Capital gains are great, but dividends play an outsize role in total market returns. Reinvesting dividends to generate even more dividend income will give your portfolio's performance a boost, even if the market goes nowhere.
Of course, all dividend stocks aren't created equal. The best dividend stocks have market-beating yields and are backed by high-quality companies with competitive advantages. Three of our Fool.com contributors think Ford (NYSE:F), Hanesbrands (NYSE:HBI), and Pfizer (NYSE:PFE) are ideal for your dividend portfolio. Read on to find out why.
An automaker under pressure
Nicholas Rossolillo (Ford): The soon-to-be maker of the Mustang, F-150 pickup, a bunch of SUVs, and not much else has come under fire once again. As of this writing, Ford's stock is barely holding a multiyear low of $10 a share, pushing its dividend yield to 6%.
Second-quarter earnings disappointments -- specifically plummeting sales in China and a fire on the F-150 production line that will cost $591 million -- are behind the most recent share-price decline. Management lowered its full-year 2018 profit guidance to $1.30-$1.50 compared with previous guidance of $1.45-$1.70 as a three- to five-year restructuring plan will cost an estimated $11 billion. Details on what "restructuring" means were scant, and this new strategy effectively throws out plans to save $11.5 billion in operating expenses by 2020.
Revamping its older product lineup is the likely cause for the new expenses, and Ford is also investing in new tech initiatives like ride-sharing, autonomous vehicles, and electric vehicles. All of those changes cost a lot of money, especially for an old manufacturing company trying to update its business model as the world goes digital. Investors are rightly worried about the ever-shrinking profit guidance, but the trade-off between investing for the future and the bottom line is a zero-sum game.
The good news is the aforementioned dividend yield of 6%. In spite of its sales struggles, Ford's revised profitability forecast still easily covers the dividend payment while allowing for free cash flow to pay for business restructuring charges. Don't expect a quick rebound in share price; it will take time for the automaker to right the ship. The company's new vehicle lineup won't start rolling out until next year. In the meantime, though, the income Ford's stock is generating looks too good to pass up.
Bad news is good news for dividend investors
Tim Green (Hanesbrands): Shares of apparel manufacturer Hanesbrands took a dive earlier this month after it disclosed in its second-quarter report that retailer Target planned to drop an exclusive line of athletic wear. C9 by Champion generated $380 million of revenue for Hanesbrands last year, and the company will need to replace that revenue when the contract expires in 2020.
But Hanesbrands is confident that growth in its Champion business will continue. Sales of the brand grew by 30% in the first half of 2018, and the company said that the loss of the Target deal doesn't change its goal of hitting total Champion sales of $2 billion by 2022. Focusing on growing sales outside of mass retailers like Target is part of the strategy -- Champion sales outside of the mass channel grew by 70% in the second quarter.
The market freak-out over the Target news offers a great opportunity to pick up shares of Hanesbrands at a low price, and with a high dividend yield. The stock trades for around 10 times the company's guidance for full-year adjusted earnings, and it sports a dividend yield of about 3.3%. Based on the midpoint of earnings guidance, the payout ratio is just 34%.
The loss of the Target contract is unequivocally bad news for Hanesbrands, but the growing Champion brand can eventually replace that lost revenue. With Hanesbrands' valuation beaten down by this development, now is the time to pick up this solid dividend stock.
This drugmaker's fortunes are improving
Todd Campbell (Pfizer): Pfizer's share price has been threatening to break out for a while, but it finally made good on it following the company's second-quarter financial results. The shares aren't as cheap as they were before the report, but I believe investors can still be rewarded for buying it now.
Pfizer's been in transition since its megablockbuster cholesterol drug Lipitor lost patent expiration back in 2011. Finally, it appears Lipitor's headwinds have eased to a point where growing demand for newer drugs can move the revenue and profit needle higher.
In Q2, growing use of breast cancer drug Ibrance, anticoagulant Eliquis, and autoimmune disease drug Xeljanz resulted in sales of 13.5 billion, up 4.4% from one year ago. That sales growth contributed to non-GAAP adjusted income of $4.8 billion, up 18.8% from last year.
Importantly, Pfizer's biosimilars appear to be finally gaining steam. Inexact copies of drugs that have lost patent protection, biosimilars deliver similar efficacy at a cheaper price. Initially, sales of Pfizer's Inflectra, which competes against the top-selling Remicade, didn't impress. However, growing use of it helped Pfizer's biosimilar revenue grow 55% year over year to $188 million in Q2.
The company's bottom-line performance has management upping the low end of its full-year profit forecast to at least $2.95 per share from $2.90 per share. That guidance is particularly important because Pfizer was forced to roll back some planned price increases last month after they drew the ire of President Trump.
The company has already returned over $10 billion to investors this year, and given its improving fortunes, investors could enjoy tailwinds from increased buybacks and dividend payments in the future -- especially if new drug launches go off as planned. Pfizer's CEO thinks he may secure up to 15 billion-dollar blockbuster approvals by 2022, and if the company delivers on that bullish outlook, then there could be plenty of upside still left for Pfizer's shares.
Nicholas Rossolillo owns shares of Ford and Pfizer. Timothy Green owns shares of Hanesbrands. Todd Campbell owns shares of Pfizer. The Motley Fool recommends Ford. The Motley Fool has a disclosure policy.