Editors' note: Now that the markets have closed after one of the most tumultuous weeks ever on Wall Street, there's something we have to tell you: told ya so.
Wednesday, following four straight days of major indexes trading in the red, before the market opened, TheStreet identified 10 high-quality dividend stocks down 10% or more to scoop up at a discount. Lo and behold, Wednesday was one for the books for the U.S. markets. The Dow closed up 619 points, or 4%; the S&P 500 was up 3.9%; and the Nasdaq Composite Index rose 4.2%. The markets followed up a tour de force Wednesday performance with another huge rally on Thursday. Friday was a flat day of trading. Stock futures were pointing to a lower open for stocks on Monday.
Many of the stocks we picked made huge gains as well. If you had bought one share of each of the companies below, you would have made a 7.38% gain in just two days -- and you'd own a portfolio of high-quality dividend stocks.Read on to see which stocks appreciated the most.
NEW YORK (TheStreet) -- The S&P 500 was down by just under 10% last week on Wednesday, which created opportunities to buy excellent businesses for bargain prices (the S&P 500 finished the week up slightly, but still down 6.6% from its all-time high). It was helpful to remember what legendary investor Warren Buffett once said: "Be greedy when others are fearful and fearful when others are greedy."
This past Wednesday was the time to be greedy and load up on high-quality businesses. The 10 businesses below all have paid steady or increasing dividends for 25 or more years, and all of their stocks declined more than the S&P 500 as of the opening of trading Wednesday morning.
They have since recovered. Below, our analysis of the companies with updated prices and dividend yields. This was one great buying opportunity that was too good to pass up.
Deere (DE) , the world's largest manufacturer of farming equipment, has paid steady or rising dividends for 27 consecutive years, proving over the last several decades that it can maintain or increase its dividend payments even through recessions.
The stock has declined over 15% as of Wednesday morning. It recovered 1.82% from that low as of Friday's close. It was undervalued even before the selloff, largely because its earnings are highly cyclical. When crop prices fall, farmers tend to put off purchases of new equipment, hurting Deere's earnings, which are near lows not seen since 2011.
The stock now has a price-to-earnings ratio of 12.66 and a 2.9% dividend yield. The world's wealthiest investor -- Warren Buffett -- bought into Deere this year, and the stock is trading at its lowest price of the last 12 months.
When Buffett gives a stock his seal of approval, long-term investors should take note. When you can buy the stock at a better price than Buffett himself, you are setting yourself up for potential high total returns.
2. Phillips 66
Since that time, Phillips 66 stock has risen to over $70 from $30. Still, the company is undervalued. The stock had declined 18.1% as of Wednesday morning. It recovered 6.77% since that time and now has a P-E ratio of 9.94 and dividend yield of 2.9%. A regulatory filing Friday said Berkshire Hathaway (BRK.A- Get Report) has accumulated about 58 million shares, which amounts to more than 10% of the Houston company's stock.
Phillips 66 doesn't rely on oil and gas prices as many other large-cap oil companies do. Phillips 66 makes over half of its earnings from its refining segment. Oil needs to be refined regardless of oil prices.
In addition, the company generates another 24% of earnings from its chemicals segment. Oil is one of the primary input costs for the chemical segment. When oil prices fall, chemical segment profits tend to rise.
Phillips 66 is a shareholder-friendly company. It has paid steady or increasing dividends since 1987 counting its history with ConocoPhillips. Phillips 66' management has committed to returning 40% of cash flows to shareholders in the form of share repurchases. The company has repurchased shares while its P-E ratio is depressed -- significantly boosting long-term shareholder value.
The company's earnings per share are expected to increase at a compounded rate of about 5% a year over the next several years. That growth combined with the dividend yield should give investors a total return of over 8% a year. Investors will also likely see gains from an increase in valuation.
Oil giant Chevron (CVX) has paid increasing dividends for 27 consecutive years. It is one of only two companies that have 25-plus consecutive years of dividend increases. The other will be discussed later in this article. Click here to see a list of all 52 Dividend Aristocrats.
Shares of Chevron were down 16% for the week as of Wednesday morning, but recovered 14.73% to close out the week.
Chevron has both upstream and downstream operations. When oil prices fall, upstream profits decline while downstream profits increase. In the company's most recent quarter, the upstream segment was unprofitable because of low oil prices. The downstream segment saw earnings increase, but that didn't fully compensate for the drastic reduction in profits from the upstream business.
The stock now has a P-E of 12.45 and 5.32% dividend yield. Management has made dividend payments a priority.
