Dividend investors often look for stocks based on yield. Sometimes that can make you miss out on great investments simply because they don't meet a minimum threshold. And if you skip right past the best companies, that can hurt your returns.
So we decided it would be well worth the effort to "lower" the bar for a change and find some of the best dividend stocks with yields around 2%. While a 2% yield won't make anyone rich (it will barely cover inflation), screening for dividend stocks at this starting point will help you find some of the best companies you can buy, many of which you might miss out on completely if you only look for a higher yield.
Case in point: Three Motley Fool investors identified healthcare giant Johnson & Johnson (NYSE: JNJ), resurgent big pharma Bristol-Myers Squibb Co. (NYSE: BMY), and stalwart steelmaker Nucor Corporation (NYSE: NUE) as top dividend stocks for investors to buy. Keep reading to learn why you can look beyond the yield, and count on these three top dividend stocks to help grow your personal wealth.
Stretching for high yield might make you miss better investments. Image source: Getty Images.
A stalwart that doesn't rely on brand power alone
Brian Stoffel (Johnson & Johnson): At an investment conference in Vancouver last month, former hedge fund partner Mike Alkin argued that many consumer staple companies -- particularly those that relied on brand strength for pricing power -- were in for trouble. The combination of an aging baby boomer population that will be spending less in retirement, combined with millennials who have absolutely no brand allegiance whatsoever, will change the landscape considerably.
That's why, despite the bevy of solid dividend payers in the consumer staple industry, I think Johnson & Johnson -- and its 2.5% dividend yield -- is one of the most solid picks today. While the company's consumer division relies on the strength of brands like Band-Aids and Visine, it is also the smallest of the company's three divisions.
Last quarter, medical devices made up 34% of all sales. Most of these devices are used in surgical procedures, and have relatively high switching costs -- as hospitals that order the consumables for these devices have invested large up-front sums for the devices, as well as time doctors have devoted to learning how to use them.
And the company's pharmaceutical division has performed well, bringing in 49% of sales and growing by 18% during the third fiscal quarter. Oncology drugs in particular -- like Zytiga, Imbruvica, and Darzalex -- showed strength, showing 40% growth. While the moat around these products -- buffered by patents -- isn't the strongest, the company has the resources to continually invest in R&D in hopes of finding more breakthrough drugs going forward.
When you combine those aspects plus the fact that the company only used up 48% of its $18.5 billion in free cash flow over the past 12 months to pay its dividend, as well as the fact that it trades for less than 20 times that cash flow figure, and I think you have the type of dividend stock worth owning for the long run.
On the upswing
George Budwell (Bristol-Myers Squibb): Although Bristol-Myers Squibb's dividend yield of 2.32% is slightly below average for its peer group, the company's growth prospects and rising free cash flows should transform it into a top income stock over the course of the next decade. Therefore, this big pharma stock might be a worthwhile buy right now for investors on the hunt for sustainable sources of passive income.
Turning to the specifics, Bristol now has two legitimate franchise-level drugs in its arsenal with the immuno-oncology megablockbuster Opdivo, and the blood thinner behemoth, Eliquis, that it co-markets with Pfizer. Moreover, the drugmaker's recent licensing deal with Nektar Therapeutics for its experimental add-on drug, NKTR-214, to Opdivo should eventually open up a sizable commercial opportunity for its oncology franchise -- that is, cancer patients who do not overly express the PD-L1 protein.
Bristol also sports a handful of additional high-growth products outside of Opdivo and Eliquis -- such as the cancer medicines Sprycel and Yervoy. The company therefore isn't overly reliant on any single drug to drive growth like some of its closest peers.
Summing up, Bristol's sales are forecast to rise by a healthy 8.5% next year, thanks to its overall well-rounded product portfolio. Perhaps the best part for income investors, though, is that the company's free cash flows should continue to march higher as well. So, barring any major acquisitions that would require a drastic change in capital allocation, Bristol's dividend appears to be a safe bet going forward.
A rare steelmaker worth owning for the long term
Jason Hall (Nucor Corporation): Cyclical shifts in demand can swing steelmakers from profit to loss quickly, and protracted downturns can take years to recover from. However, Nucor has proven a rarity as a steelmaker worth holding through just about every part of the steel cycle and in most economic environments.
There are two reasons: First, Nucor relies on mini-mills that give it far more flexibility in its operating costs based on its output, while many steelmakers use blast furnaces. The benefit of this operating model is that, while blast furnaces can produce large quantities of steel at lower costs, high fixed expenses make them uncompetitive when demand falls. Nucor may not be as profitable at the peak of demand versus blast furnace-heavy steelmakers, but its ability to be more nimble and avoid huge losses when demand falls more than makes up for that.
Second, this gives management a big advantage. Since it can operate more profitably during downturns, Nucor's balance sheet has been a strength, and management has used this to invest in growth when there are bargains to be found, turning Nucor into the U.S.' biggest steelmaker. All these growth investments are paying off on the bottom line, too, with Nucor having its most profitable year in almost a decade in 2017.
Today, Nucor trades for 16.6 times last year's earnings and 13.6 times 2018 earnings estimates, a reasonable price for this stalwart. With a 45-year streak of consecutive quarterly dividends paid and 35 years of base dividend growth, Nucor is certainly a top dividend stock to consider.
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Brian Stoffel has no position in any of the stocks mentioned. George Budwell has no position in any of the stocks mentioned. Jason Hall owns shares of Nucor. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool recommends Nucor. The Motley Fool has a disclosure policy.