Updated on July 3rd, 2019 by Bob Ciura
The S&P 500 Index currently sits near a record high. And while strong share price gains are a major component of a stock’s total returns, so are dividends.
Investors looking for high-quality dividend stocks should consider companies with high profitability and dividends that are sufficiently covered.
The combination of share price appreciation (through rising earnings-per-share and an expanding valuation multiple) plus dividends can yield excellent long-term returns.
With that in mind, we have compiled a list of the best dividend stocks in the Sure Analysis Research Database. This article analyzes 10 of the highest expected total return securities in our Sure Analysis Research Database with:
We further narrowed the list to the 10 best dividend stocks using a qualitative assessment. We will occasionally remove a stock from the list based on this assessment.
Table Of Contents
The 10 best dividend stocks for July 2019 are listed in order of 5-year expected total returns, from lowest to highest.
- W.W. Grainger, Inc. (GWW)
- A.O. Smith (AOS)
- Southwest Airlines (LUV)
- Caterpillar (CAT)
- Cardinal Health (CAH)
- Eaton Vance (EV)
- Ameriprise Financial (AMP)
- Walgreens Boots Alliance (WBA)
- Bank OZK (OZK)
- Brookfield Asset Management (BAM)
Best Dividend Stock #10: W.W. Grainger, Inc. (GWW)
- Dividend Yield: 2.2%
W.W. Grainger is one of the world’s largest business-to-business distributors of maintenance, repair, and operations (MRO) supplies. The company generates sales of approximately $10 billion per year.
Source: Earnings Presentation
Grainger’s strong business model has allowed the company to increase its dividend for 48 consecutive years, including a 5.9% hike on April 24th. Grainger is on the list of Dividend Aristocrats, an exclusive group of 57 stocks in the S&P 500 Index with at least 25 years of consecutive annual dividend increases.
They are the ‘best of the best’ dividend growth stocks. The Dividend Aristocrats have a long history of outperforming the market.
The requirements to be a Dividend Aristocrat are:
- Be in the S&P 500
- Have 25+ consecutive years of dividend increases
- Meet certain minimum size & liquidity requirements
There are currently 57 Dividend Aristocrats. You can download an Excel spreadsheet of all 57 (with metrics that matter) by clicking the link below:
Grainger is a very shareholder-friendly company. Not only does it have a 2.2% yield and a long history of dividend increases, it also returns cash via share repurchases. In addition to its recent dividend increase, the company authorized a repurchase of up to 5 million of its own shares. Since 2014, Grainger has reduced its number of shares outstanding by more than 15%.
Grainger reported its first quarter earnings results on April 22nd. Revenue of $2.8 billion grew 1.4% compared to the prior year’s quarter. Organic revenues, adjusted for forex rates and days in the quarter, rose by 4.5% year over year, primarily thanks to higher sales volumes. Operating profits increased by 8% year over year, leading to 8% adjusted EPS growth for the quarter.
Grainger’s guidance for 2019 looks promising, as management forecasts a net sales growth rate of 4% to 8.5% for 2019, with earnings-per-share seen in a range of $17.10 to $18.70. At the midpoint of the guidance range, $17.90, Grainger expects EPS growth of 7.2%. We expect Grainger to grow its EPS by 7% per year over the next five years.
Based on its expected EPS for 2019, Grainger stock trades for a P/E ratio of 14.8x. Our fair value estimate for Grainger is a P/E of 18.0x. If the valuation expands to our fair value estimate, shareholders would see a 4% boost to annual returns.
Best Dividend Stock #9: A.O. Smith (AOS)
- Dividend Yield: 1.9%
A.O. Smith is a leading manufacturer of residential and commercial water heaters, boilers and water treatment products. A.O. Smith generates 64% of its sales in North America, 34% in China and the remaining 2% in the rest of the world.
A.O. Smith has raised its dividend for 25 years in a row, which qualifies it as a Dividend Aristocrat. Its long history of dividend growth is the result of a leadership position in its industry and a high historical growth rate.
