Please ensure Javascript is enabled for purposes of website accessibility

3 Dividend Stocks I'd Buy Right Now

By Leo Sun – Jun 14, 2021 at 12:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

P&G and two other solid income stocks should generate reliable long-term gains.

Dividend stocks might not be exciting, but they usually generate more stable returns than volatile growth stocks. Enrolling those stocks into dividend reinvestment plans and then leaving them alone for decades can generate dazzling total returns as they compound their gains.

But investors shouldn't simply chase the highest yields. Instead, they should invest in stable companies with sustainable payout ratios and low valuations. Here are three companies that check all those boxes.

Three plants sprout from jars of coins.

Image source: Getty Images.

1. Procter & Gamble

Procter & Gamble (PG 2.53%) is a Dividend King, one of the elite S&P 500 stocks that's raised its dividend for at least 50 straight years. The consumer staples giant has paid dividends continually for 131 straight years, and it raised its dividend for the 65th straight year this April.

P&G maintained that stable streak through numerous recessions because its business is well-diversified. It serves more than five billion consumers across 180 countries with 65 well-known brands, including Tide, Pampers, Tampax, Charmin, Gillette, Oral-B, Pantene, Olay, and SK-II.

Demand for those products generally remains evergreen through economic expansions and contractions, and the reputations of those brands often grants it pricing power against lesser-known brands.

P&G has acquired and divested many brands, but it consistently tries to return most of its adjusted free cash flow (FCF) to investors via buybacks and dividends. It reduced its outstanding share count by 11% over the past decade, and it spent 50% of its FCF on its dividends over the past 12 months. It currently pays a forward yield of 2.6%, which is much higher than the 10-Year Treasury's 1.5% yield.

P&G profited from pandemic-induced shopping trends last year, but analysts still expect its revenue and earnings to rise 6% and 10%, respectively, this year. The stock is still reasonably valued at 23 times forward earnings, and remains a solid long-term income investment.

2. American Eagle Outfitters

American Eagle Outfitters (AEO 0.76%) is one of the few mall-based apparel retailers that survived the retail apocalypse. It weathered that storm with three main strategies.

First, its namesake stores sold more of its popular jeans instead of diluting its brand with too many products. Second, it expanded its lingerie and activewear brand Aerie, which attracted shoppers with its low prices and body-positive marketing campaigns, while shuttering weaker mall-based AEO stores. Lastly, it invested in its digital channels, which brought in 40% of its sales last quarter.

An Aerie ad campaign.

Image source: Aerie.

AEO suspended its dividend last year as the pandemic spread, but it reinstated that payout earlier this year. It also recently raised its quarterly dividend 31% to $0.18 per share, which gives it a forward yield of 2.1%. 

AEO boosted its payout because its business is improving. Its revenue fell 13% last year as its adjusted earnings broke even, but analysts expect its revenue to jump 32% this year with a return to stable profitability.

The catalysts are easy to spot. Aerie's sales have already risen by the double digits over the past four quarters, and that growth should continue as AEO opens new stores and expands its e-commerce platform. AEO also remains one of the top apparel brands for U.S. teens, according to Piper Sandler, and will likely profit from pent-up back-to-school shopping trends as the pandemic finally ends. That's a bright outlook for a stock that trades at just 15 times forward earnings.

3. Best Buy

Another retail survivor is Best Buy (BBY 1.35%), which once struggled against Amazon and Walmart. But between 2012 and 2019, CEO Hubert Joly fixed its outdated inventory systems, improved its employee training, expanded its e-commerce presence, and rented out its floor space to top brands as store-in-stores.

Best Buy also matched Amazon's prices and used its stores to fulfill online orders. By the time Joly handed the reins to Corie Barry, Best Buy was growing at a healthy clip again.

Barry quickly faced her first major test as the pandemic spread. However, Best Buy kept most of its stores open, and benefited from stay-at-home trends by selling more PCs and consumer electronics. The digital foundations it had built over the years also easily handled the surge in online orders.

As a result, Best Buy's revenue rose 8% in fiscal 2021 (which ended this February), its domestic digital comps skyrocketed 144%, and its adjusted earnings surged 30%. Best Buy will face tough comparisons after the pandemic ends, but analysts still expect its revenue and earnings to both increase 4% this year. In other words, the stock still looks cheap at 13 times forward earnings.

Best Buy continued to pay its dividends throughout the crisis, and raised its annual payout (excluding special cash dividends) for the eighth straight year this February. It spent just 17% of its FCF on those payments over the past 12 months -- so it has plenty of room to raise its forward dividend yield of 2.5%.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Amazon and American Eagle Outfitters. The Motley Fool owns shares of and recommends Amazon. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon and short January 2022 $1,940 calls on Amazon. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Nearly 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Best Buy Stock Quote
Best Buy
$85.30 (1.35%) $1.14
Walmart Stock Quote
$152.42 (-0.36%) $0.55
Procter & Gamble Stock Quote
Procter & Gamble
$149.16 (2.53%) $3.68 Stock Quote
$96.54 (4.46%) $4.12
American Eagle Outfitters Stock Quote
American Eagle Outfitters
$15.82 (0.76%) $0.12
Piper Sandler Companies Stock Quote
Piper Sandler Companies
$143.66 (2.15%) $3.02

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.