Over the past 15 years or so, the collective dividends of companies in the S&P 500 would equate to a dividend yield of 2% for an investment in an index fund. So for anyone with an interest in dividends, it makes sense to look for stocks with yields of 2% or higher. Otherwise, you might as well just invest in the index.
Luckily for investors looking for investments with this as a basic screening criterion, there is a plethora of great investments out there. Here's why three of our investing contributors elected to highlight oil services company Core Laboratories (CLB 5.66%), ExxonMobil (XOM 3.64%), and Dunkin' Brands Group (DNKN).
A head above the rest
Tyler Crowe (Core Laboratories): Everywhere you turn in the oil and gas industry, you run into incredibly capital-intense businesses that probably don't have much pricing power, either because they sell a commodity product, or the service they provide is quickly commoditized as well. There is one exception, though, and that is Core Laboratories.
The services Core provides -- reservoir description and production optimization -- aren't the kind or services that require billions in equipment and crews at every possible well site. Also, as a company that offers products or services that improve well economics, the company has much more pricing power than other oil services companies that provide simpler services to replicate such as pressure pumping for hydraulic fracturing or well maintenance. The combination of pricing power and low capital intensity gives Core three unique qualities virtually unheard of in oil and gas: high margins, generous rates of free cash flow, and high rates of return.
In the ups and downs of this particular industry, it's reassuring that Core has the kind of business that can generate a decent rate of return. It also helps that the company has a propensity of returning capital to shareholders. While its 2% dividend isn't anything to write home about, Core's use of share repurchases to grow per-share earnings is staggering as it has reduced total shares outstanding by 30% over the past 15 years.
All told, Core is an incredible business in the oil and gas industry that is incredibly hard to replicate, making it an attractive investment in any part of the energy cycle.
A bigwig hits a rough patch
John Bromels (ExxonMobil): Things aren't looking so great for oil behemoth ExxonMobil right now. A disappointing fourth-quarter 2017 earnings report put the company's shortcomings front and center just as the big February market correction hit. As a result, the stock -- which had already been lagging its big oil peers like Royal Dutch Shell -- finished the month down a stomach-churning 15%.
Part of the issue is that during the oil price downturn, the conservatively managed Exxon cut back on its capital spending. That caused overall production to flatline, again lagging behind peers like Shell, as the production declines in older wells weren't being offset by enough newer wells. And in the most recent quarter, overall production actually declined. That's not an encouraging sign.
That said, February's price declines have boosted the yield of ExxonMobil's storied dividend to about 4.2%. Exxon is a Dividend Aristocrat, meaning it's raised its dividend annually for more than 25 years (and has raised it at least every other year for more than 50 years), and it's unlikely to stop doing so now. The company's valuation is also now well below Shell's. Plus, the company has some promising new projects in the works that seem likely to pay off for investors down the road. While it might not be the hottest company in big oil right now, ExxonMobil is certainly worth a look for dividend investors who invest for the long term.
Only half of America runs on Dunkin'
Brian Feroldi (Dunkin' Brands Group): I grew up in New England, so I'm accustomed to seeing a Dunkin' Donuts on every corner. I thought the same was true in every other part of the country, but as it turns out, that's not the case at all. While there is a roughly one Dunkin' Donuts store for every 8,500 people in the Northeast, that ratio is 1 to 250,000 for Americans who live west of the Mississippi River. That fact provides investors with an opportunity that should drive growth for years to come.
What's more, Dunkin' Brands' growth plans are not limited to the U.S., either. The company only recently introduced its Dunkin' Donuts and Baskin Robbins concepts in international markets like China, Europe, and South America in recent years, and it has a tremendous growth runway in those markets, too.
While the store expansion plans provide investors with enough reason to own this stock, the company has a few other growth initiatives in place that promise to sweeten the growth story. One example is the company's push into consumer packaged goods. Consumers can now buy Dunkin' Donuts coffee grounds and Baskin Robbins ice cream at their local convenience stores. The company is also experimenting with mobile ice cream stores as a way to drive incremental sales.
For investors, these growth avenues promise to drive high single-digit sales growth for the foreseeable future. When combined with share buybacks and margin enhancements, double-digit profit growth isn't out of the question. Income investors will also love that Dunkin' offers up a dividend yield of 2.3% that has been raised every year since this company's IPO in 2011. What's more, the dividend only consumes about a third of its profits, so there's still plenty of room left for future hikes.
Overall, Dunkin' Brands offers investors double-digit profit growth potential and an above-average yield. That's a compelling story for a company that trades at about 20 time next year's earnings estimates.