You can see a video further discussing the company’s dividend below:
The company reported its first quarter earnings results on April 30. Revenue of $748 million declined 5.1% compared to the prior year’s quarter. A.O. Smith grew its revenues by 4% in North America during Q1. However, weakness abroad weighed on the company.
Sales in the rest of the world, including China, fell by 21% compared to the previous year’s quarter. A.O. Smith produced earnings-per-share of $0.53, which represents a decline of 12% compared to the prior year’s quarter.
A.O. Smith has grown its earnings-per-share by 18% annually over the last decade, which is a very attractive growth rate. Such strong earnings growth was due largely to 10% annual sales growth from 2010 to 2018, as the company benefited from the booming housing market in the U.S. and stronger consumer spending.
Performance is even more impressive in China, where sales have grown 21% per year on average during the last decade. The company is poised to keep growing for years in China thanks to the country’s huge population, its robust GDP growth, and a booming middle class.
Such strong growth, as well as aggressive share repurchases, produced an even more impressive earnings growth rate since 2010 of 25% compounded annually.
Source: Investor Presentation
Growth is expected to slow down in 2019, due to the impact of trade conflicts. A.O. Smith guides for sales growth of 2.5%-3.5% during fiscal 2019, despite the revenue decline in the first quarter, and an earnings-per-share growth rate of 4.2% for 2019. Still, the company expects 2019 to be another year of growth.
Stock buybacks will greatly help A.O. Smith reach its target EPS growth this year. On June 3, the company increased its buyback by 50%, adding 3 million shares to its repurchase authorization. Over the long-term, we believe that A.O. Smith can grow its EPS by 9% per year.
Based on annual EPS forecasts of $2.72, A.O. Smith trades for a P/E ratio of 17.3x. We believe that a 20x times earnings multiple would represent a fair valuation for the company’s shares, leading to 2.9% annual returns over the next five years.
Best Dividend Stock #8: Southwest Airlines (LUV)
- Dividend Yield: 1.4%
Southwest Airlines is a leading airline company. Southwest Airlines is the second-largest United States airline based on market capitalization. The company was founded in 1967 and now carries more than 120 million people annually. Revenue should exceed $23 billion this year and the stock trades with a current market capitalization of $28 billion.
Southwest reported first-quarter earnings on 4/25/19 and results were mixed. Revenue was a new record in Q1 at $5.1 billion despite 10,000 flight cancellations due to the Boeing 737 MAX grounding. Growth of 4.1% was largely attributed to operating revenue per available seat mile gains of 2.7%. Passenger yield revenue rose 2.6%, offset slightly by a small decline in load factor to 81%.
Southwest guided for 5.5% to 7.5% operating revenue per available seat mile gains in the second quarter. We expect higher operating and fuel costs will crimp earnings for the rest of the year, which is why we’ve lowered our full-year EPS estimate from $4.80 per share to $4.60 after the first-quarter report.
New routes are an additional growth catalyst for Southwest. For example, Southwest launched service to Hawaii, as scheduled, in March of 2019. The first flights were from Oakland to Honolulu, but other routes have since opened, and more are on the way. Southwest aims to loosen the grip that Hawaiian Airlines has on the lucrative tourism market for the islands with its recent move.
With earnings-per-share declining on an adjusted basis from $0.75 to $0.70 in Q1, and with operating expenses moving against the company, we see earnings-per-share growth as slowing this year. We maintain our forecast for 8% annual EPS growth through 2024.
Southwest stock trades for a 2019 P/E ratio of 11.2x, below our fair value estimate of 14.0x. We believe this to be a fair long-term valuation for a highly profitable company with a dominant position in its industry. Expansion of the P/E ratio could boost Southwest’s annual returns by 4.6% per year over the next five years. Combined with EPS and dividends, total returns are expected to reach 13.9% per year through 2024.
Best Dividend Stock #7: Caterpillar Inc. (CAT)
- Dividend Yield: 3.0%
Caterpillar manufactures heavy machinery used in the construction and mining industries. The company also manufactures ancillary industrial products such as diesel engines and gas turbines. Caterpillar generates annual revenue of $58 billion.