The company has $12.5 billion in cash and liquid investments on its balance sheet, and is accelerating its divestment plan and reducing capital expenditures to conserve cash. The company pays out around $8 billion a year in dividends and can fully fund its dividend payments with just cash on hand for well over a year. But it won't need to, as cash flows from operations are still well in excess of the amount needed to fund the dividend.
4. Exxon Mobil
Exxon Mobil (XOM) is the other oil company that has increased dividends for at least 25 straight years. The company's stock price has declined about 31% over the last year, up to this past Wednesday, including a 11.8% drop in the first two days of trading last week. Since then, the stock has shot up 9.25%.
With the recovery in price, the stock has a dividend yield of 3.89%, which is the highest yield Exxon has offered in the last decade. There wasn't been a better time in the last decade to buy Exxon's stock than Wednesday morning, when we recommended it.
The company has paid increasing dividends for 33 consecutive years. This is not Exxon's first bout with low oil prices or a potential recession. Every time over the last three decades, the company has increased its dividend through all of these scares.
During the last decade, earnings a share have grown at a compounded rate of 3.4% a year. The company hit its high EPS mark in 2011 during a period of high oil prices.
Oil prices fluctuate. They are low now, which results in lower earnings for Exxon. Few things are certain in finance, but one thing that never changes is fluctuations and reversion to the mean. Oil prices will rise again, and when they do, Exxon shareholders will see large gains from both an increase in the company's P-E ratio and EPS.
Insurer Aflac (AFL) generates 75% of its revenue in Japan, with the remaining 25% coming from the U.S.
Aflac's reliance on Japan has caused investors to worry, resulting in a declining share price. Japan's economy is in trouble with a high debt level. The country has a declining population growth rate and is trying prop up its stagnating economy.
Aflac's stock was down 17.5% as of Wednesday morning last week, but recovered 6.23% since then. What most investors are missing is that Aflac is an exceptionally high-quality insurer. Japan's economy may be in trouble, but Aflac will likely manage to grow despite that obstacle.
Over the last decade, Aflac's operating income has increased 8% a year. Aflac is unlikely to grow as fast over the next decade as it did over the previous decade, but it should still see growth of around 3% to 6% a year. The company is rewarding shareholders in a different way, however.
Aflac plans to repurchase $1.3 billion in common stock this year. The share repurchases will boost Aflac's EPS, and combined with the company's expected earnings growth, should give shareholders a return of 6% to 11.5% a year.
That doesn't include a current dividend yield of 2.66%. All told, Aflac investors should see total returns of between 8.66% and 14.16% a year at current prices.
The stock appears to be deeply undervalued relative to its expected total return. Long-term investos in Aflac could see even higher compound gains if the company's P-E rises.
Take a look at the P-E ratios of Wal-Mart's closest competitors as of Wednesday morning:
- Costco has a P-E ratio of 25.5
- Target (TGT) has a P-E ratio of 15.
- Dollar General (DG) has a P-E ratio of 20.4
- Dollar Tree (DLTR) has a P-E ratio of 28.5
At the time, Wal-Mart's P-E was 13.2, even though it is the industry leader, meaning it was significantly undervalued at the time.
The stock declined 9.1% as of pre-market on Wednesday. It since recovered 2.49% in the following three trading days. The declines make now an historically excellent time to buy Wal-Mart's stock. Wal-Mart is one of Buffett's largest high-dividend stock holdings. The company is also a "Dividend Aristocrat" with over 40 consecutive years of dividend increases. At current prices, the dividend is 2.96%.
Wal-Mart has struggled recently, however. The company is retooling itself for future growth by raising employee wages and investing heavily in e-commerce. In the short run, that is slowing growth. In the long run, Wal-Mart shareholders should benefit from the company's renewed focus on motivating employees and better serving customers both online and in stores.
7. UnitedHealth Group
UnitedHealth Group (UNH) has been the the best investment of current S&P 500 stocks over the last 25 years, generating compound returns of 27.5% a year during that time. The company has also paid steady or increasing dividends for the last 25 years.
Investors seem to have forgotten how rewarding UnitedHealth has been. The company's stock declined 12.3% as of Wednesday morning. It has since bounced back 6.64%.
It's true that United Health is not as undervalued as many of the other stocks in this list, but the stock's decline gives investors an opportunity to pick up shares at a cheaper price.
The stock had a P-E ratio of 17.7 and dividend yield of 1.8%. (Since the chance in price, UnitedHealth now has a P-E of 18.67 and a dividend yield of 1.71%).
