The stock market can sometimes feel a bit overwhelming for beginning investors. There are more than 7,000 different equities to choose from across a variety of sectors, and each has its own unique set of risks and catalysts.
However, one of the very few constants that's held up over the long run, and which beginning investors can take comfort in, is that dividend stocks tend to outperform non-dividend-paying stocks. Think about it this way: the only companies that are usually going to share a percentage of their profits with shareholders are those with sound business models that have withstood the test of time, as well as companies that expect to grow, or at least retain their competitive advantage. In a way, dividend stocks are beacons of success for beginning investors to follow.
Of course, that isn't all. Dividends can help to hedge the impact of the stock market's inevitable corrections, and they can also be reinvested back into shares of more dividend-paying stock via Dividend Reinvestment Plans, or DRIPs. This repeating pattern of buying more stock with your dividend payout and thusly receiving a larger dividend during the next payout is a trick the smartest investors on Wall Street use to get rich.
So where's a new investor to begin? My suggestion would be to consider the following three best dividend stocks in 2017.
Johnson & Johnson
It's certainly not going to wow investors with double-digit growth anymore, but healthcare conglomerate Johnson & Johnson (JNJ -0.04%) has everything you'd look for in a top dividend stock for a beginning investor.
The most attractive component of Johnson & Johnson is its business diversity. It's composed of more than 250 subsidiaries, making divestments and acquisitions easier to incorporate without disrupting the larger business, and it has three primary revenue channels, each with its own purpose:
- Consumer health products is a slower-growth segment, but J&J's brand-name health products are usually inelastic and maintain strong pricing power. Thus, J&J's health products segment tends to generate consistent and predictable cash flow.
- Medical devices have grown slower of late, likely a result of increasing competition in the device space. However, an aging America that's living longer than ever is bound to need an increasing amount of preventative care via hip, knee, and spine procedures in the years to come, setting up J&J for success.
- Pharmaceuticals are the icing on the cake for J&J as its branded drugs provide most of its operating margin. Between 2009 and mid-2014, Johnson & Johnson brought 14 novel medicines to market, half of which have gone on to generate $1 billion-plus in annual sales. Management believes another 10 blockbuster drugs can be brought to market (or at least have new drug applications filed with the Food and Drug Administration) by 2019.
Johnson & Johnson is currently sitting on nearly $41 billion in cash and cash equivalents, boasts one of just two AAA credit ratings from Standard & Poor's for all publicly traded companies (the highest credit rating given by S&P), and has a 54-year streak of increasing its payout, putting it among truly elite company. J&J's 2.8% yield is nicely above the average yield for the S&P 500, making it one of the best dividend stocks, and least volatile investments, for beginning investors.
Another great dividend stock for beginning investors to consider is NextEra Energy (NEE 1.37%) in the utility sector.
Electric utility stocks are often a great place to start for both income-seeking investors and beginning investors because they deal with an inelastic product: electricity. If you own a home, rent an apartment, or run a business, you need electricity. With the exception of being unable to control Mother Nature, electricity usage and regulatory price increases make cash flow and profitability somewhat predictable -- and trust me, Wall Street and investors love when there aren't any surprises.
However, NextEra Energy doesn't have too much in common with your standard utility company. Whereas most electric utilities have only begun to recognize the benefits of alternative energies, NextEra has been embracing them for more than a decade. NextEra Energy and its affiliates are the largest provider of renewable energy from the wind and sun in the world. Not to mention it also is one of the largest operators of commercial nuclear power with the capacity to generate more than 6.4 GW of emissions-free electricity, which is enough to power almost 5 million households.
NextEra Energy's focus on going green is critical for a number of reasons. To begin with, though the expense of focusing on renewable energy is costly upfront, NextEra's electricity-generating costs are probably going to be a lot lower five or 10 years from now than nearly all of its peers which could be scrambling to install wind and solar platforms. Secondly, it puts NextEra ahead of the curve when it comes to reducing its carbon emissions. Should the U.S. Environmental Protection Agency choose to tighten emissions regulations in the years or decades to come, NextEra will be prepared. Lastly, its high usage of wind and solar means lower long-term costs for the consumer, which probably means a happier customer.
NextEra likely has the potential to grow its profits by between 5% and 9% annually through the end of the decade, which, when combined with its 2.9% dividend yield, could make it one of the best dividend stocks for beginning investors to own.
One of the best dividend stocks beginning investors can consider buying from the technology sector is networking giant Cisco Systems (CSCO 1.69%).
Like all stocks, Cisco Systems has its imperfections. Innovation within the technology space moves rapidly, and from time to time Cisco has had to ramp up its spending to seemingly catch up with the next innovative wave. We're beginning to see Cisco's investments really pay off. For instance, in August Cisco announced that it was going to eliminate 5,500 jobs in its traditional switching and router division, which it primarily supplies to enterprise customers and telecom carriers, and it invest the "savings" into faster-growing software segments, such as security, cloud-computing, and the Internet of Things, all of which have long-term double-digit growth potential. During the first quarter of fiscal 2017, security revenue wound up increasing 11% year over year.
However, investors don't have to throw Cisco's legacy businesses out with the bathwater just yet. Even though it's making the move into software, it's still a dominant player in networking equipment (switching and routing), which is nothing to sneeze at. As noted by my Foolish colleague Tim Green, Cisco had north of 60% market share in the switching market, according to IDC, in 2015. Comparatively, there aren't any other manufacturers above 9% market share, leaving Cisco as the brand-name hardware company in the networking space. And it's still healthfully profitable on these products.
But if there's one thing Cisco's dominance brings to the table every year, it's lots of free cash flow. Earlier this year Cisco announced a $15 billion share buyback and once again increased its dividend (by 24% this go-around). Currently yielding 3.4%, Cisco is in prime position to benefit income-seeking investors and those beginning investors who are terrified of risk and want to own brand-name companies.