Nearly everybody loves a winner. From the Rocky movies to sports heroes, people cheer on winners. That's true for investing also.
With this in mind, we asked three Motley Fool contributors to pick dividend stocks that they think are winners. They chose General Motors (GM -0.04%), Enbridge (ENB 0.68%), and AbbVie (ABBV -1.03%). Here's why these are three dividend stock winners that could make you a winner over the long run also.
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A lot to like
Tim Green (General Motors): Shares of GM haven't done much over the past few years, other than fluctuate around the same level. This has frustrated some investors, most notably hedge fund manager David Einhorn, who has been pushing a convoluted dual-class stock proposal to unlock value. Shareholders easily shot that idea down, deciding that financial engineering wasn't the answer.
GM stock may not be a winner at the moment, but the company certainly is. Adjusted earnings per share jumped 22% in 2016, and GM expects to maintain or even grow earnings this year despite stagnating U.S. auto sales. GM has also exited some less profitable international markets, including India and Europe. While the company is giving up sales, the bottom line should benefit.
GM's dividend currently yields 4.4%, the result of a beaten-down stock price. The payout ratio, based on 2016 adjusted earnings, is just 25%. Earnings could fall if demand in the U.S. declines significantly in the coming years, so GM is playing it safe and making sure the likelihood of a dividend cut down the road is close to nil. With the stock trading for less than 6 times earnings, share buybacks are a better use of cash anyways.
GM stock may not reflect its true value until the company proves that it can thrive during periods of weaker demand. For dividend investors, getting paid 4.4% to hold a value stock that has the potential to be a big winner over the next few years seems like a good deal to me.
An illustrious past and an even brighter future
Matt DiLallo (Enbridge): North American energy infrastructure giant Enbridge has been an excellent stock for dividend investors over the years. The company has paid a dividend for 64 straight years, including increasing the payout for the last 22. Further, over the last two decades, it has grown the payout by a remarkable 11.2% compound annual rate. That growth has created meaningful value for investors, evidenced by the fact that Enbridge has generated an 18% compound annual total return over the past decade, outperforming the market and its peers by a wide margin.
That said, the company's best dividend growth days might still be ahead of it. That's because the company expects to increase the payout by 15% this year and 10% to 12% annually from 2018 through 2024. Backing that outlook is the fact that Enbridge has the largest backlog of growth capital projects in the energy infrastructure sector.
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Further supporting the company's forecast is its conservative financial profile. The foundation of which is its predictable cash flow since 96% comes from fee-based and regulated assets. The next support of its strong financial foundation is its investment-grade balance sheet. While the company's leverage ratio was elevated last year at 6.2 times debt-to-EBITDA, that was due to a slew of growth projects it currently has under construction. As those projects enter service and start generating cash flow, leverage should drop to a much more comfortable 4.3 times by 2019, which is well below its 5.0 times target. The final piece of its conservative financial plan is the fact the company expects to achieve its peer-leading dividend growth while maintaining a conservative payout ratio of 50% to 60% of cash flow.
With a visible growth forecast backed by rock-solid financials, Enbridge appears poised to continue its winning ways for income investors.
A dividend stock that has it all
Keith Speights (AbbVie): The best winning dividend stocks have it all. They, of course, pay great dividends. They consistently generate solid gains for shareholders. And they somehow manage to remain attractively priced. AbbVie is definitely a dividend stock that has it all.
This big biotech pays a dividend that currently yields 3.81%. AbbVie has increased its dividend 60% since being spun off in 2013 from its parent, Abbott Laboratories. It's also a Dividend Aristocrat, including the time that it was part of Abbott, with annual dividend increases for 45 consecutive years. With AbbVie using only 61% of its earnings to fund dividend payouts, the company appears to be in good position to keep the dividend hikes coming.
AbbVie's stock price has nearly doubled in the last five years. That's something many dividend stocks can't claim. The company also should be poised for solid growth in the future. AbbVie's pipeline is loaded with promising candidates, including experimental autoimmune drugs ABT-494 and risankizumab and cancer drugs veliparib and Rova-T. Wall Street analysts think that the biotech's new drugs combined with its current product lineup could help deliver annual earnings growth of more than 14%.
Despite having a strong dividend and great growth prospects, AbbVie's shares trade at only 10 times expected earnings. The stock's valuation appears even more attractive considering the company's growth prospects. Probably the biggest risk for AbbVie is that its top-selling drug Humira could come under pressure from biosimilars. However, AbbVie thinks it can hold off U.S. competitors until 2022, which should allow it to roll out some of its potential winners currently in the pipeline.
