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2 Overlooked Dividend Stocks to Buy for 2018

By Daniel Miller - Dec 26, 2017 at 9:05AM

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Sure, dividend investors love to find great companies boasting yields of 5% or higher, but that leaves some great dividend stocks overlooked -- here are two.

"A stock dividend is something tangible -- it's not an earnings projection; it's something solid, in hand. A stock dividend is a true return on the investment. Everything else is hope and speculation." – Richard Russell.

Many investors love owning dividend stocks as they pay shareholders real money at consistent intervals. These companies are often very stable cash-printing machines that offer investors some sense of safety. But without eye-popping dividend yields, some great companies are overlooked, including The Hershey Co. (HSY -0.96%) and Pfizer Inc. (PFE -2.20%), which fall short of the requirements for many dividend watchlists.

Moving on up

On Monday, Pfizer made a move its investors are sure to enjoy as it announced a 6% increase to its dividend payment to $0.34 per share. That's a very solid 3.6% dividend yield, even if not an eye-popping 4% to 6% yield that many income investors hunt for. Minus a cut during the past recession, Pfizer's dividend track record is impressive: The first-quarter 2018 dividend will be the 317th consecutive quarterly dividend paid out. But wait, there's more. In addition to the 6% increase to the dividend, Pfizer also announced that the board of directors authorized a new $10 billion share repurchase program in addition to the $6.4 billion remaining under the current authorization.

Pharmaceutical worker operates tablet blister packaging machine

Image source: Getty Images.

Pfizer's increasing dividend and massive share repurchase program emphasize its commitment to returning value to shareholders, but the company also offers investors a strong business with upside. Pfizer's scale alone offers competitive advantages for developing its pipeline of new drugs, and it has historically generated tons of cash flow from a diverse range of drugs. That pipeline should only get more lucrative for investors as its Xeljanz gains traction in immunology and Ibrance develops into a winner for breast cancer. 

While 2017 was a solid year for Pfizer, some investors expected more of a splash in the form of acquisitions that never materialized. Despite no major acquisitions, Pfizer is a cash-printing machine that dishes a lot of value back to investors through dividends and share buybacks, and if 2018 contains a splash acquisition, it could help drive the stock price higher.

Better for you

Everyone loves a good snack, and over its 85-year history, Hershey has dominated much of the U.S. chocolate market with brands that include Reese's and Kit Kat, in addition to its namesake Hershey's brand and many others. But consumers in general, especially millennials, are looking for healthier snacks, and as we approach 2018, it's clear that Hershey is trying to capitalize on that opportunity to expand its brand portfolio.

The "better-for-you" snack opportunity is why Hershey announced it would be acquiring Amplify Snack Brands (BETR), a snack-food company focused on developing healthier snacks such as its well-known Skinny Pop brand that will become Hershey's sixth largest brand. The deal is valued at $1.6 billion, or roughly 15 times Amplify's full-year adjusted EBITDA.

It's a move that can move the needle in the near term as management expects the acquisition to be accretive to adjusted earnings in the first year post closing, and for annual run-rate synergies to check in at $20 million over the next two years alone. The move helps Hershey expand its reach into the snack aisle and gives it an opportunity to reignite growth by helping Amplify improve its scale, distribution, and brand management.

Graphic showing $5 billion returned in dividends and buybacks over past decade.

Graphic source: Hershey's March 1, 2017 Investor Update Presentation.

While investors wait for Hershey to continue gobbling up opportunities in the healthier snack market, rest assured that management will continue to return value through dividends and buybacks, as you see in the graph above. Hershey is committed to a dividend payout ratio of at least 50%, and it has dished out roughly $5 billion in dividends and repurchases over the past decade. At a current dividend yield of 2.3%, and as management expands through acquisitions, Hershey is a sweet dividend stock many investors overlook.

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Stocks Mentioned

The Hershey Company Stock Quote
The Hershey Company
$218.83 (-0.96%) $-2.13
Pfizer Inc. Stock Quote
Pfizer Inc.
$50.74 (-2.20%) $-1.14
Amplify Snack Brands, Inc. Stock Quote
Amplify Snack Brands, Inc.

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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