There are three reasons to buy dividend stocks and high yield is not one of those reasons. Rather, dividend investing is about balance sheet quality, asset valuations and underlying growth, asserts Kirk Spano, chief investment officer of Bluemound Asset Management and editor of Fundamental Trends.
Investing is all about “relative performance,” so only take single company risk on stocks that can significantly outperform the S&P 500. The stock market correction is a perfect time to upgrade your portfolio and these stocks can help you do that.
There are some who want to brag about their 7%, 8%, 9% or 10% dividend yielding portfolios. I guess that’s one way to do things, but history again and again has shown that high yield stock investing is a very high risk way to invest.
In my opinion, high-yield dividend investing is just not the sort of thing that retirees who care about their principle should be doing. Instead, focus on balance sheet quality, asset valuations and underlying growth.
Following are my top dividend stocks. Each ranked spot is worthy of up to a full position in your portfolio at the right prices. I consider 3-4% of a portfolio asset allocation to be a full position for a stock.
Where there are more than one stock in a rank, split your position up between those stocks for up to a full position combined. Remember, scale in slow and at wide price points using our buy zone. Below are briefs with a key point or two that I think the market is missing.
#10 — NRG Energy (NRG) & Algonquin Power (AQN)
Utility companies NRG Energy and Algonquin are both leaders in the clean energy transition. Both companies are growing fast, but with different approaches.
Algonquin’s regulated businesses in natural gas, water and wastewater are financing an aggressive renewable energy expansion. The company is aggressively buying assets, building renewable assets, leveraging and diluting. Normally, I would not like the leverage and dilution, but their deals in the Permian and with key partners is impressive.
Their community solar and renewable natural gas have very high growth potential. Algonquin could be the rare utility with a high growth rate and potential to triple or quadruple in market cap by mid to late decade. You’ll have to watch execution and that they don’t get over their skis on debt, but, the 2025-6 period is looking like there will be a massive drop down of free cash flow to the bottom line.
NRG has a diversified asset base, but it retiring and selling fossil fuel assets. It has mostly gotten through its business transition and is now growing its asset light renewable generation and consumer services. They have no debt maturing this year or next. That have 15-20% free cash flow excluding growth which is projected at 7-9% per year. NRG compared to Algonquin is more organically growing.
I don’t like trying to outsmart the market here, so, I like buying both to spread my risk. If one is a big winner and the other muddles, you’re in good shape. Both could be big winners, though.
#9 — Blackstone (BX) & KKR (KKR)
While I have dramatically reduced my investing directly into oil and gas companies, ending 21 years of oil and gas investing from 1999 to 2019, I still understand and respect the energy industry. I now choose to invest along with private equity whose assets are cheap and into clean energy where growth is strong.
Blackstone and KKR were both vulture investors as fossil fuels tanked from 2015 to early 2020. They are now both are pivoting to clean energy. Blackstone is a bit ahead in the game having just announced it was done with new oil investing. Smart investors should take that as a sign of an impending top in the oil market rally.
Blackstone swears off oil-patch investing as private equity’s retreat widens. The firm pays a higher regular dividend, but KKR has put out some doozy special dividends in the past. Neither is a buy right now, but I’d expect to own both sometime this year.
#8 — Comcast (CMCSA) & Paramount Global (PARA)
Content is King and these companies have it. Consolidation in this space is still the name of the game and we should expect these companies to be bid on soon. The likely bidders are big tech. In the meantime, both are cheap, have good cash flow, controllable expenses and pay strong dividends. I rate both Comcast and Paramount as buys right now.
#7 — STAG Industrial (STAG), VICI Properties (VICI) & American Tower (AMT)
There are no good diversified REIT ETFs in my opinion and only a few decent mutual funds or closed end funds. So, I choose to build my own REIT basket. Here are my three “go to” REITs.
STAG Industrial is among the strongest industrial REITs out there. If you have followed along the past decade, then you know that industrial REITs, storage REITs and some specialty REITs have been the strongest in almost every metric over almost every rolling time frame.
