2024 is off to a slow start for the stock market. After a strong rally at the end of last year, the S&P 500 hasn't budged so far this year. But it's keeping its gains as investors eagerly anticipate the latest updates from public companies and the newest economic data.
When investors are unsure about the market, there's always one kind of stock they know they can count on: dividend stocks. They provide passive income no matter the state of the market, and they're usually established, reliable companies that are resilient under pressure.
If you have $1,000 that you don't need for paying down bills or other immediate expenses, beefing up your long-term investment portfolio with some excellent dividend stocks, no matter what happens to the economy this year, would be the best thing to do. Consider investing in Ally Financial (ALLY 0.41%) and American Express (AXP -0.62%) in equal parts.
1. Ally Financial: The largest all-digital bank
Ally made a name for itself as the financial arm of General Motors, and it still has a robust auto lending unit. It's taken some time for it to catch on as a digital consumer bank, but even though it's feeling some negative impact from raised interest rates, it's been able to shine under these circumstances. Customers have been looking for higher rates on deposits and easy-to-use services, and Ally is capturing market share. Armed with tons of new members, it's poised to spring forward when economic policy becomes more favorable to banks.
Despite higher interest rates, Ally had a record 3.7 million auto loan applications in the third quarter. It had a 30% approval rate and $10.6 billion in originations. It is the top U.S. prime auto lender and the top bank in retail auto loans outstanding.
The company added 95,000 consumer banking customers in the 2023 third quarter, a 15% year-over-year increase, for a total of total of 3 million. Seventy-two percent of them are millennial age or younger, and Ally has an industry-leading 96% retention rate. Deposits increased by $7.1 billion for a total of $152.8 billion, and it has demonstrated more than 14 years of retail deposit growth. Customers using more than one product continue to rise, increasing 22% over last year in the third quarter, and 85% of new Ally Invest customers came from existing accounts.
Ally doesn't have a strong track record of dividend raises, but it has been paying a dividend reliably, with raises throughout, since 2016. At the current price, Ally's dividend yields 3.4%. That's more than double the S&P 500 average, and it's lower than usual for Ally. That's because its stock has rocketed since the announcement that the Federal Reserve would lower interest rates this year, up 34% over the past three months.
Ally is a Warren Buffett stock in the Berkshire Hathaway portfolio and it's a top dividend stock to buy in 2024.
2. American Express: The differentiated credit card model
American Express has enjoyed strong growth despite the inflationary environment. It targets an affluent market that's more resilient during challenging times, and the annual fees it collects from cardmembers provide bottom-line growth, irrespective of how much money cardmembers spend.
In fact, 70% of new account signups were for fee-based cards in the 2023 third quarter. Not surprisingly, fees increased 20% year over year and accounted for 12% of total revenue.
In the 2023 third quarter, revenue increased 13% over last year. Net income increased 30%, and that was inclusive of a 58% increase in provisions for losses. Banks increase their provisions for losses when defaults are expected to rise, and banks have had to increase their due to higher interest rates.
American Express operates a closed-loop credit card network. Unlike other networks like Visa and Mastercard, which partner with financial institutions, American Express acts as its own bank. In that capacity, it benefits from deposits and interest. Net interest income increased 30% over last year in the third quarter as deposits increase and rates are high.
Travel and experiences are a major segment for American Express, and this segment is finally getting back to high growth after pandemic-driven declines. The company is seeing its strongest growth among younger clients, whose spending increased 18% over last year in the third quarter, in contrast with 7% overall. They also accounted for 60% of all new member signups. Like with Ally, this is an important group to capture because these members will drive growth for decades to come.
American Express has paid a dividend for decades and it has increased 160% over the past 10 years. It yields 1.3% at the current price, but it's usually closer to the S&P 500 average. However, American Express stock has jumped over the past few weeks with the positive news about interest rates. American Express is also a Buffett stock, and one of his favorite and longest-held. Buffett touts the dividend as an attractive feature in owning American Express stock, and it's a top pick for a reliable dividend stock.
