Rising rates for U.S. Treasury bond yields have recently caused some investors to move away from dividend-paying stocks, but there are still great income-generating companies that are worth owning for the long haul. Stocks that regularly pay dividends have historically outperformed those that do not, reflecting the general rule that companies paying significant dividends tend to have more mature businesses and less growth-dependent valuations. With the market now more than nine years into a bull run, fortifying your portfolio with sturdy, income-generating stocks capable of weathering volatility is a move worth considering.
With that in mind, we asked three Motley Fool investors to identify income-generating stocks that offer compelling value for long-term investors. Here's why they named Johnson & Johnson (NYSE:JNJ), Verizon (NYSE:VZ), and The Walt Disney Company (NYSE:DIS) as some of this month's most promising dividend stocks.
Buy the dip
George Budwell (Johnson & Johnson): Dividend Aristocrat Johnson & Johnson is trading close to its 52-week low as a result of political turmoil over prescription drug prices in the United States. While this dip may seem justified to some given that the bulk of J&J's growth comes from high-priced cancer medicines like Darzalex, Imbruvica, and Zytiga, I think bargain hunters and income investors alike might want to take advantage of this lull to grab shares right now.
The underlying reason is that the fear over President Trump's string of proposals to lower drug prices seems to be largely overblown. As things stand now, the administration's various proposals really boil down to creating more transparency for consumers in terms of where the cheapest medicines can be found, as well as enabling government regulators to more heavily scrutinize annual price hikes for older medicines.
At the end of the day, however, I'm not convinced either of these modifications to the current system will ultimately impact the top line of pharmaceutical giants like J&J. And J&J's management has essentially stated as much. Following another respectable quarter in Q1 of this year, for instance, J&J's management raised the dividend by a healthy 7.1% -- citing the company's "strong financial position and confidence in the future" as the two core reasons. Given the conservative nature of J&J's brass, I find that statement rather reassuring in the face of these political headwinds.
So, with a yield that's in line with the industry average at 2.57% and an attractive valuation to boot (14.2 times earnings estimates), I think this blue-chip biopharma remains a solid long-term buy-and-hold stock -- despite the never-ending controversy over prescription drug prices.
Go for growth
Keith Noonan (The Walt Disney Company): Disney doesn't get as much attention as it deserves when the topic of great dividend stocks is discussed. With the company's roughly 1.7% yield coming in well below the 2.9% yield currently offered by 10-year U.S. Treasury bonds, it's not too hard to see why that's the case, but disqualifying the company on that characteristic alone might cause investors to miss out on a dividend growth stock that also has the potential for big capital appreciation.
Disney has roughly doubled its payout over the last five years, and it still has plenty of leeway to continue growing its dividend. The cost of distributing its current payout comes in at less than a quarter of both trailing earnings and free cash flow, suggesting that the company is in good shape to strengthen its returned-income component while also investing to expand the business.
If Disney were to deliver dividend growth of 50% over the next five-year period, shares purchased today would yield 2.4% at the end of the stretch. That doesn't appear to be an unrealistically ambitious target, and hitting it would see your holdings in the company handily topping the S&P 500 index average's current yield of 1.8%.
Shares trade at just 14 times this year's expected earnings, a metric that looks enticing in light of the business posting record free cash flow even as it faces pressures from cord-cutting and new content rivals like Netflix and Amazon. Disney certainly has challenges that need to be addressed, with changes in the cable television industry chief among them, but the strength of the company's assets in the entertainment space and current valuation leave room for substantial growth.
For investors willing to weather some near-term uncertainty, Disney stock presents an opportunity to buy a great company at a great price, settle in for the long haul, and enjoy big dividend growth along the way.
Take advantage of a beaten-down telecom stock
Nicholas Rossolillo (Verizon): As of this writing, shares of America's leading telecom provider, Verizon, have dipped below $48 a share. That's well off its highs in the mid-$50s over the last few years, and pushes the current dividend yield to an attractive 4.96%.
So the dividend looks great, but what's up with that share price? A number of factors, including increased debt from the acquisition of Yahoo!, a slowing rate of net wireless subscriber additions, pricing pressure from smaller competition, and a possible merger between Sprint and T-Mobile that could further exacerbate the competitive landscape in the telecom world.
A couple developments could help the company return to growth, though. First was the passing of U.S. corporate tax reform, which has helped Verizon nearly double its profits from a year ago. That extra cash will be used to clean up the balance sheet by paying down debt. Second is that the next-generation 5G wireless network will begin rolling out later this year. That extra cash flow will help with its further development and expansion in the years to come.
5G has the potential to pay off big for Verizon. It's more than just increasing network speeds for data streaming on smartphones. The network could end up being the highway on which the data from myriad internet-connected devices travel, from self-driving cars to connected healthcare services to industrial machinery.
While waiting for those developments to unfold, investors get treated to a near-5% payout and hold a stock trading on the cheap with a price-to-earnings ratio of only 6.3.
George Budwell has no position in any of the stocks mentioned. Keith Noonan owns shares of Walt Disney. Nicholas Rossolillo owns shares of Johnson & Johnson, Verizon Communications, and Walt Disney. The Motley Fool owns shares of and recommends Walt Disney. The Motley Fool owns shares of Johnson & Johnson and Verizon Communications. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.