Anyone can buy a dividend-paying stock, but only the most astute investors are able to ferret out those that represent the best combination of income, yield, and growth. Sometimes it takes looking where others fear to go.
We asked three top Motley Fool contributors to highlight a dividend stock that a sharp investor would find advantageous to own. Read on to find out why Hasbro (NASDAQ:HAS), AbbVie (NYSE:ABBV), and Best Buy (NYSE:BBY) could be just what an astute investor is looking for.
Dividends can be fun
Demitri Kalogeropoulos (Hasbro): At a 2.1% yield, toys and games specialist Hasbro is paying about what you could get by owning a diversified total stock market index fund. There are good reasons to expect this dividend to grow at a market-thumping rate in the years ahead, though.
Its latest quarterly results showed off the strength of Hasbro's deep portfolio of company-owned and -licensed brands. Revenue ticked higher by 2% to meet management's expectations at a time when rival Mattel (NASDAQ:MAT) posted a surprising 15% slump. Yes, profitability fell slightly. But CEO Brian Goldner and his team expect operating margin to rise for the full year thanks to excitement around popular theatrical and TV releases in the Disney Princess, Star Wars, and My Little Pony franchises.
Hasbro raised its dividend by 12% in 2017 to mark the second straight year of accelerating payout growth. The company is no dividend aristocrat, since it had to pause raises in 2009 during the worst of the financial crisis. Yet even including that stumble, Hasbro's dividend has increased at a 14% compound annual rate over the past decade. I'm expecting its core gaming business to continue snatching market share over the next few quarters. Meanwhile, Hasbro should begin generating significant profits from a young entertaining and licensing segment that's just starting to tap into promising areas such as digital gaming. Those positive operating trends imply solid dividend growth for income investors.
More to the story for this biotech dividend stock
Keith Speights (AbbVie): A big biotech depends on one drug for 63% of its total revenue. The U.S. Food and Drug Administration approved a biosimilar competitor to that one drug. The biotech's No. 2 drug makes only a little over one-eighth of the top-selling drug that's in jeopardy. Could the dividend the company pays be in trouble? Should investors stay away? Not when the biotech in question is AbbVie.
All of those statements are true, though. AbbVie does depend on Humira for much of its revenue. The FDA did approve Amgen's (NASDAQ:AMGN) Amjevita, a biosimilar to Humira, last September. Sales for AbbVie's second best-selling drug, Imbruvica, totaled $551 million in the first quarter. That's an impressive amount, but it pales in comparison with the $4.1 billion in sales for Humira.
Astute investors, however, won't be too worried about all of this. They'll understand that AbbVie is in pretty good shape to fend off Amgen and other rivals for quite a while. Although the FDA approved Amjevita, the drug isn't on the market yet. AbbVie has taken Amgen to court over patent infringement. That court date is set for November 2019. AbbVie remains confident that it will protect Humira from U.S. competition through 2022.
Astute investors will also look at AbbVie's growth prospects from new drugs. The company's pipeline is loaded with potential blockbusters, including cancer drugs Rova-T and Veliparib and autoimmune-disease drug ABT-494.
And, of course, these investors will pay attention to AbbVie's dividend. Its yield currently stands at 3.77%. AbbVie has increased its dividend payments by 60% since the company was spun off from parent Abbott Labs (NYSE:ABT) in 2013. With Humira safe for a while and plenty of new drugs on the way, the dividend checks should keep on flowing for a long time to come.
Last man standing
Rich Duprey (Best Buy): It was only five years ago that Best Buy was seen as the next Circuit City, a rival electronics superstore that was forced into bankruptcy. Its CEO had resigned amid an investigation into his personal conduct, Amazon.com (NASDAQ:AMZN) was stealing its customers through "showrooming," and its own e-commerce efforts were negligible at best. How far Best Buy has come!
Today, it's pretty much the last man standing, as Radio Shack, hhgregg, and others have also succumbed to the rigors of the marketplace. But not Best Buy. CEO Hubert Joly has transformed the financially troubled electronics retailer into a relatively reliable performer that's even able to challenge Amazon at its own game. Recode recently reported that Best Buy is trialing a new try-before-you-buy service. Now, not just cost-cutting and improved customer service, but also by making its business better than Amazon, it plans to ring up higher sales. Its e-commerce sales may not be on par with the internet's retailing leader, but its rate of growth continues to surpass Amazon.
And next year, Best Buy could become the third biggest appliance retailer, behind Lowe's and Home Depot. According to Twice, Best Buy has cut third-place Sears Holdings' sales lead from $1.3 billion to just $743 million, meaning, at this pace, it could leapfrog ahead of the ailing retailer.
The market apparently hasn't noticed Best Buy's newfound strength. Although its stock has doubled from its 52-week low, shares still trade at just 15 times earnings and 13 times next year's estimates, and it goes for just a fraction of its sales. It also trades at just 13 times the free cash flow it produces, making it a cheap stock. Considering it pays a dividend of $1.24 per share yielding 2.2%, it makes it a perfect stock for astute income investors looking for overlooked opportunities.
Demitrios Kalogeropoulos owns shares of Hasbro, Home Depot, and Walt Disney. Keith Speights owns shares of AbbVie and Walt Disney. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Hasbro, and Walt Disney. The Motley Fool recommends Home Depot and Lowe's. The Motley Fool has a disclosure policy.