If you like disciplined long-term total returns and compound growth (i.e. making money) through a combination of healthy dividend growth and long-term share price appreciation—this list may be for you. These aren’t the biggest yielding stocks, and they’re not the most rapidly growing business. But these are healthy, growing, blue chip companies, that can help a lot of people sleep well at night through a combination of impressive dividend growth and powerful share price appreciation potential (i.e. they’re trading at attractively discounted prices relative to their long-term value).
As a reminder, you can access our entire Income Equity Portfolio update for May (including these top 10 dividend stocks) in this portfolio tracker sheet (which also includes a variety of additional important portfolio holding metrics). And with that backdrop in mind, let’s get into the list…
Business Development Companies (BDCs):
Four big-yield BDCs have made it collectively, as a group, into the #10 spot in the ranking. As many of you are aware, BDCs provide capital (mainly loans, but sometimes equity) to smaller (middle market) companies, and they don’t pay corporate income tax as long as they payout the majority of their income as dividends to shareholders. We believe BDCs are particularly attractive right now for two reasons. First, they’re not subject to the same strict regulatory capital requirements of traditional banks (this creates risks and opportunities, especially as traditional banks have been facing mounting challenges this year). Second, select BDCs will benefit from the fact that interest rates have been increased significantly this year (specifically, BDCs will benefit from higher net interest margins on the rates they loan money at versus their cost of capital).
10. Ares Capital (ARCC), Yield: 10.5%
Not new to the Income Equity Portfolio, but new to the Top 10 list is Ares Capital Management. ARCC is the largest publicly-traded BDC in the US. It has a large well-diversified portfolio of investments (mainly loans to businesses in need) across market sectors. It also has an investment grade credit rating and a well run business. We’ve previously written about ARCC in great detail here.
Ares announced quarterly earnings at the end of April, and the results were solid. In particular, we were concerned as interest rates rise (and the economy heads towards recession) that too many of Ares loans would start going bad. However, Ares reassured its loan portfolio is in good share and it has plenty of capital to weather the storm. We own a couple other BDCs in our High Income NOW portfolio (including Main Street Capital and Owl Rock), plus another BDC in our Income Equity Portfolio (Hercules Capital), however Ares is the only one to break into this top 10 list. We currently have a 3.0% position in Ares in the Income Equity Portfolio (and the BDC allocation is actually higher when you include the 3 additional BDCs in the portfolio tracker sheet).
9. Visa (V), Yield: 0.8%
Some investors may be scratching their head wondering how a stock with only a 0.8% dividend yield could make this list. The answer is twofold. One, Visa has an extremely powerful “yield on cost” trajectory. For example, if you bought Visa 10 years ago (when the price was only $45 per share and the dividend was $0.32 per share) you’d have picked up a 0.7% yield. However, Visa now pays a $1.80 in annual dividends (the dividend has grown steadily every year) and your “yield on cost” is now 4.0%. What’s more, the shares are now $229 (that’s a price gain of over 400%). The total return on Visa (price gains plus dividends reinvested) over the last 10 years is 460%! (versus only 203% for the S&P 500). And what’s more, Visa is on track to continue delivering powerful dividend growth and strong price appreciation in the years ahead.
For example, Visa has one of the most impressive net profit margins around, consistently around 50%—wow! That means for every dollar in revenue Visa receives, they earn 50 cents in profit. And that margin is better than really any other large cap blue chip you’re going to find (for comparison, many very well respected companies have net profit margins only in the 5% to 30% range).
Further still, Visa is positioned to keep benefiting as the economy grows, especially in an increasingly cashless society. People are much more comfortable paying online with a credit card today than they were a decade ago, and that bodes well for Visa. Further still, Visa has incredible competive advantages versus peers because of economies of scale (Visa is accepted just about everywhere).
