By Lawrence C. Strauss
Although it's entirely possible to pick good dividend stocks on your own, it always pays to keep an eye on what the pros are doing. Barron's recently checked in with three good ones.
"It's been a challenging market for dividend investing," says one of those managers, Peter Santoro, lead manager of the Invesco Diversified Dividend fund. "People forget the importance of dividends when the market is so strong."
While looking for attractive dividends, Santoro leans toward stocks he thinks can also notch price gains. But many dividend stocks have been trailing the market.
The S&P 500, helped by strong showings in technology, communications services, and a few other sectors, has returned some 25% over the past year, including dividends. That's well ahead of the 7% result for the ProShares S&P 500 Dividend Aristocrats exchange-traded fund, a group of companies considered a proxy for consistent dividend growers.
One of Santoro's holdings is Walmart, which is also a dividend aristocrat, having increased its annual payout for 51 straight years. The retailer has a strong balance sheet, "very sustainable cash flow," says Santoro, and "the ability to balance long-term investments with near-term returns."
The stock yields 1.4%, in line with the S&P 500's average, but Santoro expects the company to keep growing its payout with the help of strong cash flow. In February, Walmart announced a 9% dividend increase, its largest in more than a decade.
Another of Santoro's holdings is big pharma Merck, which yields 2.4%. He cites Merck's Keytruda, a cancer drug that generated $25 billion in sales last year, as an important foundation for the payout. Keytruda's patent protections will begin expiring in 2028, but the drugmaker's "late-stage pipeline looks increasingly well positioned to mitigate the eventual patent loss on Keytruda," says a research note from Morningstar's Damien Conover.
Peter Fisher, portfolio manager of the Vanguard Dividend Growth fund, likes companies that have the financial wherewithal to invest in their own businesses to spur growth and to responsibly return capital to shareholders, including dividends.
That includes McDonald's, the global fast-food chain. The stock yields 2.4%. The company pays a quarterly disbursement of $1.67 a share, up about 10% from its previous level. " McDonald's has a long history of growing its business and investing to make its business more valuable every day -- and also a long history of getting excess cash back to us in the form of a dividend," says Fisher.
His other holdings include Diageo, the beverage company whose brands include Smirnoff vodka and Johnnie Walker Black whisky, and TJX Cos., parent of discount retailer T.J. Maxx. Their stocks yield 2.9% and 1.6%, respectively.
Grace Lee, lead manager of the Columbia Dividend Opportunity fund, says there's a wide spectrum of dividend stocks, from tech companies yielding less than 1% to high-yielding names like AT&T and Philip Morris International at 6.6% and 5.5%, respectively.
"You really have to figure out where you want to play and what your ultimate goal is," says Lee, whose fund combines higher yields with capital appreciation.
Her holdings include Citigroup, which yields 3.4% -- a lot higher than around 2.4% for JPMorgan Chase and Wells Fargo. "There's still a lot of value to be had there," Lee says, adding that Citi's higher yield points to a "lower valuation and potentially greater price appreciation" for that stock. Other holdings in the fund include Darden Restaurants, which yields 3.4%, and United Parcel Service at 4.4%.
One avenue of growth for UPS is healthcare, she says: "It's a much more complex supply chain, and I think that's something they are pretty well suited for."
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May 03, 2024 21:30 ET (01:30 GMT)
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