The 5 Best Dividend Stocks in the S&P 500

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This is a guest contribution by Nick McCullum from Sure Dividend. Sure Dividend uses The 8 Rules of Dividend Investing to systematically identify high-quality dividend-paying stocks trading at fair or better prices suitable for long-term investment. 

The S&P 500 is the most well-known and widely-benchmarked index of U.S. equities. It is known for containing the 500 largest companies in the United States by market capitalization.

The index also has other criteria, including:

  • Universe: All constituents must be U.S. companies.
  • Eligibility Market Cap: Companies with a market capitalization of US$6.1 billion or greater.
  • Public Float: At least 50% of shares outstanding must be available for trading.
  • Financial Viability: Companies must have positive as-reported earnings over the most recent quarter, as well as over the most recent four quarters (summed together).
  • Adequate Liquidity and Reasonable Price: Consists of highly tradable common stocks, with active and deep markets.

We believe that the S&P 500’s breadth and characteristics make it an excellent place to look for compelling investment opportunities.

In today’s article, we’ll explore our five favourite dividend investment opportunities within the S&P 500.

S&P 500 Dividend Stock #5: Invesco Ltd. (IVZ)

Invesco (IVZ) is a diversified asset management firm with a market capitalization of $12 billion. The firm manages equity, fixed income, and alternative strategies for both individuals and institutions. Invesco was founded in 1935 and currently has approximately $950 billion of assets under management.

In late April, Invesco reported (4/26/18) financial results for the first quarter of 2018. Operating revenues increased by 13.6% while operating income rose 24.5% and diluted earnings-per-share expanded by 19.2%. Acquisitions catalyzed much of this growth, specifically the purchase of Guggenheim Investments’ ETF business, which closed on April 6th.

Ex-acquisitions, performance was still strong. Net revenues increased by 10.5%, adjusted operating income increased by 9.5%, and adjusted diluted earnings-per-share increased by 9.8%.

Invesco appears to be a very compelling investment at current prices. The company’s valuation is almost unbelievably low despite strong fundamental performance. Invesco is trading at a price-to-earnings ratio of 9.7 and has traded at an average price-to-earnings ratio of 16.5 over the last decade. We believe that between earnings growth, valuation expansion, and dividend payments, the company is capable of delivering very attractive returns for today’s investors.

S&P 500 Dividend Stock #4: Applied Materials (AMAT)

Applied Materials is a technology corporation that provides equipment and services related to the manufacturing of semiconductors. The company began as a small office unit in 1967 and has since grown to a market capitalization above $50 billion and annual revenues of nearly $18 billion.

Applied Materials is likely the fastest-growing company in this list. In its recent second-quarter earnings release (5/17/18), the company delivered 29% year-on-year revenue growth. Applied Materials is also very shareholder-friendly. The company’s shares outstanding had declined from approximately 4% over the prior year’s period.

Looking ahead, Applied Materials should be able to deliver excellent earnings growth as semiconductor volumes are increasing substantial driven by television and mobile device manufacturing. Moreover, share repurchases should continue at an attractive pace. The company has approximately $6 billion remaining on its existing share repurchase authorization, which is good for approximately 12% of the company’s current market capitalization.

Despite these strong fundamentals, Applied Materials is trading at a very compelling valuation. The stock trades for less than 12 times earnings today. We believe that a fair valuation for Applied Materials is closer to 17 times earnings (in-line with its long-term average). Accordingly, today’s investors should benefit in three ways: from valuation expansion, from business growth, and from the company’s 1.6% dividend yield.

S&P 500 Dividend Stock #3: AT&T Inc. (T)

AT&T (T) is the largest telecommunications company in the United States by market capitalization. The firm’s only competitor of similar size is fellow U.S. telecommunications company Verizon Communications (VZ). AT&T trades with a market capitalization of $200 billion and has increased its dividend for 34 consecutive years, which qualifies it to be a member of the Dividend Aristocrats Index.

In late April, AT&T reported (4/25/18) financial results for the first quarter of 2018. While revenues fell by 3.6%, cost-cutting and share repurchases helped the company’s bottom line to perform better. AT&T’s adjusted earnings-per-share rose by 14.9% in the quarter. Moreover, the telecommunications giant reported an all-time record low for first-quarter churn in postpaid customers. All said, the quarter’s revenue figure disappointed the markets and shares fell following the announcement.

