The best way to start the New Year off on the right foot is by purchasing high-quality dividend stocks and allowing them to go to work for you over the long-term. Dividend stocks have historically left non-dividend-paying stocks in the dust over the long run, and companies that pay dividends often have time-tested business models that serve as beacons to attract investors hungry for added income.
So which dividend stocks should you consider buying in January? That's a question we posed to a diverse set of Foolish contributors. The dividend stocks they settled on include Paychex (NASDAQ:PAYX), PNC Financial Services (NYSE:PNC), Terra Nitrogen Company LP (NYSE: TNH), Brookfield Infrastructure Partners (NYSE:BIP), and United Technologies (NYSE:UTX).
Sean Williams (Paychex): The one dividend stock that comes to mind for me, a stock which has nearly everything working in its favor, is payroll and human resource solutions provider Paychex.
To begin with, Paychex is benefiting from unemployment rates hitting more than a nine-year low. The recently released November jobs report showed an unemployment rate of just 4.6%, which is well within the Fed's targeted unemployment range. The more people who are employed, in theory, the more active Paychex will be with small- and medium-sized businesses. It's a company that relies on a strong economy to drive growth.
Secondly, Paychex looks poised to benefit from a number of Donald Trump's policy proposals. Trump's plan to boost infrastructure spending and lower corporate income tax rates from 35% to 15% could easily mean more money in the pockets of businesses; and this could lead to even more hiring. Also, if Trump is able to pass legislation for a corporate tax holiday for overseas cash, the repatriated capital may be put to work to boost employment. A lower corporate tax rate would also be a positive for Paychex, which had an effective income tax of 33% during Q1 2017.
Paychex is also receiving a boost from the Federal Reserve, which just raised the federal funds target rate for only the second time in a decade this December. Usually, higher interest rates are bad news for most consumers and businesses, but not for Paychex. Paychex can earn interest income over the short-term period between when it receives cash from the businesses it deals with and when it cuts paychecks to the employees of those businesses. The higher interest rates go, the more interest income Paychex will be able to generate on its short-term float.
Sporting a 3% yield, Paychex could continue to fly high in January and beyond.
PNC Financial doesn't need Trump to reward investors
Jamal Carnette, CFA (PNC Financial): The stock market has registered an impressive run in the short period following the presidential election of Republican Donald J. Trump. Under a Trump Administration, investors expect lower taxes, less regulation, and a $1 billion infrastructure plan -- and each could be positive for equity investments. However, I think it's important to temper the "animal spirits" until we receive more concrete details. In reality, it's likely the Trump Administration will fall short of expectations on one plan -- and possibly all three -- at least in the short term. Additionally, a few of Trump's economic ideas appear negative for investors, like import tariffs and other anti-free trade provisions that investors seem to be ignoring in the "Trump Rally."
One sector that has been rallying post-election is financials. However, I feel this sector will continue to push higher, even taking into account a "trust, but verify" approach to the next administration. While the financial media has mostly focused on the run-up in stocks, there has been a rout in the Treasury markets. The chart below shows the yield curve, which is the yield across various maturities, between the day before Trump's election and this writing:
As you see above, yields are up across all maturities. More importantly, however, is the fact that yields have increased more for longer maturities than shorter ones. This steepening of the yield curve is great news for banks that are in the business of lending at longer maturities and borrowing from depositors at the shorter ones. Even if regulatory and tax reform are delayed, financials should immediately benefit from the shift in the yield curve.
PNC Financial is a strong dividend stock to buy in this environment. While the recent stock run has pushed its dividend yield down to 1.9%, PNC has a strong record of dividend increases. After passing the Federal Reserve's stress test, PNC increased its per-share dividend payout nearly 8% over last year's total and committed up to $2 billion in share buybacks in the fourth quarter, and has increased its per share dividend payout nearly 60% in five years. PNC Financial is suited to outperform as a dividend investment in this environment, and won't require an act of Congress (or the new administration) to do so.
