One of my favorite baseball players was Hank Aaron, who wore number 44 and had a lifetime batting average of .305; in investing terminology, he was truly a “total return” player, asserts Chuck Carlson, editor of DRIP Investor.
I thought of Aaron as I was putting together my own “44 Club” for investors. The stocks in this club meet the following criteria: a current dividend yields of at least 4%; a 5-year annualized dividend growth of at least 4%; an ability to post moderate capital gains each year (at least 4%).
It is worth mentioning that all of these stocks offer direct-purchase plans whereby any investor may buy the first share and every share directly from the company.
One reason I wrote this article is that too often investing gets framed as an “either/or” proposition — there are either low-yielding stocks with big dividend-growth potential; or there are high-yielding stocks with little or no dividend growth potential.
I don’t buy that framework. True, once you start getting in the 4% yield range or higher, dividend growth is harder to find. But there are exceptions, and I think some of the best exceptions are listed here. (I list my favorites in bold.)
One final point worth mentioning is the importance of dividend growth in the current inflationary environment. Owning stocks with high yields but static dividends is akin to owning traditional bonds — the cash flow has no inflation protection. However, much like floating-rate or inflation-protected bonds, high-yielding stocks with rising dividend streams provide some protection against inflation.
Here are five stocks from different industries that would comprise a diversified “44 Portfolio”:
■ AbbVie (ABBV) is a major pharmaceutical company. The firm’s leading drug is Humira, which is one of the biggest-selling drugs of all time. The risk of owning AbbVie is that the company turns out to be a one-trick pony. Humiragoes off patent in 2023. The good news is that the company has been bringing along other medicines, such as
Skyrizi and Rinvoq, to help offset the inevitable decline in Humiraonce it goes off patent. The stock is discounting some of the challenges; these shares trade at a 20% discount to their 52-week high.
However, yielding 4% and with 5-year dividend growth of 17%, AbbVie should continue to generate a healthy and rising cash-flow stream for investors. Minimum initial investment in the company’s direct-purchase plan is $250.
■ Devon Energy (DVN) is a cash-flow monster right now. The company is paying both a fixed quarterly dividend as well as variable dividends based on the company’s excess cash flows.
Since cash flows have been surging this year, the variable dividend has been rising dramatically. Indeed, Devon’s dividend in the latest quarter totaled $1.55 per share, a 22% increase from the previous quarter.
To be sure, the biggest chunk of the dividend is the variable part, and that will change over time depending on cash flows. Nevertheless, the outlook for this oil and gas producer looks solid, and I expect strong cash flows to continue to accrue to shareholders.
Energy stocks will show above-average volatility, but investors should have exposure to the group, and Devon is a solid choice. The company’s direct-purchase plan has a minimum initial investment of $25.
■ I’m starting to warm toward financials, and Huntington Bancshares (HBAN) provides the “44 Portfolio” with exposure to the group. Interest rates have started to rise again, which should help banks’ net interest margins. And the economy is showing signs of avoiding a big decline, which is good news for loan demand and credit quality.
Huntington sports strong across-the-board Quadrix scores. Per-share profits should grow for 2022 overall, and further gains are expected in 2023. The stock has come off its lows and trades at just nine times 2023 earnings estimates.
Yielding 4.5% and with a growing dividend stream, Huntington should provide nice returns for shareholders. The company’s direct-stock purchase plan has a minimum initial investment of $250.
■ OGE Energy (OGE) provides utility services in Oklahoma and Arkansas. Utility stocks typically have higher-than-average dividend yields but relatively modest dividend growth. OGE’s five-year annualized dividend growth of 6% has been a big help in offsetting the impact of inflation.
The stock has had a good showing over the last year, rising 17% versus a 7% decline in the S&P 500. While it is hard to argue that utility stocks are cheap, the group should continue to find support from income-hungry and safety-conscious investors. OGE’s direct-purchase plan has a minimum initial investment of $250.
■ Philip Morris (PM) may be my favorite stock on this list. The company continues to put up numbers exceeding Wall Street’s estimates, all the while successfully pivoting its business to a “smoke-free” future. The firm hopes to have the majority of revenues coming from smoke-free products by 2025.
To that end, the company is planning to acquire Swedish Match, the firm behind the Zynnicotine-pouch brand. Zynis the U.S. market leader in this category. Acquiring Swedish Match would give Philip Morris a stronghold in the U.S. market for smoke-free products.
The deal is meeting some resistance from certain Swedish Match shareholders, and it is possible Philip Morris will have to boost its offer to close the deal. However, if successful, the merger would be a big plus for the company’s smoke-free aspirations.
I view Philip Morris akin to a bond yielding 5% — a fairly stable investment with not much downside, perhaps to the high $80s — with an upside kicker in the form of dividend growth and appreciation. Please note the company’s direct-purchase plan has a minimum initial investment of $500.
