The S&P 500 has gained 8.6% from its intraday low of 2083.79 on Nov. 4, and the Dow Jones Industrial Average is within spitting distance of 20,000. So how should investors prepare their portfolios for 2017 and beyond?
Despite the bullish market environment, there are still high-quality dividend growth stocks available at fair or better prices. Today we'll look at my 10 favorite dividend stocks that investors should consider holding over the next several years.
Many of these stocks are dividend aristocrats. This is an elite group of just 50 stocks that each have 25-plus years of consecutive annual dividend increases. You can see the full list of dividend aristocrats here.
Keep reading this article to see the top 10 best dividend stocks to buy now for 2017.
10. Flowers Foods (FLO)
Flowers Foods has seen its price increase 22% in the last month, but even so, it's a great investment for the new year.
Flowers Foods share price plunged back in August. The company was facing potentially serious litigation. Specifically, some of the company's contract drivers claimed they should have been classified as employees. Litigation fear caused the stock price to plunge from more than $17 to less than $15. As is often the case, the market overreacted.
Flowers Foods settled the litigation by making tweaks to its contractor agreement for $9 million. This is peanuts for a company that has generated more than $180 million in net income in the last 12 months.
Flowers Foods is extremely stable. The company has paid steady or increasing dividends for 29 consecutive years. It has increased its dividend each year for the past 10 years, which makes it a dividend achiever. You can see all 273 dividend achievers here.
In addition, Flowers Foods has a 3.3% dividend yield. The company's yield should appeal to investors looking for stable, growing, above-average dividends.
Flowers Foods is the second largest bakery in the U.S. The company operates in a slow-changing industry.
Flowers Foods was founded in 1919. Despite being an established business, Flowers Foods is still exhibiting solid growth over full economic cycles. The company has compounded its earnings per share at 12.2% a year over the last decade.
Flowers Foods growth comes from slowly expanding its geographic presence across the U.S., and from efficiency gains. The company is currently focusing on increasing margins by reducing costs through its "Project Centennial." This bodes well for investors going into 2017.
9. Becton, Dickinson and Company (BDX)
Becton, Dickinson is the largest medical instruments and supply business publicly traded in the U.S., based on its $35.62 billion market cap.
The company's 1.8% dividend yield might not stand out for dividend investors. And that's a shame, because Becton, Dickinson has much to offer potential investors in the way of total returns.
BD has a 118-year operating history. The company is truly global, with 40,000 employees operating in 190 countries around the world.
BD operates in two large segments: BD Medical, which accounts for about 70% of sales; and BD Life Sciences, which accounts for about 30% of sales.
BD really gets interesting when you look at its growth. The company increased its dividend 11% in November. Adjusted earnings per share grew 20% in fiscal 2016, which ended on Sept. 30. On a currency-neutral basis, adjusted EPS grew 29%.
This is excellent growth for any business. It's even more impressive when you consider Becton, Dickinson's size and operating history.
Strong growth was driven by integrating the CareFusion acquisition and eliminating duplicate costs from that acquisition. Earnings per share have grown at 10% a year over the last decade for BD. Dividends have grown at 12% a year over the same period.
I expect BD to grow its EPS at around 10% a year going forward as well. The company has a low dividend payout ratio of just 31%. This means dividends should grow by at least 10% a year over the next several years. It's very likely that they could grow at a faster clip than that.
Becton, Dickinson is currently trading at a price-to-earnings ratio of 19 using adjusted earnings. The company appears to be a bit undervalued for a high-quality business with a long history of stable growth.
8. Medtronic (MDT)
Medtronic shares have declined 18% over the last quarter. Price declines can create opportunities for contrarian investors to buy into great businesses at bargain prices.
And Medtronic is certainly a great business.
The company has increased its dividend payments every year for 38 consecutive years. Medtronic has grown its earnings per share at 9% a year over the last decade. Dividends have grown at a healthy 15% a year over the same time period.
