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3 Dividend Stocks I'd Buy Right Now

By Demitri Kalogeropoulos - May 20, 2018 at 5:02PM

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GPS device specialist Garmin tops this list of attractive income investments.

A recent spike in interest rates has made dividend stocks a bit less attractive as income investments. Yet there are still many high-quality options available for investors seeking a mix of capital gains and above-average yields.

Below, I'll highlight three of these dividend payers that you might want to add to your watchlist.

A jar of coins with the labed "dividends."

Image source: Getty Images.

Garmin isn't lost

Garmin's (GRMN 0.97%) dividend lacks the steady track record that many investors prefer. The GPS device maker only recently raised its payout after holding it steady for almost three years. However, if you can accept that checkered past you might find plenty to like about this stock.

Garmin has endured a few major hits to its portfolio in recent years, including a shift away from car dashboard navigation devices and consumer adoption of high-end fitness devices. Yet its wide product offering has allowed overall sales to continue marching higher as more focused companies like Fitbit struggled with big declines. Garmin has also demonstrated a knack for anticipating changing consumer trends, and its steady flow of innovative products is driving significant profitability gains. CEO Cliff Pemble and his team believe gross margin will tick up to 59% of sales this year, up from 58% last year and 56% in fiscal 2016. That success would give executives room for another modest dividend boost even though the stock today yields over 3.5%.

McDonald's is back on top

McDonald's (MCD -0.94%) growth turnaround has attracted most of investors' attention lately. And there are good reasons for that focus. The fast food giant is back at the top of its industry and grabbing market share from a wide range of competitors.

Friends sharing a fast food meal.

Image source: Getty Images.

I'd add two big financial factors to that sales momentum as reasons to like this stock today. First, McDonald's is planning to invest $2.4 billion into the business this year on high-return areas like store remodeling and digital sales infrastructure. That's a level of spending that almost no peer could match or hope to maintain. It's just another investment year for McDonald's, though.

Second, profitability has improved by over 10 percentage points since 2012 and stands to rise even further from its current 40% perch. The chain has sold off thousands of its company-owned locations to franchisees and replaced food sales with higher-margin rent, fees, and royalty payments. That financial strategy has more room to impact results as the company-owned restaurant base falls to around 5% in the next few years from 8% today. As a result, the outlook is bright for McDonald's $4 annual dividend that currently yields about 2.6%.

Home Depot has a bright future

At some point there will be a pullback in the cyclical home improvement market, and that slump will likely stall Home Depot's (HD 0.74%) multiyear expansion. But there's no reason to think that downturn is imminent -- or even close.

Sure, the retailer's sales growth slowed to a 4% rate at the start of 2018. But executives explained how that decline was tied to seasonal products like gardening equipment that didn't sell well during an unusually long winter. CEO Craig Menear and his team backed up that explanation by affirming their full-year targets after noting that sales gains shot up to a double-digit pace as soon as warmer weather arrived in early May.

Over the longer term, assuming just a steady rebound in home improvement spending, investors can look forward to this retailer reaching a sales base of as high as $120 billion by 2020 even as its market-leading profitability rises to 15% of sales. Home Depot's highly efficient business, and its conservative plans to keep a steady store base, meanwhile, should translate into plenty of excess cash that the retailer can direct toward higher dividend payments in the coming years.

Demitrios Kalogeropoulos owns shares of Home Depot and McDonald's. The Motley Fool owns shares of and recommends Fitbit. The Motley Fool has the following options: long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.

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Stocks Mentioned

The Home Depot, Inc. Stock Quote
The Home Depot, Inc.
$311.97 (0.74%) $2.28
McDonald's Corporation Stock Quote
McDonald's Corporation
$256.80 (-0.94%) $-2.43
Garmin Ltd. Stock Quote
Garmin Ltd.
$98.55 (0.97%) $0.95

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

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