When the curtain does close on 2020 in a little over five months, it's likely to go down as one of wildest, most-volatile years on record.
The uncertainty surrounding the coronavirus disease 2019 (COVID-19) pandemic sent the benchmark S&P 500 careening lower by 34% in less than five weeks during the first quarter. But in the subsequent four months, the broad-based index has regained most of what was lost, while the technology-heavy Nasdaq Composite has rattled off more than two dozen all-time closing highs.
There's little question that technology and innovation have been leading this rally since March 23. But I'd like to put dividend stocks back on your radar, as they've been one heck of a superior long-term bet.
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Here's why dividend stocks should be on your radar
Back in 2013, Bank of America/Merrill Lynch released a report that examined the performance of dividend-paying stocks versus non-dividend-paying stocks over the course of 40 years (1972-2012). The analysis found that businesses paying and growing their dividend over this four-decade period returned an average of 9.5% per year. By comparison, the non-dividend stocks averaged an annual return of a meager 1.6% over this same period.
Companies that pay a dividend are often profitable, have transparent outlooks, and are almost always time-tested (i.e., they've survived their fair share of economic downturns and recessions).
But as you know, not all dividend stocks are created equally. That's why if income investors want the best of the best they usually turn to Dividend Aristocrats. A Dividend Aristocrat is a group of more than five dozen S&P 500 companies that have raised their annual dividend for at least 25 consecutive years. In other words, they're a model of consistency.
Right now, there are three Dividend Aristocrats that are screaming buys for patient, income-seeking investors.
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Walgreens Boots Alliance
This has not been a pretty year for pharmacy chain Walgreens Boots Alliance (WBA 3.69%). The company has lost about a third of its value as weaker-than-expected earnings have dampened investor optimism and the COVID-19 pandemic has stymied foot traffic into its stores. But while short-term investors see woe, I view Walgreens at roughly $40 a share as a massive opportunity for income seekers.
For one, Walgreens is the type of company that's set up perfectly to take advantage an aging population. No country spends more on healthcare than the United States. As baby boomers age, the amount of maintenance therapies prescribed by physicians is likely to rocket higher, resulting in a boost to Walgreens' highest-margin segment: its pharmacy.
Walgreens should also see substantive longer-term results by its personalized medicine initiatives. The company has more than 370 Walgreens Healthcare Clinics located throughout the U.S. to handle simple diagnoses and vaccines, and has been generating double-digit year-on-year sales growth from its Boots.com website. Furthermore, Walgreens' digital Find Care solution is aimed at helping people with chronic conditions connect with medical personnel. Ultimately, engaging with more consumers at the local level and/or improving patient convenience can play a big role in landing future pharmacy business.
Currently riding a 44-year streak of increasing its dividend, Walgreens is paying out 4.6% (that's more than double the yield of the S&P 500) and is valued at less than 8 times Wall Street's earnings per share forecast for 2021. Even with some profit wiggle room, this is an inexpensive stock that's screaming to be bought.
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ExxonMobil
Although oil stocks aren't going to be for everyone, income seekers who aren't scared off by the idea of owning a name in the oil patch should seriously consider ExxonMobil (XOM 1.15%).
It's definitely been a year to forget for oil stock investors. ExxonMobil has shed approximately 35% of its value on a year-to-date basis, all while the S&P 500 is roughly flat. At one point in April, the price for a barrel of West Texas Intermediate (WTI) crude briefly turned negative, with WTI and Brent crude simply trying to claw their way back over these past three months. Given the unprecedented level of global disruption we've witnessed from COVID-19, oil demand has fallen at a record-breaking pace.
And yet, despite these issues, ExxonMobil is a screaming buy. That's because it's an integrated oil and gas giant that's built to survive disruptions like we're experiencing now. Even though ExxonMobil generates its juiciest profits from the drilling and exploration side of the business, it can lean on its downstream refining and chemical operations when crude prices slump. Declining WTI and Brent prices mean low input costs for the company's downstream operations, and often higher consumer and enterprise demand for petroleum products.
ExxonMobil also has plenty of levers it can pull if it needs to on the cost front. The company already shaved up to $10 billion off of its original $30 billion to $33 billion capital expenditure plans for 2020. But make no mistake about it, ExxonMobil still has its eyes on expanding the Payara project off of Guyana. With bankruptcies ramping up in the oil sector, ExxonMobil may actually have a clearer path to global drilling expansion in a post-COVID-19 bull market.
Having raised its payout for 37 consecutive years, ExxonMobil's 7.8% yield appears safe.
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AT&T
I've said it before and I'll say it again: Sometimes boring is beautiful.
Telecom giant AT&T (T 1.10%) is unquestionably well past its prime and has been beaten back in recent months by COVID-19 uncertainty and the growing prospect of cord-cutting. AT&T owns satellite TV operator DirecTV, which is one of a handful of larger cable players that have seen a steady decline in subscribers. But growth catalysts are on the horizon, and that makes AT&T, which is valued at only 9 times Wall Street's projected earnings per share for 2021, a bargain.
Perhaps the most exciting development for AT&T is the rollout of 5G networks. AT&T will be spending big bucks to upgrade its existing infrastructure to 5G in the years to come. Its reward will be a multiyear technology upgrade cycle that results in customers and businesses consuming data like never before. As a reminder, AT&T's wireless segment generates its juiciest margins on data, so this is certainly an opportunity for AT&T's organic growth to improve.
AT&T is also being given an opportunity to grow its streaming offerings. Nearly two months ago, AT&T launched HBO Max, which is aims to turn into a streaming service with 80 million subscribers by 2025. HBO Max's more than 10,000 hours of premium content could be the dangling carrot that helps reverse cord-cutting weakness from DirecTV.
With AT&T halting its share buyback program earlier this year, it's a virtual certainty that its dividend, as well as its 36-year streak of increasing that base payout, are safe. That means AT&T's 7% yield can singlehandedly double your money, with reinvestment, about once a decade.