Separately, AT&T’s stock price has fallen as its proposed merger with Time Warner (TWX) works through an antitrust lawsuit from the Department of Justice. The merger is strategically appealing. If complete, the combined company would have over 140 million mobile subscribers and another 45 million video subscribers worldwide. A final decision is expected on June 12th.

Importantly, we believe that AT&T has a compelling investment thesis regardless of the outcome of the Time Warner lawsuit. This is largely due to the company’s appealing valuation. The company reported adjusted earnings-per-share of $3.45 in 2018, which implies a current price-to-earnings ratio of 9.4. AT&T’s average price-to-earnings ratio over the last decade has been 13.4. The company appears significantly undervalued today. We believe that the firm’s future total returns should be strong thanks to valuation expansion, its 6%+ dividend yield, and modest business growth.

S&P 500 Dividend Stock #2: Walgreens Boots Alliance (WBA)

Walgreens Boots Alliance (WBA) is the largest retail pharmacy in both the United States and Europe. Through its flagship Walgreens business and other business ventures, the company has a presence in more than 25 countries and employs more than 385,000 people. In its leading retail pharmacy business, Walgreens operates approximately 13,200 stores in 11 countries.

The company also operates one of the largest global pharmaceutical wholesale and distribution networks, with more than 390 pharmacies that deliver to upwards of 230,000 pharmacies, doctors, health centres, and hospitals each year. Like AT&T, Walgreens is a Dividend Aristocrat. The pharmacy retailer has increased its dividend for 42 consecutive years.

Our most recent insight into Walgreens’ financial performance came in late March, when the firm reported (3/28/18) financial results for its fiscal 2018 second quarter. Sales increased by 12.1% (9.4% on a constant-currency basis) and adjusted diluted earnings-per-share increased by 27.2% (25.7% on a constant-currency basis). The company also hiked its fiscal 2018 financial guidance. The firm expects adjusted earnings-per-share between $5.85 and $6.05.

Still, Walgreens continues to trade at an almost unbelievably low valuation. Using the midpoint ($5.95) of its new fiscal 2018 financial guidance, the firm is currently trading at a price-to-earnings ratio of 10.7. For context, Walgreens’ 10-year average price-to-earnings ratio is 16.7. The firm is tremendously undervalued and we believe that today’s investors will be well-rewarded if the firm’s valuation can move closer to its historical norms.

S&P 500 Dividend Stock #1: Cardinal Health Inc. (CAH)

Cardinal Health (CAH) is one of the “Big 3” U.S. drug distribution companies along with McKesson (MCK) and AmerisourceBergen (ABC). Cardinal Health serves over 24,000 United States pharmacies and more than 85% of the country’s hospitals. Cardinal Health is a global company with operations in over 60 countries and approximately 50,000 employees. The company qualifies to be a Dividend Aristocrat with 32 years of consecutive dividend increases.

In early May, Cardinal Health reported (5/3/18) financial results for the third quarter of fiscal 2018. The company delivered strong revenue growth of 6% over the prior year’s period. Unfortunately, this was unable to translate to solid bottom-line performance. Cardinal Health’s adjusted earnings-per-share declined by 9% year-on -year. The company’s decline in adjusted earnings was caused by a “significant negative change in [its] effective tax rate primarily associated with its Cordis business.” Looking ahead, we believe that Cardinal Health should sort out these tax problems in short order.

In the meanwhile, Cardinal Health’s valuation continues to be compelling. The company is forecasting for adjusted earnings-per-share between $4.85 and $4.95 in fiscal 2018. The midpoint of this guidance band combined with Cardinal Health’s current stock price implies a price-to-earnings ratio of 10.7. We believe that an earnings multiple of around 16 represents fair value for Cardinal Health. Because of the difference between Cardinal Health’s current valuation and its intrinsic value, the firm’s expected total returns are among the highest in our investment universe today. 

Related 5i Research articles from Nick McCullum:

The Power of Investing in Dividend Growth Stocks

Why Dividends Are The Most Stable Form of Total Returns

Why The Canadian Banks Make Great Dividend Stocks

5i readers interested in Nick's newsletter can also try it free here for 7 days and receive $21 off by using the discount code "21off" (5i is not compensated for this endorsement, we simply like the research and think it's of value to 5i readers).

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