Dividend stocks are often the driving force of a well-rounded retirement portfolio.
They offer three key advantages that are attractive to long-term investors. First, they're 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 help to hedge against downturns in the market. Since 1950, the S&P 500 has experienced 35 corrections of at least 10%. While a dividend generally won't erase the paper losses from a correction, it can help reduce investors' anxiety and mitigate some of their losses.
Finally, 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 nearly 16% gain over the trailing-12-month period, quite a few top-notch dividend-paying stocks have moved lower over the same time span. In fact, a quick screen of stocks yielding at least 3% with a minimum market cap of $2 billion and a loss in value over the trailing 12 months of 5% or greater produced just over five dozen companies. Among them are three that stand out as top dividend stocks selling at discounts this spring.
Though drugmaker Gilead Sciences (GILD -0.29%) has lost 25% over the trailing-12-month period, underperforming the S&P 500 by 41 percentage points, I believe now would be the perfect time for income investors to give it a closer look.
Gilead is an interesting company in that its own success has been the primary culprit of its recent struggles. The bulk of its sales come from its hepatitis C and HIV product portfolios, and it's the hepatitis C virus (HCV) products that are doing the most harm. In 2014 and 2015, Gilead essentially had no competition for its effective HCV cure, and as such didn't have to pass along much in the way of gross-to-net discounts to insurers. Nowadays, new competition has emerged, and Gilead's discounting has increased. After generating more than $20 billion in HCV sales in 2015, as Harvoni and Sovaldi were prescribed to the most in-need patients, the company guided to between $7.5 billion and $9 billion in HCV sales this year.
However, giving up on Gilead wouldn't be a smart move. To begin with, there are an estimated 180 million people worldwide that have HCV, according to the World Health Organization. While the margins aren't nearly as juicy outside the U.S., that still represents a long-tail treatment opportunity for Gilead's HCV product portfolio, which still dominates HCV prescription market share.
Secondly, don't discount the long-tail growth opportunity in HIV maintenance therapies, which are going to handily overtake HCV sales in 2017. Gilead recently introduced a number of new TAF-based HIV therapies that have thus far been very well received. Genvoya totaled nearly $1.5 billion in sales during its first full year, while Odefsey and Descovy are already pacing an extrapolated $600 million in annual sales based on their respective fourth-quarter revenues. Both of these new HIV therapies are expected to easily top $1 billion in annual sales.
And lastly, keep in mind that Gilead's cash flow gives it a lot of flexibility. Even with substantially lower HCV sales, Gilead's free cash flow is probably going to stick around $10 billion to $12 billion annually through the end of the decade. Add in the $32.4 billion in cash, cash equivalents, and marketable securities it ended 2016 with, and the company could have in excess of $70 billion in cash and cash equivalents by 2020. This gives Gilead the liberty to acquire other companies, as well as reward patient shareholders with its current 3% yield.
Sporting a single-digit price-to-earnings (P/E) ratio, Gilead looks like a bargain this spring.
Another top dividend stock income investors would be wise not to ignore is high-end mall-based retailer Nordstrom (JWN 11.12%). Shares of Nordstrom have fallen 24% over the trailing year, meaning they've underperformed the benchmark S&P 500 by roughly 40 percentage points.
Why no love for Nordstrom? It's really been an abysmal past year for all brick-and-mortar retailers as e-commerce has shined and traditional retailers have faltered. For a period of time in 2016, U.S. GDP growth was subpar, and more recently credit card interest rates have pushed to new all-time highs. It hasn't been the best environment for consumers to go shopping. Even though the company reported record sales of $14.5 billion in 2016, its traditional brick-and-mortar Nordstrom locations have a dubious and ongoing six-quarter decline in same-store sales.
While these figures might be worrisome to some, they're an opportunity to snag Nordstrom stock on the cheap for savvy income investors.
One of the more intriguing moves by Nordstrom is what it's done with its discounted Nordstrom rack locations, as well as Nordstrom.com. Nordstrom rack sales wound up growing by 11% to $4.5 billion during 2016, demonstrating consumers' desire to own brand-name clothes at a discount price. Meanwhile, Nordstrom.com sales totaled $2.5 billion, or 25% of the company's full-price sales. Nordstrom took the time to invest heavily in e-commerce, and it's resulted in a nearly 10% year-over-year increase in sales. With these faster-growing business components representing about half of Nordstrom's sales, it can easily weather some weakness in its traditional brick-and-mortar locations.
Investors should also understand that Nordstrom tends to attract a different type of customers than most retailers. Nordstrom specifically goes after affluent clientele, and they, in general, tend to be less impacted by fluctuations in the U.S. economy. This means Nordstrom's core customers tend to buy with more regularity than the customers at other department stores, often providing Nordstrom with a clearer outlook as to its profitability and cash flow.
With Nordstrom currently sporting a 3.4% yield and a forward P/E of just 14, it looks like a bargain worth considering.
Last, but not least, refining company HollyFrontier (HFC) and its scrumptious 4.7% yield could be worth a look this spring for income investors. Shares of HollyFrontier are off by 21% over the trailing year, putting them 37 percentage points behind the broad-based S&P 500.
The biggest culprit of HollyFrontier's weakness, and that of the entire refining industry for that matter, has been a decline in refining margins. Consolidated refinery gross margin fell 27% to $7.23 per produced barrel in the fourth quarter, despite a 21,000-barrel-per-day increase in production. With crude oil prices bouncing by roughly 100% off their February 2016 lows, refining companies saw their margins squeezed.
Yet, despite this squeeze, HollyFrontier and its conservative management team looks set to reap the rewards of its business strategy.
To begin with, the vast majority of HollyFrontier's expansion has been done on an organic basis with the use of the company's operating cash flow. The advantage of relying on its operating cash flow for business development is that it keeps debt levels down and financial flexibility up. The company ended the year with $2.24 billion in long-term debt, up from $1.04 billion in the year earlier (we'll get to the reason for that increase in a moment), but it also ended with $1.13 billion in cash, cash equivalents, and marketable securities, as well as total equity of $5.3 billion. HollyFrontier's strong capitalization allows it to weather volatility better than many of its peers.
It also recently acquired the Petro-Canada Lubricants plant from Suncor Energy for about $845 million, which is one of the reasons its long-term debt rose. The plant is expected to add 15,600 barrels per day of lubricant capacity, pushing HollyFrontier up to being the fourth-largest North American lubricant manufacturer. More importantly, lubricant margins tend to be higher and less volatile than its traditional gasoline- and diesel-refining businesses, meaning it's immediately accretive to HollyFrontier's bottom line.
With a PEG ratio of less than 0.4 (implying strong growth in the years to come), HollyFrontier appears to be a discounted stock you won't want to pass up.