Dividend-paying stocks are like the ballast that keeps a ship from capsizing during stormy seas. They provide grounding for investors who, when markets are volatile, just as we're experiencing now, may otherwise get queasy from being tossed around. Knowing that income will continue to stream in regardless is a calming feature.
But only if the stock is shipshape. So we asked three Motley Fool contributors for their best dividend stock ideas for investors looking for income. They suggest boarding Royal Dutch Shell (RDS.A) (RDS.B), Texas Instruments (TXN 3.17%), and Philip Morris International (PM 2.20%).
A cash cow
John Bromels (Royal Dutch Shell): For income investors looking at the oil and gas space, Big Oil behemoth Royal Dutch Shell has always been a top pick. And with a current yield of 6%, Shell's dividend is looking incredibly attractive. But this shareholder-friendly company is a solid pick for income in other ways as well.
In Shell's most recent quarter -- Q3 2018 -- it raked in bushels of cash: $12.1 billion, to be precise. That's the most cash the company has generated in more than a decade, since Q2 2008. Back then, though, oil prices were more than $100/barrel! The company has so much cash, in fact, that it's been able to fund multiple priorities to benefit shareholders.
First of all, Shell has embarked on a share-buyback spree and anticipates repurchasing $25 billion worth of its own shares by 2020. The company is also aggressively expanding into the liquefied natural gas (LNG) sector, which CEO Ben Van Beurden projects will grow faster than the oil sector over the next decade. Its latest LNG project is a 40% stake in a massive facility in Canada -- the first LNG project on North America's west coast. Low-cost LNG from the facility is expected to meet rising demand in Asia to combat a global LNG supply shortage. The facility isn't expected to start production until about 2025, but it's another good reminder to investors that Shell is keeping one eye firmly on an energy future in which oil may play a smaller role.
Until we reach that future, though, the company continues to produce plenty of oil and makes a lot of money doing it. Shell's commitment to returning that money to shareholders through its best-in-class dividend and share buybacks makes it an excellent choice for income investors.
Dividends go big in Texas
Anders Bylund (Texas Instruments): Great income stocks have a few things in common:
- Solid and rising dividend payouts...
- ...funded from strong and growing cash flows...
- by a company with long-term staying power.
Put these three components together and you have a tasty recipe for income-generating dividends that will keep coming for decades and decades.
Semiconductor veteran Texas Instruments has all three of these essential qualities.
The first two bullet points are incredibly easy to illustrate. TI has boosted its annual dividend payouts sevenfold over the last decade, landing at a generous 2.8% yield at the moment. In the same time period, free cash flows have grown 150% larger, and that growth is only accelerating in recent years, as the chart below illustrates:
And I don't really have to explain to you what Texas Instruments does for a living, because you already know. This household name has been providing not only America but the whole world with calculators and microchips for decades. If anything, the chips show up in more places than you might expect -- TI is a leading supplier of chips used in smartphones, networking equipment, modern cars, industrial machinery, and much more.
TI holds a strong market position in a sector that is likely to stay relevant and growing for a very long time -- essentially forever, for all intents and purposes. And the company is funneling 40% of the resulting cash flows directly into shareholders' pockets by way of a great dividend policy. What's not to love?
Ready to smoke the competition
Rich Duprey (Philip Morris International): Philip Morris International has made a big bet on a smoke-free future, and as 2018 winds down, this could be when it begins to pay off. The global tobacco giant has staked out a massive lead in cigarette alternatives, with its heated tobacco device IQOS virtually owning the Japanese market with an 80% share. While sales have slowed there this year, it's also beginning to see IQOS gain traction in other markets now, including Europe and Russia.
Perhaps most opportunistic will be the chance to crack the U.S. market. During Philip Morris' recent third-quarter earnings conference call, it said it expected the Food & Drug Administration to make a decision on marketing the IQOS in the U.S. by the end of the year. It has two applications before the regulatory agency. One is for marketing the IQOS as a reduced-risk product, meaning users who switched from cigarettes would have a heightened chance of minimizing the risks of smoking; the other is simply to sell the product as a regulated tobacco product like all other electronic cigarettes on the market.
Although Japan has certain unique features about its market that make Philip Morris' success there more difficult to replicate elsewhere (e-liquids used by e-cig makers are regulated as pharmaceutical products, so competing devices are essentially banned from the market), it still has a big opportunity to take market share away from other devices, including leader Juul Labs.
Of course, there is a risk the FDA will deny the applications, but there doesn't seem to be a reason it shouldn't allow the IQOS to be simply sold without a reduced-risk label, meaning Philip Morris has a whole new avenue for growth ahead of it. With a generous dividend that currently yields 5.1% annually, the tobacco giant represents a vehicle for income that comes with more than a modicum of growth thrown in.