So don’t get discouraged by Visa’s low dividend yield, it is one of the most attractive and powerful dividend-growth stocks around (i.e. it continues to grow revenues at a double digit rate and trades at only 26 times forward earnings—low by Visa standards). We currently own shares of Visa in our Income Equity portfolio, and we have no intention of selling.
8. Accenture (ACN), Yield: 1.7%
Accenture is a global business and technology consulting company with massive competitive advantages stemming from its deep long-standing relationships with almost every large company across the globe (as well as many small companies and governments too). Plus Accenture benefits from an outstanding reputation which allows it to charge premium prices for the services it provides.
With only a 1.7% dividend yield, Accenture is about “total return,” and its steady growing dividend helps demonstrate and instill impressive financial discipline. The shares are down nearly 20% from their 52-week high as the market has sold off and the company has some sensitivity to the overall economy (for example, its beta is around 1.25), but that also supports our belief that these shares are poised to benefit from the market rebound as the economy eventually improves (remember, stocks are forward looking and tend to rebound long before backward looking economic data does).
With double digit revenue growth expected to continue, a double digit net profit margin, and trading at only 23 times forward earnings, this stock has plenty of price appreciation and dividend growth in the years ahead. Long Accenture.
7. Medtronic (MDT), Yield: 3.0%
Medtronic is a medical device company, and its dividend yield currently sits close to all-time highs. It’s paid a dividend for 44 years straight (and increased it in the last nine), but the reason the yield is higher than normal is because the shares are underpriced in our view.
Medtronic’s business has performed relatively poorly in recent years due mainly to a slower than expected (and ongoing) recovery to the pandemic. Specifically, patients delayed procedures during the pandemic, and now that they are resuming there is a shortage of hospital workers. We expect this to change over time, and we expect the share price will rise significantly (as we wrote about in this report). Further, Medtronic was recently upgraded to overweight (on April 24th) at Wells Fargo based on its strong pipeline and attractive valuation.
Trading at under 17 times forward earnings, Medtronic is simply a very attractive long-term dividend growth stock. We own shares, and have no intention of selling anytime soon.
6. Royce Value Trust (RVT), Yield: 9.8%
5. Royce Micro-Cap Trust (RMT), Yield: 11.3%
Coming in at numbers 6 and 5 on our list are two small cap stock funds from Royce Investment Partners. These funds each own a widely diversified portfolio of small cap stocks, and Royce has a long history of outperforming their respective benchmarks. Furthermore, we believe now is a particularly attractive time to invest in small (and micro-cap) stocks from a contrarian standpoint.
In particular, small cap stocks are down a lot relative to the rest of the market (common when fear is higher and the market expects a recession), however small (and micro-cap) stocks tend to rebound much harder than the rest of the market, and they usually begin their rebound before the recession is actually over (remember the stock market is forward-looking, whereas recessionary economic data is backward looking).
Historically, now has been an extremely attractive time to own small and micro-cap stocks, and these funds offer big yields and attractive share price appreciation potential. We’ve left the portfolio weight of each (RVT and RMT) at % 3.0% each, but we’ve bumped them up (together, as a unit) into the top 10. We like and own both. We’ve written about these funds previously, and you can access those reports here and here. Small and micro cap stocks and currently inexpensive and significantly attractive.
4. Phillips 66 (PSX), Yield: 4.5%
Simply put, PSX is a great business with a big healthy growing dividend and trading at an attractive price. Known mainly as a refiner, the company has grown its business in midstream and deserves a higher valuation multiple (midstream businesses generally trade at higher multiples due to their steadier long-term fee based income). It also just increased its quarterly dividend by 8% to $1.05 and repurchased $800 million in shares during the quarter
To put that into perspective, PSX recently announced non-GAAP EPS of $4.21 thereby beating expectations by $0.65. Specifically, the earnings beat was due to much bigger than expected refining earnings (strong market conditions) and from higher midstream and marketing earnings (slightly offset by weaker chemical earnings).
