Though the market has only risen slightly this year, with the S&P 500 up about 1% year to date, stocks are still up significantly over longer time horizons. Over the trailing one- and three-year periods, for instance, the S&P 500 is up 12% and 28%, respectively. With stocks trading much higher than they were a few years ago, some investors may be looking to put their money in more quality, dividend-paying equities. This way, if stocks do undergo a correction, investors can at least count on some reliable cash flow from their portfolio.
Fortunately, there are still plenty of great dividend stocks trading at good prices -- even after the overall stock market's gain in recent years. Two dividend stocks worth considering are Costco (COST 3.25%) and JPMorgan Chase (JPM 0.15%). Here's a quick look at why both of these stocks are compelling bets for investors looking for income.
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|
Company |
Dividend Yield |
Payout Ratio |
5-Year Average Annual Dividend Growth |
|---|---|---|---|
|
Costco |
1.1% |
29% |
12% |
|
JPMorgan |
2.1% |
29% |
12% |
Data source: Morningstar and Reuters. Table by author.
Costco
Dividend stocks don't get much better than Costco. But understanding why Costco is compelling as an income investment requires a little extra due diligence, as the company's dividend yield doesn't show the full picture.
Costco's dividend yield of 1.1% is understated, because this key metric fails to take into consideration the occasional special dividends Costco pays out. Sure, Costco's last four quarterly dividends amount to about 1.1% of Costco's current share price. But Costco paid a special dividend of $7 in May 2017 -- a dividend that more than triples Costco's trailing-12-month quarterly dividend payment of $2.07.
Of course, it's difficult to predict exact timing of Costco's special dividends, but the company has paid them out with some regularity. In 2012 and 2015, Costco paid out special dividends of $7 and $5, respectively.
Supporting Costco's dividend is strong and consistent growth in the company's earnings per share, which has compounded at an average rate of about 9% over the past five years. Further, Costco's earnings growth has been even steeper recently. Earnings per share increased 21% year over year in the company's just-reported third quarter for fiscal 2018 when adjusted to exclude a one-time benefit to earnings per share in the year-ago quarter associated with Costco's special dividend.
JPMorgan Chase
I've long been a proponent of JPMorgan Chase's dividend. Banks, in general, have been great dividend stocks for decades. But high-quality banks like JPMorgan are particularly good dividend stocks. However, JPMorgan's dividend yield was pushed down to 1.8% earlier this year as the stock climbed higher, making the bank's dividend less attractive. But thanks to a pullback in the bank's stock recently, with shares falling 6% in the past three months, JPMorgan's dividend yield has jumped back up to an attractive level of 2.1%.
JPMorgan is also fairly attractive from a valuation standpoint. Its price-to-earnings ratio of 17 is fairly conservative for a bank with such impressive return on equity and earnings growth. JPMorgan's trailing-3-year mean for its return on equity, or its net income as a percentage of shareholders' equity, has hovered between 10% and 12% for the past five years, trending at about 11% more recently. Further, trailing 12-month earnings per share is up 17% year over year.
Sure, JPMorgan isn't as attractive of a dividend stock as it was two years ago, but it remains a well-rounded investment worth betting on for the long haul -- especially for investors looking for reliable income.
