're new, I'd first say it totally depends on your goals as an investor, your age, and your perceived time frame. My view is one should know their investment goals before they actually invest in my view. I assume you do.

    I'm a big dividend guy, so my stance is largely slanted toward the dividend route. Do keep that in mind. Every quarter you get 60% of PM's profits rain, sleet, snow, or shine in the form of a dividend. Own a 1000 PM shares, you get $770 every 3 months. Not bad. That's over $3k a year based on current dividend levels, and most companies that pay dividends will raise them. That's part of their appeal. Less growth, more income. You won't get divdends with virtually any growth stock, for example. You may eventually get a dividend say with some company that eventually becomes "old tech" such as MSFT, CSCO, or INTC. The best part about dividends is you never have to hit the sell button to receive a 'reward' on your investment. Not so with stocks that don't pay dividends. With dividends, you get profits along the way.

    If you're investing in an IRA or something really long term, dividend stocks also create more of a floor in down markets than the high-flyer growth stocks. If you reinvest your dividends, lower stock prices don't bother you quite as much as a stock that doesn't pay a dividend because your dividends are buying more shares in the company at better prices, which, in turn, will create more dividends later. Every quarter if you reinvest you are buying more shares in some of the more boring, steady companies such as PM, KFT, WM, GIS, CAG, PG or something like that. Companies that you know are going to be around a long time.

    For instance, the PM I bought back in the 40s is now yielding me over 6.5%. When I bought in, it was paying nearly 5%. With dividend increases, I am getting more and more of a share in the profits without doing a thing other than remaining long in the company that people will buy products of in both good and bad times. Same can be said for virtually almost all other consumer staples.

    Lastly, in severe market downturns, people flock to the consumer staples for safety. That also helps "cushion" your investment better than say a RIMM, GMCR, CMG, NFLX, or some of the other high flyer growth stocks. Lots can change in those companies. Not much changes in some of the boring companies that sell basic necessities such as food, toothpaste, toilet paper, and other consumer products. Booze, cigarettes are consumer staples to many as well.

    Happy investing!

  • Report this Comment On December 02, 2011, at 4:17 PM, fennecfoxen wrote:

    I would never buy Phillip Morris!!!! .... I'm from Winston-Salem, an RJR town. It would be unpatriotic of me. ;)

  • Report this Comment On December 02, 2011, at 11:14 PM, brokeassbroad wrote:

    While I agree in some part that smoking that first cigarette is a choice, I would venture to say that smoking the 100th cigarette is a little less of a choice and a little more of a need.

    Since the decision to smoke that first cigarette is often made in one's teens, it is a decision made before the brain is fully developed.

    But as an investment? No prob. Same w/McD - I wouldn't eat that poop on a bet, but it seems to be a staple of many people's (diets and) portfolios. Alcohol? You betcha - we drink when times are good; we drink when times are bad.

    There is probably a moral downside to almost any investment - from paying millions in bonuses to officers who ruin a company to polluting our beautiful planet to profitting from products that are just not good for us.

    I guess we all just have to choose the investments that keep us solvent and let us sleep at night based on our own personal moral compasses.

    Peace and prosperity.

  • Report this Comment On December 03, 2011, at 9:31 PM, ikkyu2 wrote:

    I am a doc, lost my father and many patients to lung cancer. Dad had 3 heart attacks too. Don't smoke, will never start.

    Glad to hold PM, though. I counsel my patients not to smoke. They ignore me and other docs. Very strong trend. Why not profit off it?

    If you really feel guilty about it, send part of the dividend to anti-tobacco charities like the AHA or ALA.

  • Report this Comment On December 04, 2011, at 8:37 AM, philipp10 wrote:

    Ironically, by some investors claiming the moral high ground by not owning tobacco stocks, the price of these stocks is held down from their normal market level, given their dividend. So in effect, MO's dividend payout rate is probably higher than it would be, all else being equal.

    Unlike other posters, I do not respect the position that investor should not own MO. It just plain silly. Has even one person ever quit smoking because you did NOT own MO? Cigarettes will be available whether you own MO or not. Secondly, if your'e going to start getting moral, then maybe you should'nt own fast food stocks, stocks of any processed food companies and stocks in pharma companies since alot of pharma drugs are garbage anyway. What about oil companies, they pollute. It could get to the point where all you could own is stock in an organic farmers.

  • Report this Comment On December 04, 2011, at 12:47 PM, TMFBWItime wrote:

    Thanks for all the great comments guys! There are definitely some strong opinions about tobacco stocks here, but what about any of the other companies mentioned? Does anyone have an opinion about their future growth?

    Thanks. Fool on!

  • Report this Comment On December 04, 2011, at 7:43 PM, supplydemandpe wrote:

    I have been looking for high dividends, been looking at preferreds. May just jump into PM this week.

    Don't let your values stop you either. After all, the human population is not exactly dwindling on this smoggy blue rock!

    Grab the ring when it comes by!

  • Report this Comment On December 04, 2011, at 9:22 PM, Hiyer31 wrote:

    Whats wrong with a stock like EXC if you want dividends gains without sin?

  • Report this Comment On December 05, 2011, at 4:22 AM, marc5477 wrote:

    Logic tells me not to care but a voice in the back of my head that questions whether or not I should profit from semi-involuntary addiction... semi because no one wants to be addicted but at the same time no one forced them to smoke to begin with.

    Ive heard arguments that other companies do dirty things but I have to disagree. There is a difference between capitalizing on bad products and capitalizing on something involuntary. Ask most smokers and they will all tell you they want to quit but its very hard to do. Im not making excuses for them but thats different than banking with BofA where you can go withdraw your money any time.

  • Report this Comment On December 05, 2011, at 11:38 AM, CasperGhosts wrote:

    Thanks for your detailed answer, mm5525. I have one more question: Why choose dividend stocks over mutual funds?

  • Report this Comment On December 06, 2011, at 10:13 PM, lemny wrote:

    I'm new to MF membership so still learning how to navigate the system. I've been enjoying many articles on the site but am bummed by the crazy marketing ones. I accessed "Secure Your Future w/11 Rock Solid Div Stocks" and got shut out of the last 2 picks because it was a special report meant to lure new customers in - what gives?? How do I get the full report without paying another membership fee?

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