Every day, Foolish analysts do a deep dive on an industry in the popular podcast Industry Focus. This week we're focusing on income-generating dividend stocks -- a must-have in any retirement portfolio. See what each of our industry experts pick as the best dividend stock in their sector!
Which pitch do you find most compelling? Let us know at [email protected].
Kristine Harjes: Healthcare
When it comes to finding a quality dividend-paying stock, I like to search for companies with a strong track record. Not only is Johnson & Johnson (JNJ 0.84%) a Dividend Aristocrat (meaning it's increased its dividend every year for at least the past 25 years), it boasts a 53-year streak of dividend increases -- greater than any other healthcare company's record -- that has resulted in a current yield of 3.12%.
Speaking of bragging rights, J&J is also one of just three companies to boast an AAA credit rating. That's right -- Standard & Poor's considers J&J to have more financial strength and discipline in meeting its obligations than the U.S. government itself.
Johnson & Johnson appears to be in excellent financial shape, too -- on the back of 31 years of consecutive earnings increases, J&J's dividend payout ratio is right around a modest 50%, meaning the company has plenty of room to responsibly continue its increases.
Of course, past performance can only go so far -- personally, I'm more intrigued by future prospects. And here's where J&J truly begins to shine. Most people know the Johnson & Johnson name from its flagship consumer products like Tylenol and Band-Aid. This consumer segment is certainly a robust business, steadily bringing in revenue year after year regardless of economic conditions (if you need Band-Aids, you need Band-Aids, recession or not) to the tune of $3.3 billion in Q3 2014.
However, the consumer business segment accounted for just 19% of last quarter's total revenue. Medical devices made up 36%, and the rest was attributed to the real driver of J&J's business: pharmaceuticals. It's J&J's continued innovation in this segment that makes me most bullish on the company's future and ability to continue dividend increases. Drugs like blood-thinner Xarelto, diabetes treatment Invokana, and cancer therapy Imbruvica are some of the more recent success stories, and with plans to file 10 new products for approval by 2019 that each have the potential to cross $1 billion in annual sales, this pharmaceutical powerhouse should continue to be a staple for dividend-seekers.
Vincent Shen: Consumer Goods
My income investor pick is Philip Morris International (PM -0.01%), the leading name in tobacco with nearly 30% global market share (excluding U.S. and China). Last month, the company reported for its third-quarter results:
- Revenue down 11.8% year-over-year.
- Adjusted earnings per share down 10.8% year-over-year.
- Cigarette volume shipments down 1.5%.
Based on the snapshot of performance above, many investors would assume this company is struggling in the face of a long-term decline in smoking rates worldwide.
Not quite. The primary driver behind those downbeat results is the strength of the U.S. dollar -- unfavorable currency stripped a whopping $1.4 billion from the company's top line for the quarter. In constant currency, Philip Morris actually posted 5.9% revenue growth and a 17.4% boost in earnings per share.
Global cigarette volumes may have declined during the quarter, but Philip Morris’ two biggest brands, Marlboro and L&M, enjoyed volume increases of 2.1% and 9.3%, respectively, as their market share expanded in important regions like the EU. The company has also been able to raise prices simultaneously -- it expects full-year 2015 to see $1.8 billion in pricing gains over historical average levels.
The stability of this business allows Philip Morris to generate significant amounts of cash. Through the first nine months of 2015, the company has kept free cash flow levels steady year-over-year, despite $1.8 billion of unfavorable currency. And that benefits shareholders directly, as the company pays a rich quarterly dividend of $1.02 per share, up over 120% since 2008. The stock yields nearly 5% as of this writing.
That cash is also key as management increases spending to develop a leading position in the next generation of tobacco products, which are expected to far outpace the growth of traditional cigarettes over the next decade. Last quarter, Philip Morris launched iQOS, its heat-not-burn technology, in Switzerland and Japan, with plans to expand the offering to new markets over the next year. These efforts will help the company maintain the steady growth of both its core business and its dividend payouts.