Giving you a lot of cash to wait for a recovery
Tyler Crowe (Terra Nitrogen Company LP): Here's the thing when buying companies in commodities: You're never going to be able to call the exact bottom and get things just right. In reality, though, you don't have to. You're much better off finding a company than can do reasonably well even when times are tough in the industry. If weakness in that market lasts longer than expect, then at least you can be comfortable with modest returns until the market does pick up.
This is why Terra Nitrogen Company looks compelling to me as an investment for January and headed into 2017. Terra Nitrogen is a manufacturer of ammonium nitrate and urea, two nitrogen-based fertilizers. It is uniquely positioned because it is a variable rate master limited partnership that pays out all available cash at the end of each quarter. Even though it only has one factory as an asset, it also has no debt and generates strong returns even during tough times in the market. Even last quarter when urea prices were at their lowest in a dozen years, Terra Nitrogen produced a 30% net income margin.
The nitrogen market is in a tough spot right now, as demand has been weak and cheap US natural gas has introduced a lot of new fertilizer plants that use natural gas as a feedstock -- the lowest cost method out there today. Luckily, Terra Nitrogen is out in front of these trends, and is one of the low cost producers. I can't put a timeline on it, but eventually higher cost production will get cut out of the market, and prices will likely rise when that happens. Even if it takes a long time, though, Terra Nitrogen will do just fine and throw off large amounts of cash to shareholders.
A one-of-a-kind stock
Brian Feroldi (Brookfield Infrastructure Partners): Brookfield Infrastructure Partners is a publicly traded limited partnership that owns a variety of infrastructure assets sprinkled all around the world. This includes toll roads In Brazil, cellular towers in France, shipping ports in Australia, and much, much more.
Brookfield's goal is to buy one-of-a-kind infrastructure assets that crank out cash flow and are nearly impossible to reproduce, thereby proving the company with stable and recurring profits. Management then returns that cash flow to investors in the form of a distribution, which is partnership speak for dividend.
This operating formula has worked like magic. Since being spun out of Brookfield Asset Management in 2009, the company's funds from operation have compounded at 34% annually. That's allowed the company to increase its payout by 12% each year and still have plenty of capital leftover to invest in growing the business.
Management believes that Brookfield's assets should allow the company to grow its distribution by 5% to 9% annually over the long term. That's an attractive growth rate for a company that currently yield 4.6%, making this a great stock for dividend investors to consider buying today.
Steady as she goes
Daniel Miller (United Technologies): Investors know what they're going to get with United Technologies: an extremely balanced and diversified company that consistently outperforms the market when it comes to returning value to shareholders.
United Technologies can essentially be split into four entities. Pratt & Whitney manufactures engines for both commercial airplanes as well as the military, while UTC Aerospace Systems makes landing gear, brakes, interior products and flight control systems. Closer to the ground, United Technologies and its Otis company is the world's largest elevator manufacturer and sells a slew of other products to residential and commercial buildings.
But just listing its divisions and product offerings doesn't do its diversified business justice. Consider that it makes about 44% of its net sales from reoccurring and high-margin aftermarket products, while the other 56% is generated from OEM sales. Also, its commercial & industrial business generates 52% of net sales, while commercial aerospace and military aerospace generate the other 48%. It even generates this pretty evenly across the globe, with 38% generated in the U.S., 27% in Europe, 20% in Asia, and 15% in other regions.
In terms of a growth story, United Technologies expects worldwide urbanization and economic growth to fuel its commercial building business. It also estimates that revenue passenger miles will move from 3.1 trillion in 2010 to 5.4 trillion in 2020, before jumping to 9.1 trillion in 2030 -- which spells good things for its aerospace business. For investors looking for a diversified global conglomerate with upside, and a dividend yield of 2.36% with consistent annual raises, United Technologies is definitely worth a look in 2017.