Strong growth is not relegated to history for Medtronic. The company saw adjusted EPS grow 15% in its most recent quarter, on a currency-adjusted basis. And strong growth should continue as the company releases several new products in 2017.
Medtronic currently has a payout ratio of 38%. There's still plenty of room for the company to grow dividends ahead of earnings per share.
Medtronic is a large global medical devices business. The company was founded in 1949. Today, Medtronic has a market cap of nearly $98.79 billion. Medtronic employees 88,000 people in 160 different countries.
The company embraced its global nature in 2015 by relocating to Ireland. The relocation was accomplished by acquiring Covidien. The move reduced Medtronic's tax burden, a plus for shareholders.
Medtronic is currently trading for a price-to-earnings ratio of just 15.9 using adjusted earnings. The company appears undervalued relative to its strong historical growth and track record of shareholder friendliness.
Whenever a company offers investors a mix of a reasonable valuation, a shareholder-friendly management, and double-digit growth prospects, it is likely to produce superior results. This will be as true in 2017 as it has been in other years.
7. Disney (DIS)
Disney is one of the largest entertainment companies in the world based on its $166.91 billion market cap.
The company has built a truly enviable collection of entertainment brands. Disney is far more than just Mickey Mouse... The company owns (among other brands): the Star Wars franchise, Marvel, ESPN, ABC, A&E, Touchstone and Pixar.
Disney's strong brands have translated into excellent results for shareholders. The company has grown EPS at 14% a year over the last decade. Dividends have grown at 18% a year over the same time period.
Like Medtronic & BD, Disney has a low payout ratio (26%). The company's dividend yield is just 1.5%. With such a low payout ratio, it is likely that Disney will continue to grow dividends above the (already fast) pace of its EPS growth. A 1.5% yield may not be much to write home about today, but that same 1.5% yield becomes a 6.0% yield on cost in a decade (growing at 15% a year).
What makes Disney's rapid growth even more valuable is that it is not based on a technological edge. It's a result of having brands people love. This gives Disney a durable and sustainable competitive advantage.
Normally, investors must pay a high price for growth. That isn't the case with Disney. The stocks is currently trading at a P/E of 18.5. This is significantly less than the S&P 500's average P/E of 26.0.
Disney has better growth and safety metrics than the "average" S&P 500 stock, yet it trades for a discount to the market. This makes Disney a prime pick for outperformance in 2017 and beyond.
6. V.F. (VFC)
V.F. Corp. (referred to hereafter as VF) is one of the largest clothing companies in the world, based on its $21.95 billion market cap.
VF has not taken part in the stock market rally this year. In fact, the company's share price has declined 14% so far in 2016. That's actually good news, because it gives investors a chance to load up on this high-quality business.
The clothing industry is notoriously fickle. Fashions change rapidly. This is exemplified by the high number of bankruptcies the clothing industry faces. Simply put, it's hard to keep up with changing trends.
But VF has a solution. That much is clear; the company was founded in 1899 and has paid increasing dividends for 43 consecutive years. VF is not susceptible to the fickle whims of the fashion industry.
The company has accomplished this stability by focusing on iconic, slow changing brands. In total, the company has five brands that each generate more than $1 billion a year in sales. These are household clothing brands you most likely know: The North Face, Van's, Timberland, Wrangler and Lee.
The newest of these brands (Timberland) was founded 43 years ago. The company's large brands (with the possible exception of Van's) don't change often. Innovation in the blue jean category hasn't exactly been as robust as in the tech industry, as an example. The same can be said for The North Face and Timberland brands.
What makes VF a compelling investment for 2017 and beyond is the company's mix of stability, yield, growth and valuation.
VF stock has a 3.2% dividend yield. This is more than 50% greater than the S&P 500's 2.0% dividend yield. The company has compounded EPS and dividends at 11% and 15% a year over the last decade, respectively. And best of all, the stock trades for a reasonable P/E of 18.5.