Gaby Lapera: Financials
Data storage is an increasingly hot commodity, especially for high-tech companies. Stock market darlings like Facebook and IBM often rely on third parties to supplement their server space. With the need for data storage likely to continue growing, a real estate investment trust (REIT) that specializes in data centers presents an attractive opportunity.
Digital Realty Trust (DLR -0.85%) is a specialty REIT that owns and operates 132 data centers around the world. They have more than 600 tenants across an array of industries, with some of their largest clients including JPMorgan, Facebook, AT&T, LinkedIn, and IBM. DLR’s tenants typically sign 12-year leases with built-in annual increases, have an average of 6.2 years remaining on leases, and an average tenant retention rate of approximately 80% -- all of which ensure a steady cash flow while DLR invests heavily in its own expansion. It recently closed a $1.886 billion deal to acquire Telx, which dramatically expanded Digital Realty’s colocation business.
Despite the REIT’s fast growth, it is less leveraged than its peers. Interestingly, DLR can achieve a 4% return on invested capital with only a 50% occupancy rate, which provides a buffer in case the market sours temporarily. It also makes DLR’s current occupancy rate of 93% all the more impressive.
DLR has a great business model that has netted it an annual total return of 18.7% with its funds from operations (basically the equivalent of earnings for REITs) increasing an average of 15% per year. The company has also issued 10 consecutive years of dividend increases and currently sports a 4.7% dividend yield. DLR likely has a bright future when you take its solid approach to business and combine it with growing global IP traffic and the increasing reliance of new services and products on data and the Internet.
Sean O'Reilly: Energy
In what amounts to a prime example of "throwing the baby out with the bathwater", Foolish income investors should strongly consider adding shares of Spectra Energy (SE) to their portfolios. No, I'm not referring to the newest James Bond film, Spectre, I am of course referring to one of the largest natural gas pipeline operators in North America.
Pipelines are one of the last businesses that offer monopoly-like characteristics to investors and, despite their "toll collector" nature, have been sold off along with the rest of the energy sector. Shares of Spectra have taken a beating, falling 32.65%, over the last 12 months, which is even more drastic than the Energy Select Sector SPDR ETF's 22.3% drop. This makes little sense, as the company's revenues and profits have remained in line with results in previous years. Despite the fact that both oil and natural gas prices are at multi-year lows, Spectra will remain profitable as long as the United States produces and consumes natural gas. It's just that simple. With a current yield of 5.58%, income-oriented investors would be downright, well, foolish to ignore a rare opportunity to pick up a strong business amid industry-wide turmoil.
Dylan Lewis: Technology
When I’m looking for a stable dividend stock I want to see a business that:
- Operates in an industry with high barriers to entry.
- Has available growth avenues.
- Maintains a sustainable payout ratio.
Verizon Communications (VZ 0.03%) checks all three boxes.
The infrastructure-intensive nature of the wireless business keeps its participants insulated from disruption. Aggressive promotions from Sprint, T-Mobile, and AT&T are looming competitive risks, but Verizon Wireless has consistently added to its retail connections, hitting 110.8 million last quarter, thanks to its network’s industry-leading performance, reliability, and speed.
Today, the average smartphone in North America uses 2.4 GB of data per month. That number is expected to jump to 14GB by 2020, and Big Red will have the network to support the leap and the customer base to profit from it.
But mobile data consumption isn’t the only growth driver for Verizon. With its ThingSpace initiative and IoT ambitions, the company is also positioning itself well to enable M2M connections and provide applications to monitor devices, putting them at the heart of what IDC estimates could be a $1.7 trillion industry by 2020.
On a trailing-12-month basis, Verizon’s free cash flow payout ratio clocks in at 45%, so the company shouldn’t have any problems continuing to pay and grow the dividend moving forward.
Verizon’s strong business and its 5% yield make it my pick for the best dividend stock in tech… plus investors get the added benefit of having a wireless carrier pay them, for once.