Earnings a share have grown at a compounded rate of 9.7% a year over the last 10 years. With health care spending continuing to grow rapidly in the U.S., the above average EPS growth should continue.
Expect UnitedHealth to generate EPS growth of between 8% and 11% a year over the next several years, in line with its more recent historical growth. The growth combined with the dividend yield should give investors total returns of between 9.7% and 12.7% a year.
Industrial-machine maker Dover (DOV) has paid increasing dividends for 59 consecutive years. The streak makes Dover a member of the exclusive "Dividend Kings," a group of 16 stocks that have paid increasing dividends for 50 or more consecutive years. Click here to see all 16 Dividend Kings.
A business must have a strong and durable competitive advantage to pay increasing dividends for more than half-a-century. Dover's competitive advantage comes from its extensive technical knowledge and patent portfolio in several machinery and industrial-goods segments.
Dover has shown solid growth over the last decade, with a compounded EPS growth rate of 9.5% a year. The stock has a dividend yield of 2.78%, and the relatively high dividend yield and solid growth make it likely that investors will see total returns of over 10% a year.
The stock, which fell about 12.5% through Wednesday morning, but recovered 7.55% since then, now has a P-E ratio of 10.5. The stock's decline is likely the result of Dover's exposure to the oil and gas industry. About one-third of the company's earnings typically come from the manufacture of bearings, compressions and lift technology for the energy sector. When oil prices recover, so should Dover's earnings.
Dover may experience EPS declines during recessions and periods of low oil prices, but the company has proven it prioritizes its dividend. Dover's share-price decline over the last week shows that investors are heavily discounting the company's history of consistent dividend growth and focusing only on negative short-term events.
9. Abbott Laboratories
Abbot Laboratories (ABT) sells medical devices, diagnostic equipment, generic drugs and nutrition products.
The company's best-known brands to consumers include Similac, Ensure and Pedialyte. Abbott's diversified health care segments have resulted in consistent growth, and the company has paid increasing dividends for 43 consecutive years.
Abbott's share price declined 14.9% as of Wednesday before trading on fears about a global recession as the company has invested in emerging markets. Since then, the stock is up 7.27%.
Its generic pharmaceuticals segment now generates all of its sales from emerging and developing markets. Over the long run, the strategy should result in faster growth for Abbott, but emerging markets tend to be more prone to the effects of recessions. When the global economy suffers, Abbott's emerging-market sales will likely decline.
Fear of this scenario is what has caused the steep decline in Abbott's share price. But don't be scared by temporary price weakness. Abbott's long-term growth prospects are excellent.
The company is expecting constant-currency earnings-a-share growth of between 13% and 18% in 2015. Growth expectations may decline somewhat because of weakness in the global economy, but Abbott should benefit from the long-term trends of a growing population, growing wealth and greater demand for quality health care in emerging markets.
Abbott now has a dividend yield of 2.09%. The company's long history of paying rising dividends, growth prospects and dividend yield make it a good choice for dividend investors looking for long-term growth.
10. Helmerich & Payne
10. Helmerich & Payne (HP) leases its drilling rigs under long-term contracts to oil and gas companies, primarily in North America. It benefited from the boom in the North American oil industry as from 2005 through 2014, its earnings a share grew at a compounded rate of 22.8% a year.
Oil prices have declined over much of the past year, which has caused oil companies to cut back on drilling, reducing Helmerich & Payne's profits. The company saw that coming, however. Helmerich & Payne includes penalties in its contracts that provide one-time payments when customers terminate early.
All told, Helmerich & Payne's earnings a share are expected to decline to $3 this year from $6.46 last year.
The company pays $2.75 a share annually in dividends and has $7.26 a share in cash on hand. Helmerich & Payne could fund its dividend payments for nearly three years with just its cash on hand. It has paid steady or increasing dividends every year since 1987. Despite low oil prices, it seems unlikely the company will reduce its dividend any time soon.
Helmerich & Payne's stock price has declined over 50% in the last 12 months, which includes the 13% drop in the first two days of trading last week. The stock was deeply undervalued at those prices. Since then, it is up 13.24%.
After a wild week of price action, the company now has a 4.77% dividend yield and a P-E ratio of 10.31. The stock market is offering investors a rare opportunity to buy a shareholder-friendly and industry-leading business for less than 10 times trailing earnings.
When oil prices recover, Helmerich & Payne will likely see both its EPS and its P-E ratio increase, which should result in big gains for shareholders.