There are a lot of ways to make money over the long term in the stock market, but a vast majority of them involve buying high-quality dividend stocks and reinvesting your payouts over the long run to supercharge your ability to create wealth. It's a not-so-secret trick that money managers have used for decades to pump up returns for their clients, and it's one that investors with portfolios of all sizes can use to their advantage.
Perhaps the biggest question investors have to tackle is what dividend stock(s) to buy? After all, there are hundreds upon hundreds of publicly traded companies currently paying a dividend, and none of them are necessarily comparable to the rest. This leaves income investors with a dilemma: They want the highest yield possible, with the lowest risk imaginable. Generally, yield and risk are factors that tend to move in tandem with one another, meaning high yields often come with high risks to the investor. In other words, a lot of homework needs to be done to find high-quality income stocks to invest in over the long term.
The advantage and disadvantage of megacap income stocks
One such group of stocks that tends to treat income investors fairly well over the long run are megacap stocks. A megacap is a company with a market capitalization of $100 billion or larger. By seeking out huge companies, you'll be investing in businesses that have well-known brand names and, most importantly, established business models that've stood the test of time.
On the flip side, seeking out megacap stocks can often mean giving up on strong growth potential. Sure, megacaps like Amazon.com and Facebook offer incredible growth potential, but neither pays a dividend. Meanwhile, you can receive an above-average dividend (relative to the average yield of the S&P 500) from the likes of Coca-Cola or Procter & Gamble, but you'll only need your fingers on one hand to signify their respective annual growth rate. There's always a trade-off to be made, and more modest growth rates are to be expected with megacap income stocks.
These high-yield dividend stocks are running circles around the S&P 500's yield
As of June 29, the average dividend yield of the S&P 500 was less than 1.9%. Yet, out of the 78 publicly traded companies in the U.S. with a market cap in excess of $100 billion, a diversified grouping of just three of these stocks, picked out by yours truly, produced an average yield of 5.77%. That's more than triple the yield of the S&P 500. If you're looking for safety in size and brand name, as well as a high-yield dividend, might I suggest the following three megacap income stocks.
AT&T: 6.32% dividend yield
While it can be somewhat of a toss-up between AT&T (NYSE:T) and Verizon in the wireless space for income-seeking investors, I'd personally suggest AT&T for its superior dividend, as well as its recent acquisition of Time Warner.
In December, AT&T announced that it was increasing its payout to shareholders by 2%. And while that may not be a large increase on a percentage basis, it's nonetheless the 34th consecutive year it's increased its dividend to shareholders. What's more, the company's $2-per-share annual payout is "only" costing roughly $14.7 billion per year. Meanwhile, AT&T generated more than $39 billion in cash flow from operations in 2017, providing more than enough coverage for this premium payout now and likely in the future.
As for growth, AT&T plans to lean on its strong wireless U.S. market share, as well as its Time Warner acquisition. The upcoming rollout of 5G wireless networks, combined with Time Warner's key assets, such as CNN, TNT, and TBS, should act as a bargaining chip in allowing AT&T to court consumers to its wireless cable service. Though AT&T's growth glory days are gone, an uptick in its growth rate to perhaps 4% to 7% annually over the next decade isn't out of the question.
Philip Morris International: 5.69% dividend yield
There's no denying that cigarette sales volumes have been down around the globe, which is a big reason Philip Morris International's (NYSE:PM) stock has struggled recently. But we also can't deny the advantages afforded to Philip Morris given its pricing power, as well as its geographic diversity.
For those of you willing to dip your toes into the vice industries, tobacco stocks like Philip Morris are able to benefit from the addictive nature of nicotine. Even with 9.3 billion fewer units of cigarettes shipped during the recently competed first quarter (a 5.3% decline), revenue rose by nearly 14%, or 8.3% if we exclude the impact of currency conversion. This substantial increase in sales was the result of both an increase in heated tobacco unit sales -- an alternative system of ingesting nicotine -- as well as higher price points on its tobacco products.
The company also benefits from its geographic breadth. Though more developed countries have pushed hard to reduce adult smoking rates, Philip Morris has emerging markets like India and China to lean on in the years to come. This nearly 5.7% yield is looking more intriguing with each passing day.
Royal Dutch Shell: 5.29% dividend yield
The integrated oil and gas industry is another area of the market where high-yield dividends can often be found. In particular, U.K.-based Royal Dutch Shell (NYSE:RDS-A)(NYSE:RDS-B) is currently paying out a nearly 5.3% yield to its shareholders.
The obvious downside of owning an integrated oil and gas giant like Royal Dutch Shell is that your investment is intricately tied to the price of the underlying commodities that it produces. If there's an extended period of weakness in oil, natural gas, or liquefied natural gas (LNG) prices, there could be an adverse impact on profitability, and under extreme circumstances, perhaps even a need to reduce its dividend payout through no fault of management.
On the upside, long-term demand for energy assets is only likely to increase in developed and emerging markets. This is especially true for cleaner-burning natural gas and LNG. It just so happens that Shell acquired BG Group for $53 billion in Feb. 2016 and in the process substantially increased its LNG and natural gas reserves. Yes, the combination will save the company in excess of $3 billion a year as a result of cost synergies, but it's these gas reserves that should play a major role in lifting Royal Dutch Shell's operating results, and perhaps dividend, in the years to come.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool owns shares of Verizon Communications. The Motley Fool has a disclosure policy.