In February, inflation rose at a 7.9% rate, the quickest in more than 40 years. Inflationary times can make investing tricky because it affects industries differently, and there's no telling when it will end. There is something you can do, though -- buy solid companies at reasonable prices with good dividends.
According to research from Fidelity, since 1930, dividends have accounted for 40% of the stock market's returns. However, when inflation is high, dividends account for a larger share of the market's returns. During inflationary decades in the 1940s and 1970s, dividends accounted for 65% and 71% of the S&P 500's total returns, respectively.
Three of the best dividend stocks Wall Street is sleeping on are T. Rowe Price (TROW 4.77%), Moelis & Co. (MC -1.01%), and U.S. Bancorp (USB 0.32%).
1. T. Rowe Price: 35 years of dividend increases
T. Rowe Price is an investment advisor for individual clients and mutual funds, separately managed accounts, and other institutional investors.
Last year, T. Rowe Price returned a boatload of cash to investors -- $2.8 billion. The company spent $1.7 billion in dividends to investors, and it currently yields an attractive 3.3%.
It's also a member of the exclusive Dividend Aristocrats club, or those S&P 500 companies that have increased their dividend at least 25 consecutive years. This year marks the 35th year in a row T. Rowe Price has increased its dividend. The way it got here is with stellar cash management.
After returning billions to shareholders, it spent another $2.5 billion acquiring Oak Hill Advisors at the end of 2021 -- and it still had $2 billion in cash and liquid assets at the end of last year.
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T. Rowe's steady dividend reflects the company's growth over the years. Over the past decade, the firm has increased its assets under management (AUM) by 12%, compounded annually. This comes even as investors move more toward passive investment solutions instead of active investments such as those that T. Rowe Price offers.
Last year, the firm grew AUM by $170 billion despite seeing $23 billion in outflows during the fourth quarter. This is a testament to its investment ability -- a big reason why it has grown its AUM. Revenue, meanwhile, increased 24% to $7.7 billion and net income grew 30% to $3 billion.
However, the fund outflows concerned investors, and now T. Rowe Price trades at its cheapest valuation in decades. The company believes its investment strategies will be more in demand as inflationary pressures ripple through the economy and active management offers investors an opportunity to navigate these rocky times. Given its solid AUM growth and current valuation, Wall Street is sleeping on this dividend stock.
2. Moelis & Co.: high potential dividend payouts
Moelis & Co. is an investment bank that works on mergers & acquisitions (M&A), debt restructuring, and other capital markets advisory.
Last year was the best yet for the firm, as M&A transactions across the globe were up 56%. The robust M&A market propelled Moelis & Co. higher. Revenue rose 63% to $1.5 billion during the year, while diluted earnings per share (EPS) increased 81% to $5.34. The firm pays out a $0.60 dividend quarterly, giving it a 5.2% yield at its current price.
Last year was an excellent year for investors in Moelis & Co. because of its special dividends. The company declared two special dividends totaling $4.50 per share. Factoring in these dividends gives the company a dividend yield of 14.8%.
Investors are concerned that 2022 may not live up to that same level of growth, which is why the shares are down 39% since peaking in November 2021. However, during its February earnings call, the company said that the same drivers of robust M&A activity remain in place in 2022.
The company noted, "The pace of our new restructuring mandates have slowed dramatically." If the economy slows, Moelis & Co. could benefit from debt restructuring deals. But record levels of corporate debt could pose an opportunity in the coming years. Moelis & Co. trades at a price-to-earnings ratio of 8.7 ratio following its sell-off, and it has a big pile of cash, making it another stock Wall Street is overlooking.
3. U.S. Bancorp: ready to take advantage of higher interest rates
U.S. Bancorp is a bank positioned well for the current inflationary environment as the Federal Reserve works to curb rising prices using one of its oldest tools -- interest rates.
In March, the Fed raised interest rates by 25 basis points (0.25%), its first interest rate increase since 2018. Officials at the central bank have hinted at six more 25-basis-point increases this year.
U.S. Bancorp generates most of its income from traditional banking services. As a result, it didn't benefit from the boom in investment banking in the last two years -- but it is well positioned for rising interest rates. Traditional banks make money on the difference, or spread, between the interest earned on loans and the amount paid out on deposits. When interest rates rise, banks can see profitability improve as that spread widens. U.S. Bancorp is one such bank ready to take advantage.
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The bank trades at a premium compared to other banks, with a price-to-tangible-book-value (equity minus intangible assets and goodwill) of 2.4. It trades at this premium for a reason. Over the past 10 years, U.S. Bancorp has maintained an average return on equity (ROE) of 15.2% and an average return on assets (ROA) of 1.4% -- beating out other major banking competitors, including JPMorgan Chase, Bank of America, and Wells Fargo.
Even though this bank trades at a premium to competitors, I think Wall Street is sleeping on how well it can do. The bank made investments in the last year, giving it capital and flexibility to take advantage of rising interest rates in 2022 and 2023. Because of this, plus its focus on traditional banking and high-quality assets, U.S. Bancorp looks well positioned for rising interest rates. U.S. Bancorp currently offers investors an attractive 3.3% dividend yield.