5. Boeing (BA)
Boeing is now 100 years old. The company was founded in 1916 and now has a market cap of $97.61 billion.
Boeing stock has taken flight, gaining 20% over the last quarter. But the company still has room to run.
Boeing stock is by no means expensive at current prices. The stock offers investors a robust 3.6% dividend yield, well ahead of the S&P 500's 2.0% dividend yield.
And, Boeing shares trade for an adjusted P/E ratio of 16.3. That's a reasonable price to pay for a business that has grown EPS at 12% over the last decade, and dividends at 13% over the same period.
For comparison, Boeing's 10-year historical average P/E is 18.7. The company's stock still appears to be undervalued, even after its recent run-up.
Despite being in an industry that is prone to weakness during recessions, Boeing has delivered very consistent dividends. The company has not reduced its dividend payments in 46 years.
While Boeing is certainly not recession resistant, the company did remain profitable throughout the Great Recession.
Going forward, I expect Boeing to generate 10%-plus growth in EPS. This will come from a mix of share repurchases, efficiency improvements and organic growth. Boeing has reduced its share count by 4% a year on average from 2012 through 2016.
When a management pays both a high dividend yield and aggressively repurchases shares, shareholders are likely to come out well. Boeing's management is very shareholder friendly.
Boeing is a high-quality blue-chip dividend stock that is poised to continue to perform well in 2017.
4. Abbott Labs (ABT)
Abbott Labs is headquartered in Chicago. Don't let its U.S. headquarters throw you off; Abbott is one of the most international businesses around.
The company generates 50% of its revenue in emerging markets. Another 20% of revenue comes from international developed markets. Abbott Lab's management is committed to focusing on faster growing emerging markets to spur growth.
And the strategy continues to pay dividends.
Abbott Labs realized 9.3% adjusted EPS growth in its most recent quarter. Revenue grew 4.0% vs. the same quarter a year ago. Growth is nothing new for the company. Abbott has increased its dividend payments for 45 consecutive years.
Despite continued growth, Abbott Labs stock has declined 13% this year-to-date, while the S&P 500 is up 13% over the same time period.
Abbott Labs lagging stock price is a primarily a result of its pending acquisition of Alere ALR for $5.8 billion. Abbott Lab's management is attempting to terminate the deal - though it's difficult to tell if the deal is legally allowed to be terminated at this point. Here's what the company's management said about the Alere deal.
"Alere is no longer the company Abbott agreed to buy 10 months ago. These numerous negative developments are unprecedented and are not isolated incidents brought on by chance. We have attempted to secure details and information to assess these issues for months, and Alere has blocked every attempt. This damage to Alere's business can only be the result of a systemic failure of internal controls, which combined with the lack of transparency, led us to filing this complaint."
The 'negative developments' referred to are the government eliminating billing privileges with one of Alere's departments, criminal subpoenas, and a 5 month delay on Alere's 10k being issued.
There's no question, Alere is not the company Abbott Labs thought it was. But, Abbott Labs stock price decline has caused $8.39 billion in market cap to erode from Abbott. The Alere deal is for 'just' $5.8 billion - and there will be some value to reclaim by Abbott if the deal does go through.
Abbott's recent price decline makes it a compelling choice for outperformance in 2017.
3. Johnson & Johnson (JNJ)
Johnson & Johnson JNJ is quite possibly the single most stable business in the world. The company has increased its adjusted earnings-per-share every year for 32 consecutive years.
There is no other business in the world (to my knowledge) with a 3+ decade streak of consecutive adjusted earnings-per-share growth.
On top of the company's earnings-per-share streak, it has also paid increasing dividends for over 50 consecutive years in a row. This makes Johnson & Johnson one of just 18 Dividend Kings; stocks with 50+ consecutive years of dividend increases.