PSX is very profitable and positioned to benefit from higher crude prices going forward, plus benefits significantly from its increased midstream business. At only 5.4x forward EV/EBITDA these shares are attractive for long-term investors seeking growing dividends and share price appreciation. You can read our past PSX reports here.
3. Microsoft (MSFT), Yield: 0.9%
Microsoft is an absolute juggernaut. It delivers both dividend growth (it has a truly impressive long-term “yield on cost” trajectory) and profit growth.
And in February Microsoft announced it would incorporate the new ChatGPT functionality into its Bing search engine and Edge web browser. One analyst (Wells Fargo analyst Michael Turrin) believes this could be the most substantial improvement to “search” in over 20 years (and a threat to Google), and it could add as much as $2 billion to Microsoft’s revenues.
If Microsoft is successful with ChatGPT it will add to its growing success in other categories (like Azure Cloud and Microsoft Office solutions). Currently trading at only 32x forward earnings (and with a 32% profit margin and a double digit revenue growth trajectory), combined with massive economies of scale and competitive advantage, Microsoft is an absolute long-term buy. You can read our previous Microsoft reports here.
2. Apple (AAPL), Yield: 0.6%
A lot of people think of Apple as a growth stock. However, it’s actually more like a money-printing machine, trading at an attractive price, and offering incredible long-term dividend growth (Apple has increased its dividend for 10 years in a row and it’s on a trajectory to continue).
Apple designs, manufactures and markets smartphones (iPhones), personal computers (Macs), tablets (iPads), wearables and accessories (e.g. Beats, Apple Watches, AirPods), and sells a variety of related services (including advertising, AppleCare, cloud services, digital content and payment services). Customers are primarily in the consumer, small and mid-sized business, education, enterprise and government markets.
Apple is unique versus competitors because it designs and develops nearly all of its solutions, including the hardware, operating system and software. Competitors, lead in hardware (such as Samsung mobile devices) or Software (such as Google’s Android operating system), but not both.
Apple is extremely profitable (24% bottom line profit margin), growing at a long-term double digit rate (despite near-term recessionary headwinds which will be temporary), and it trades at only 29 times forward earnings (attractive as compared to its growth and competitive advantages (scale and brand loyalty).
If you are looking for the highest dividend yield—skip Apple. But if you are looking for powerful long-term growth in the dividend and in the share price—Apple is hard to ignore. We wrote about Apple previously here, and we continue to own shares with no intention of selling.
1. Intuit (INTU), Yield: 0.7%
Intuit is the financial platform behind TurboTax, QuickBooks, MailChimp, CreditKarma and Mint. It’s also very profitable (14.2% profit margin), growing rapidly (20% year-over-year) and has huge competitive advantages (stemming from the high switching costs for customers using Intuit products).
Intuit has also increased its dividend for 10 years straight (something we view as a sign of strength and disciplined management). The company’s price-to-earnings (31x forward, non-GAAP) and price-to-sales ratios (8.5x forward) have both come down significantly, and we expect the revenues, profits and share price to all be dramatically higher over the long term (and investors can collect a healthy growing dividend while they wait). We currently have a large position in Intuit, and you can read our previous reports here.
Honorable Mentions:
In addition to the top 10 dividend-stocks described above, we also made several updates to our Income Equity Portfolio yesterday. Specifically, we added shares of big-dividend and value juggernaut, British American Tobacco (BTI), we added more shares of Blue Chip bank State Street (STT) on the recent weakness for the banking industry, we sold British Petroleum (because the regulatory and social pressures on that company are more likely to hurt its long-term performance versus peers) and added more shares of PSX (described above). We also sold our small positions in Dominion Energy (on financial weakness), sold Intel (INTC) (Intel has performed very well following its dividend cut) and we sold Unilever (UL) (to make room for British American Tobacco).
The Bottom Line:
The stocks in this report don’t necessarily offer the highest dividends yields, but they absolutely do offer impressive total return opportunities consisting of a combination of very healthy growing dividends and attractive share prices that can lead to powerful compounding and growth of long-term wealth.