2 Reliable Dividend Stocks Now Offering Excellent Entry Points
Investing.com | Nov 27, 2019 10:53
2019 has proven to be one of the best years in many for dividend stocks, as investors snapped them up on mounting fears of recession. That massive flight to safety pushed the ProShares S&P 500 Dividend Aristocrats ETF (NYSE:NOBL) index up 23% this year.
Can this upward move continue in 2020? Answering that question isn’t easy when there's so much uncertainty about U.S. economic expansion and the risks from the China trade dispute still dominate the headlines — and might very well consume the early part of the coming year.
That said, investing in dividend stocks still remains one of the best ways for investors to create a regular stream of income and wealth. Reliable dividend stocks generally offer higher yields than bonds and provide a hedge in times of extreme market volatility.
To help you start on next year’s buying list, we have selected two stocks that pay growing dividends and whose values look attractive.
h2 1. McDonald’s/h2On the surface, it probably doesn't seem to be a good time to look favorably at McDonald’s Corporation (NYSE:MCD), the largest fast food chain in the world. It sells burgers and sugary drinks that many health-conscious consumers try to avoid — and the stock has plunged in the last couple of months. But there's still enormous value to be had, especially for income investors.
The share price plummet was a response not only to the consumer shift, but also specifically to the fact that the board this month fired CEO Steve Easterbrook for having a consensual affair with an employee. Shareholders certainly aren’t happy to see Easterbrook go, as during his tenure the stock proved a great winning bet.
Indeed, initiatives like all-day breakfast and automated ordering kiosks helped send McDonald’s shares to a total return of nearly 100% since his appointment was announced in January 2015, outpacing peers such as Yum! Brands Inc (NYSE:YUM) and Burger King owner Restaurant Brands International (NYSE:QSR), as well as rapidly growing competitors including Chipotle Mexican Grill Inc (NYSE:CMG) and Shake Shack Inc (NYSE:SHAK).
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MCD stock is down more than 18% since late August after hitting a record high, to close yesterday's session at $194.01. This weakness, in our view, opens a good entry point for income investors who were waiting on the sidelines. The sudden management change is certainly an unwelcome move, but it doesn’t alter the strategic plan the company is working on to fuel growth.
For income investors, the most important factor to look at when picking a dividend stock is stability in income payments. The company has raised its payout each and every year since 1976, when it first started paying dividends. That consistency in dividend growth isn’t in danger despite the recent setback, especially for a company which is producing commendable growth. McDonald’s same-store sales grew 5.9% globally in the third-quarter, above the 5.4% that analysts polled by FactSet were expecting.
After delivering an 8% hike in its payout this year, McDonald's now offers quarterly dividends of $1.25 per share. That translates to an annual dividend yield of 2.59% at the current share price. Of note, this was the company’s 43rd consecutive annual dividend hike.
h2 2. Johnson & Johnson/h2We believe 2020 will be a good year to buy Johnson & Johnson (NYSE:JNJ) shares, the world’s largest maker of both consumer and pharmaceutical health care products.
The company lost its charm somewhat last year as investors focused on uncertainties related to liabilities from thousands of lawsuits targeting all sides of its business. The stock remained under pressure throughout this year amid litigation brought by nearly 12,000 plaintiffs over the company’s baby powder and other talc products. The complainants allege that asbestos in those products caused them to get ovarian cancer.
Shares of J&J (NYSE:JNJ) are down about 7% from their highs this year, closing at $137.17 yesterday, as investors avoid the stock due to concerns about the liability costs. According to Chris Schott, an analyst at JPMorgan Chase & Co., these liabilities could touch $20 billion and the company has already been discounted in value to reflect that exposure.
But these short-term troubles don’t negate the fact that the drugmaker is still bringing in a lot of cash which means its ability to reward income investors remains intact. For the third-quarter, Johnson &Johnson reported that sales rose to $20.7 billion. It also increased its full-year sales and EPS guidance as a result of this strong performance.
We believe Johnson & Johnson will slowly overcome the litigation challenges and could prove a good bet for patient investors whose focus is earning steadily growing dividends. As mentioned earlier, the company has an excellent moat and stellar history of raising its payout for 55 years in a row. It currently pays $0.95 a share quarterly, which has grown 7% per year over the past five years, for an annual yield of 3.80%.
Bottom Line
With their earning power remaining strong, the current weakness in both MCD and J&J (NYSE:JNJ) shares make them good candidates to add to your income portfolio in 2020. They are well-managed, global companies and both have the means and strength to emerge resilient from their current challenges.
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