Johnson & Johnson is an excellent buy for long-term investors going into 2017. The stock is trading for an adjusted price-to-earnings ratio of 17.5. This is well below the S&P 500's price-to-earnings ratio of 26.
Johnson & Johnson stock also has an above-average 2.8% dividend yield. The dividend is secured by a reasonable payout ratio of 49%.
The company has grown earnings-per-share at a mediocre 4.6% a year over the last decade. Dividends grew at 8.7% a year over the same time period.
Going forward, Johnson & Johnson is expected to grow its earnings-per-share at around 8% a year. This growth combined with the company's 2.8% dividend yield gives investors an expected total return of over 10% a year.
The appeal of investing in Johnson & Johnson is its mix of current income, growth, and stability. There are few (if any) stocks that can match the safety of Johnson & Johnson. The company makes an excellent long-term core holding for a dividend growth portfolio.
2. Cardinal Health (CAH)
Cardinal Health CAH stock has declined 17% this year while the S&P 500 has gained in double digits. This makes Cardinal Health stock ripe for a rebound year in 2017.
Cardinal Health is one of the 3 large drug distributors in the U.S. (McKesson MCK and AmerisourceBergen ABC are the others).
Together, these 3 companies have a combined 85% market share in the U.S. pharmaceutical distribution industry. They effectively form an oligopoly in this low margin industry.
Cardinal Health serves over 25,000 U.S. pharmacies and provides goods to more than 70% of U.S. hospitals. It is also a top 10 medical distributor in China's rapidly growing health care industry.
The drug distribution industry has unusually low margins. Cardinal Health has a gross margin of just 5.2%. Cardinal Health and its two largest competitors operate with tremendous scale. Smaller businesses cannot compete in this price competitive industry. This creates high barriers to entry and a strong competitive advantage for Cardinal Health.
What's more, distributing pharmaceutical products is a growth business. Prescription rates have been steadily increasing in the United States for decades. This trend is unlikely to reverse. On top of this, an aging population means even greater prescription use. As people age, they tend to use more prescriptions.
Cardinal Health has compounded its dividends at 16% a year over the last decade. The company's management is aiming for 10% to 15% earnings-per-share growth over the next several years. Even at the low end of this range, Cardinal Health is poised for strong growth.
The company's stock also has a solid-if-unspectacular dividend yield of 2.5%. The company's strong growth prospects do not come with a high price tag. Cardinal Health is currently trading for an adjusted price-to-earnings ratio of just 14.
1. AbbVie (ABBV)
The top ranked dividend stock heading into 2017 using The 8 Rules of Dividend Investing is AbbVie ABBV.
AbbVie was created in 2013 when it was spun off from fellow Top 10 dividend stock Abbott Laboratories.
What immediately stands out about AbbVie are its compelling investment metrics:
- 2% dividend yield
- Reasonable 54% payout ratio
- Adjusted price-to-earnings ratio of 13.0
When you dig deeper, the stock really shines. The company is expecting 12% earnings-per-share growth in fiscal 2016. It also hiked its dividend 12% in October.
AbbVie's management is not expecting growth to slow. The company's management believes it can grow earnings-per-share at around 14% a year going forward. This is excellent growth.
You may be wondering why a company with strong growth prospects and a high yield would trade for such a low price-to-earnings ratio in today's low interest rate environment.
The answer comes down to 1 word: Patents.
AbbVie generates around 60% of its revenue from 1 drug - Humira. The company's extensive patent portfolio on Humira will begin to expire at the end of 2016. Humira's management plans to 'vigorously defend' its Humira patents. In fact, Humira revenue is expected to slowly grow over the next several years. Fears about the Humira 'patent cliff' are overblows.
AbbVie expects an additional $25 to $30 billion in revenue from other late stage development drugs from now through 2020. The company has excellent growth potential.
AbbVie's mix of an especially low price-to-earnings ratio, strong double-digit growth prospects, and a 4%+ yield make it my top choice for outperformance heading into 2017.