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Dividend stocks are the heart and soul of any well-constructed portfolio. Having said that, there are so many dividend-paying stocks populating the landscape these days that it can be rather difficult to decide which ones best suit your long-term investing goals. With this in mind, our Foolish team of dividend experts offer their five top picks below that may be worth adding to your portfolio in the month of August.
This company's stock is way down, but far from out
Tyler Crowe: In cyclical industries like oil and gas, the best way to maximize your profits is to find steady dividend-payers and buy them when they're out of favor. So far in 2016, the market really isn't a fan of oil refiners, as rising oil prices have led to smaller refining margins. That makes now a great time to buy beaten-down refiners, and that is why HollyFrontier (HFC +0.00%) looks like a great dividend stock to buy in August.
What really sets HollyFrontier apart from independent oil refiners is the geographic advantages it enjoys. With major refineries in the Midwest and Rocky Mountains, its facilities are close to hard-to-access crudes that sell for a discount to national benchmark prices. Similarly, these refineries are also in places where it's difficult to deliver refined petroleum products, so HollyFrontier enjoys slightly larger refining margins than others in more competitive refining markets. Just as importantly, the company runs a tight operation, having kept its operational costs in check and thereby allowing it to profit from these geographic advantages.
Gasoline and diesel consumption won't evaporate any time soon, and the refining industry waxes and wanes just like any other cyclical industry. So with shares of HollyFrontier down nearly 50% this year and the dividend yield at 5.5%, now seems like an opportune time to buy shares.
A top-notch dividend stock
Andres Cardenal: PepsiCo (PEP 0.68%) is a giant in nonalcoholic drinks and snacks. The company owns 22 brands that make over $1 billion each in global revenue, and it enjoys rock-solid competitive advantages in scale, global distribution network, and financial resources to invest in marketing and advertising.
Demand in the industry is changing, as many consumers around the world are increasingly conscious about the importance of nutrition. Fortunately for investors, PepsiCo has been betting on this trend for several years now, and innovation is delivering results. According to management, nearly 9% of the company's revenue comes from new products, while "guilt-free" drinks and snacks represent 45% of revenue.
It's not easy for such a big company operating in a mature industry to find new growth opportunities, especially in times when foreign currency headwinds are hurting performance in international markets. However, PepsiCo is still expecting a healthy 9% increase in core constant-currency earnings per share during 2016.
PepsiCo has a pristine trajectory of dividend payments over the long term. The company has paid uninterrupted dividends in every year since 1965, and it has 44 consecutive years of consistent dividend growth under its belt. After raising dividends by 7% this year, PepsiCo stock is trading at a dividend yield of 2.8%.
Best of both worlds
Matt DiLallo: Enbridge (ENB 0.97%) pays its investors pretty well. In fact, at 4.3% the Canadian energy infrastructure giant's current yield is more than double the market's average as measured by the yield of the S&P 500. And that's a rock-solid income stream, given that long-term fee-based contracts secure 95% of Enbridge's cash flow, and it only pays out 40% to 50% of its available cash flow.
As lucrative as Enbridge's current yield might be, it's poised to go much higher in the future. The company has an enormous backlog of commercially secured projects consisting primarily of fee-based assets. Because of that, Enbridge expects to grow its available cash flow from operations by 12% to 14% through 2019, which is projected to fuel 10% to 12% dividend growth over that same time frame. The company expects to deliver that growth while maintaining a conservative coverage ratio of two, along with an investment-grade credit rating.
The bottom line is that investors who are looking for a reliable income stream that will rise over the next few years should strongly consider Enbridge.
A rebound in the making?
George Budwell: British pharma giant GlaxoSmithKline (GSK 1.34%) has had a tough go of it in recent years due to declining sales of its flagship respiratory product, Advair, combined with a slew of high-profile clinical failures and its bribery scandal in China. The net result is that Glaxo's trailing 12-month payout ratio has ballooned to an astronomical 681%, and its debt-to-equity ratio isn't much better at 259%. So, when the pound sterling crashed following the Brexit vote, Glaxo seemed destined for a dividend cut and perhaps further restructuring to lower costs going forward.
However, the drugmaker pulled off a small miracle in the second quarter, beating analysts estimates due to the strong performance of newer pharma products like the HIV medicine Tivicay and its growing footprint in the vaccine space. Based on its strong second-quarter results, Glaxo decided to raise its annual guidance for the remainder of the year, forecasting an impressive core EPS growth of 11% to 12% for 2016.
Even with this double-digit growth trajectory, though, the sustainability of Glaxo's dividend isn't guaranteed. But management did note in its second-quarter earnings release that the company plans to keep the quarterly payout at around $0.57 per share (based on current exchange rates) through 2017. So, if management remains true to their word, Glaxo should be able to start attracting income investors in large numbers once again, especially in light of its hefty yield of 5.18% and improving growth prospects.
Detroit's best?
Daniel Miller: While Ford has been a clear fan favorite since the Great Recession, given that it funded its own turnaround without the help of a unique bankruptcy, the second quarter showed that General Motors (GM 1.46%) may have finally started to pull away as Detroit's best automaker.
During Q2, GM's revenue rose by $4.2 billion year over year to $42.4 billion. That strong performance filtered down to the automaker's bottom line, too: GM's EBIT-adjusted income reached $3.9 billion, a staggering 37% increase over the prior year -- and a company record.
Throughout the first half of 2016, GM's return on invested capital has reached an impressive 30.5%, a 710-basis-point improvement over the same time period a year earlier, proving that GM is running its business as efficiently and intelligently as ever.
GM recently bagged more segment awards in J.D. Power's 2016 Vehicle Dependability Study than any other automaker and received seven awards in J.D. Power's 2016 Initial Quality Study, showing that GM's offerings are greatly improving.
The kicker here is that GM -- and most other automakers -- are not sizzling growth opportunities, as their primary profit-generator, the U.S. market, is likely plateauing. That doesn't mean GM's top or bottom line is done growing, but it does mean it will increasingly be seen as an income play. At a share price of $30, GM's forward price-to-earnings sits just above five, according to Morningstar's estimates, and its yield is a robust 4.6%.
General Motors is cheap -- too cheap for a company that may now be Detroit's best automaker -- and a 4.6% yield looks very tempting for investors looking to buy a dividend stock in August.