STAG takes industrial property that needs some improvement, improves them and fills them. Their strategy has been remarkably effective as they execute well and there is a secular trend of supply chains moving back to America.
VICI Properties benefits from an almost recession proof business in gambling. The company has accumulated a very impressive portfolio and their rent payers are expanding into online gaming which helps pay the rent. Of note, even during the pandemic, no casinos missed paying their rent. VICI got ahead of itself on share price, but is closing in on buy territory again.
American Tower has a growing 5G tower business, solid rents and the market is completely missing a couple growth catalysts. It’s emerging markets and space investments could yield huge upside the next decade. So, this is a very solid and essential business with added catalyst on top (like everything I invest in).
None of these REITs are bottom fishing buys right now, but all are closing in on my optimal entry prices.
#6 — Pfizer (PFE)
Simply put, the market has not appreciated the newly added growth potential of Pfizer with its mRNA platform. The company pays a strong well financed dividend, but because the stock has been range bound so long, investors have been slow to gravitate towards it. I can see Pfizer doubling to tripling its profit this decade and going on a major growth rip.
#5 AT&T (T)
There is a lot of hate for AT&T because they cut their unhealthy dividend. Dividend chasers are dumping, but real investors are buying. I believe the Warner spinoff with Discovery (DISCA) will be one of the best “dividends” ever paid.
AT&T itself will get debt reduction and cash to fuel fiber and 5G growth that should see it at least double to match the valuation of Verizon (VZ). The wild card are its ability to provide streaming from the wire to compete with the likes of Roku (ROKU) and a space investment that might make it “suddenly” a global telecom company.
#4 — Ford (F)
I will make this simple. I believe that Ford will in fact be the #1 EV company in the world by 2027. But wait, there’s more. In shifting to EVs, they free up a lot of real estate that can be repurposed or sold. That real estate is essentially unvalued by the market.
Their 4IR tech is among the best in the world, as you saw when it only took them 3 weeks to ramp up ventilator production. That technology will allow the company to engage in joint ventures, likely some in their own real estate, as well as, move towards being a conglomerate that could spinoff new companies.
We began buying Ford after the 2020 Consumer Electronics Show at about $6 per share. I think Ford will be a $100+ stock in the next several years and was my top pick for MoneyShow's "Top Picks 2022 Report" in January.
#3 — Intel (INTC)
What do you get when there is a semiconductor supply and demand imbalance so great that the U.S. Government spreads around billions to move supply chains back to America? You get Intel opening fabs in Arizona and Ohio to build semiconductors for other companies, ala, Taiwan Semiconductor (TSM). Intel is looking at growth without the new business, but with it, it’s looking at massive growth.
Intel has a fortress balance sheet, pays a growing dividend, buys back shares and is extremely low debt. It’s shareholder yield is set to surge after its capex for new fabs is complete. I rate Intel a buy right now. It is also a good one to sell cash-secured put on.
#2 — Apple (AAPL)
Apple is perhaps the best franchise on the planet. It has a fortress balance sheet and unusual growth for a mega cap company. What the market is missing is that its new policies on privacy not only are easy to pitch, but actually capture revenues from Facebook (FB) and Google (GOOG), which was a neat trick.
Apple is a rare forever stock. The only reason to every sell is if you need a few bucks and the stock gets a few years ahead of itself on valuation, like it did recently. It’s not a buy right now, but could be soon on a broader market correction. When Apple becomes a buy, the correction is essentially over by the way.
#1 — Microsoft (MSFT)
I split hairs here making Microsoft #1 over Apple. The differentiator is the cloud growth at Mr. Softy. The cloud is going to grow around 5x this decade with IoT and satellite data pouring in. Microsoft with its Azure platform will be a major winner. Microsoft, like Apple, is rarely cheap, but if it gets there, that means the stock market correction is essentially over.
I have tended since 2019 to get my Apple and Microsoft exposure via the Invesco QQQ ETF (QQQ) and have been looking at the iShares Evolved Tech ETF (IETC) as a potential future core holding. Both have big slugs of Apple and Microsoft. Adding a bit of Apple and Microsoft stock on top really can’t be a bad idea, but be careful with asset allocation.