One of the most surefire ways to build wealth over time is to buy dividend stocks. Although income stocks are often mature, slower-growing businesses, their recurring profits and time-tested operating models tend to result in higher valuations over time.
According to a study from J.P. Morgan Asset Management, a division of JPMorgan Chase, there's no comparison between dividend stocks and non-dividend payers. In a 40-year stretch between 1972 and 2012, the report showed that companies initiating a dividend and growing their payout averaged an annualized return of 9.5%. As for non-dividend payers, they managed a paltry annualized return of 1.6% over the same time frame.
Whether you're a growth or value investor, there's an income stock that fits everyone's preferences. The following trio of dividend stocks are what I consider to be the best buys for the fourth quarter and, most importantly, well beyond.
Tech stocks aren't generally known for their dividends, but semiconductor-solutions provider Broadcom (AVGO 2.57%) is an exception to the rule. It also happens to be a really inexpensive company, considering the catalysts at its doorstep.
The first factor working in Broadcom's favor is the 5G revolution. It's been a full decade since wireless infrastructure was significantly upgraded to allow for faster download speeds. Upgrading this infrastructure won't happen overnight, nor will all consumers and businesses replace their devices at the snap of a finger.
A majority of Broadcom's sales derive from 5G wireless chips and other accessories found in next-generation smartphones. Thus, the 5G smartphone replacement cycle is a multiyear revenue and profit-expansion opportunity for the company.
Broadcom's ancillary focuses should see steady growth, too. For instance, as businesses continue to shift data into the cloud, data center demand will keep climbing. Broadcom is a key supplier of connectivity and access chips used in data centers.
Semiconductor solutions for next-gen automobiles are yet another source of growth for the company. Broadcom should be busy as automakers integrate high-tech features, such as infotainment systems and driver-assistance technology, into their new vehicles.
All told, Broadcom had nearly 90% of its supply for 2021 booked as of early March. Only the company's production capacity is holding it back at the moment -- and that's not a bad problem to have.
Investors can buy into the Broadcom growth story for less than 16 times forward-year earnings, and they'll net a 3% annual yield for their patience. What's more, Broadcom's $3.60 quarterly payout has grown by more than 5,000% in less than 11 years.
Viatris isn't a well-known name on Wall Street -- at least not yet. It was officially formed less than a year ago by combining generic-drug company Mylan with Pfizer's established-brands unit known as Upjohn. Combining forces is expected to yield a number of advantages that the two companies simply wouldn't have had if they remained independent.
To start with, there should be significant cost-savings from this merger. By the end of 2023, Viatris is expected to have reduced its annual operating costs by over $1 billion. Over this same period, management also anticipates a quarter of the company's outstanding debt will be repaid ($6.5 billion of the $26 billion that was outstanding when the merger took place).
Aside from becoming a more cost-efficient drug company, Viatris will be looking to move the needle on the sales front, too. Assuming its debt-reduction goals are met by the end of 2023, management would like to reinvest some annual operating cash flow into new research and development. This would come atop a number of biosimilar therapies that are already in clinical studies.
Don't overlook the generic side of Viatris, either. Even though generic drugs generate low margins, an aging global population, coupled with rapidly rising brand-name list prices, bodes well for increased volume-based usage over time.
Investors have the opportunity to gobble up shares of Viatris right now for less than four times forward-year earnings, and they'll collect a market-topping 3.3% yield while they wait for Wall Street to come to its senses.
When you think of dividend stocks, payment-processor Visa (V -0.19%) probably isn't the first name to come to mind. It's a generally fast-growing company and yields "only" 0.6% at the moment. However, the only reason its yield is so low is because Visa's shares are higher by 975% over the trailing-10-year period. To boot, its quarterly dividend has grown by more than 1,100% since 2009.
A big part of the "Why Visa?" story is its cyclical ties. While contractions and recessions are a natural part of the economic cycle, these slowdowns typically last no longer than a few months to a couple of quarters. Meanwhile, periods of economic expansion are almost always measured in years. Visa is simply biding its time when recessions inevitably roll around and benefiting from a disproportionately long period in the sun. In other words, patience pays off when investing in Visa.
The king of payment processing is also the most dominant force in the U.S., the leading global market for consumption. As of 2018, Visa handled 53% of all credit card network purchase volume in the U.S., which was more than 30 percentage points higher than its next-closest competitor. Further, Visa's share of the U.S. payment-processing market expanded faster than its peers in the wake of the Great Recession.
Visa's not lacking for growth opportunities, either. It has the ability to organically expand into underbanked regions worldwide, and hasn't been afraid to pull the trigger on acquisitions to expand its reach (e.g., the Visa Europe buyout in 2016).
As one final note, Visa isn't a lender. By strictly sticking to the payments side of the equation, it's ensured that it won't be directly impacted by a rise in credit delinquencies when economic contractions and recessions inevitably arise. Not having to set aside capital to cover delinquencies is a big reason Visa's profit margin regularly tops 50%.