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This week’s question: What would be your top 5 picks for dividend stocks? — Pedro from Portugal
Dividend stocks present a compelling strategy for investors looking to generate income while benefiting from market appreciation. However, before diving into specific recommendations, it’s essential to note that commentary is limited to stocks within Jim Cramer’s Charitable Trust portfolio, which narrows the potential picks. For those keen on exploring dividend stocks outside this portfolio, assessing the security and sustainability of dividends is crucial.
It is important to avoid chasing high dividend yields indiscriminately. Often, an attractive yield may signal trouble if a company is draining its cash flow to make payments, inhibiting growth opportunities. Monitoring companies that consistently raise their dividend payouts over time could yield better long-term rewards.
As of February 5, the portfolio includes 28 dividend-paying stocks. Here are the stocks listed according to their annual dividend yield, from highest to lowest:
- Best Buy (BBY): 4.39%
- Bristol Myers Squibb (BMY): 4.13%
- Coterra Energy (CTRA): 2.98%
- Constellation Brands (STZ): 2.34%
- Starbucks (SBUX): 2.18%
- BlackRock (BLK): 2.05%
- Honeywell (HON): 2.04%
- Wells Fargo (WFC): 1.99%
- DuPont (DD): 1.97%
- Goldman Sachs (GS): 1.87%
- Abbott Laboratories (ABT): 1.79%
- Texas Roadhouse (TXRH): 1.35%
- Linde (LIN): 1.23%
- TJX Companies (TJX): 1.2%
- Eaton (ETN): 1.19%
- Dover (DOV): 1.01%
- Broadcom (AVGO): 1%
- Disney (DIS): 0.89%
- Microsoft (MSFT): 0.8%
- Eli Lilly (LLY): 0.72%
- Danaher (DHR): 0.51%
- Salesforce (CRM): 0.47%
- Costco (COST): 0.45%
- Apple (AAPL): 0.43%
- Alphabet (GOOGL): 0.42%
- Meta Platforms (META): 0.28%
- GE Healthcare (GEHC): 0.16%
- Nvidia (NVDA): 0.3%
For those focused on income generation, the highest yields in this list warrant attention. However, the real goal for maximizing investment returns should be the total return, which combines both price changes of the stock and dividends received. While the Trust does not reinvest dividends, it is advisable for investors to do so, taking advantage of compound growth.
In the previous 12 months, the S&P 500 saw a 22.8% increase, but when reinvesting dividends, the total return climbed to 24.5%. Over the long term, these differences can significantly impact overall investment performance.
Another crucial factor influencing stock performance is share repurchase programs. For example, Apple’s buyback plan totaling $100 billion translates to a substantial benefit for shareholders, increasing the earnings per share (EPS) and enhancing stock valuation. For investors whose primary need is income, cash dividends remain vital; however, for those committed to long-term investments, overlooking buyback implications could be a missed opportunity.
Considering maximum income from dividends, here’s a selection of stocks currently in the portfolio:
- Best Buy (BBY): 4.39%
- Bristol Myers Squibb (BMY): 4.13%
- Coterra Energy (CTRA): 2.98%
- Starbucks (SBUX): 2.18%
- BlackRock (BLK): 2.05%
While this list presents an attractive snapshot, it’s prudent to remain cautious about specific picks; for instance, Constellation Brands currently holds a rating of 3 due to concerns regarding its growth potential. Therefore, replacing Constellation with BlackRock could enhance the overall portfolio.
A well-diversified selection might consist of:
- Best Buy (BBY) or Starbucks (SBUX)
- Bristol Myers Squibb (BMY)
- Coterra Energy (CTRA)
- BlackRock (BLK)
- Honeywell (HON)
Alternatively, if focusing on high-yield stocks rated 1 in the portfolio, one might consider:
- Bristol-Myers Squibb (BMY)
- BlackRock (BLK)
- Honeywell (HON)
- DuPont (DD)
- Goldman Sachs (GS)
In summary, identifying dividend stocks for income generation requires thorough research beyond just yield figures. Investors should consider total return potential and the reliability of dividend payments. The examples drawn from the current portfolio also highlight the importance of broadening the search to include Dividend Aristocrats and Kings, which are recognized for their long-standing commitment to both paying and increasing dividends.
Alternative investment vehicles, like exchange-traded funds (ETFs) centered around Aristocrats and Kings, can also provide viable options for investors. Understanding these dynamics will arm investors with the tools to refine their dividend stock selections effectively.
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