Caterpillar performed very well in 2018. Revenue increased 20% while adjusted earnings-per-share soared 63%. Earnings-per-share of $11.22 in 2018 set an annual record.
Caterpillar continued to perform well to start 2019. In the first quarter, revenue increased 5%, while earnings-per-share increased 19% to $3.25. Earnings-per-share hit a first-quarter record for the company. Sales in Energy & Transportation were flat for the quarter, while Construction Industries reported 3% segment sales growth, and Resource Industries sales increased 18%.
Caterpillar’s most important future growth catalyst is the continued growth of the global economy. Steady GDP growth in the U.S. and around the world will naturally result in higher demand for heavy machinery.
Caterpillar’s services business is a very compelling growth catalyst. Caterpillar expects to double its Machine, Energy & Transportation services sales to about $28 billion by 2026, from about $14 billion in 2016.
Source: Investor Day
Caterpillar’s strong growth has allowed the company to raise its dividend at a high rate over the past several years.
Caterpillar recently increased its quarterly dividend by 20% and also expects to increase the dividend over the next four years by at least a high-single digit percentage rate.
We believe Caterpillar’s dividend is safe.
With a forecasted dividend payout ratio of 29% for 2019, Caterpillar’s dividend is secure barring a deep and protracted recession. Absent a significant economic downturn, Caterpillar stock could generate impressive returns, due to a combination of dividends, earnings growth, and an expanding P/E ratio.
Caterpillar is expected to produce EPS of $12.25 for 2019. The stock has a P/E ratio of 11.1x, which we feel is far too low for a high-quality Dividend Aristocrat. Our fair value estimate is a P/E of 15.0x, meaning an expanding P/E ratio could boost annual returns by 6.2% per year through 2024. Caterpillar has expected EPS growth of 5% per year and a 3% dividend yield, leading to 14.2% annual returns going forward.
Best Dividend Stock #6: Cardinal Health (CAH)
- Dividend Yield: 4.1%
Cardinal Health is one of the “Big 3” drug distribution companies along with McKesson (MKC) and AmerisourceBergen (ABC). Cardinal Health serves over 24,000 United States pharmacies and more than 85% of the country’s hospitals. The company has operations in 46 countries with approximately 50,000 employees. With 32 years of consecutive dividend increases, the company is a member of the Dividend Aristocrats Index.
In early May Cardinal Health released Q3 fiscal year 2019 results for the period ending March 31st, 2019. For the quarter Cardinal Health reported revenue of $35.2 billion, representing a 4.8% increase compared to the $33.6 billion posted in Q3 fiscal year 2018. Adjusted earnings-per-share totaled $1.59 versus $1.39 in the year ago period.
Cardinal Health operates in two segments: pharmaceutical and medical. The pharmaceutical segment makes up the lion’s share of revenues (~89%), but the medical segment remains important due to its higher margins and growth potential. The pharmaceutical segment reported profit of $536 million (a 10% year-over-year decline) on $31.4 billion in revenue. The medical segment generated $155 million in profit (a 22% year-over-year decline) on $3.9 billion in revenue.
Cardinal Health also provided an updated fiscal year 2019 outlook. The company raised its adjusted earnings-per-share guidance for the year to $5.02 to $5.17 (from $4.97 to $5.17 previously). In addition, the company announced a 1% dividend increase to $0.4811 per quarter, and extended its distribution agreements with CVS through 2023.
We expect Cardinal Health to generate adjusted EPS of $5.09 for fiscal 2019. Based on this, the stock has a P/E ratio of 9.3x, well below our fair value P/E estimate of 12.0x. A rising P/E ratio could add 5.2% to Cardinal Health’s annual returns over the next five years. Including the 4.1% dividend yield, Cardinal Health is expected to return 14.3% per year through 2024.
Best Dividend Stock #5: Eaton Vance (EV)
- Dividend Yield: 3.2%
Eaton Vance is an asset management firm with a $4.8 billion market cap. Eaton Vance offers closed-end funds, mutual funds, term trusts, and exchange-traded funds under the NextShares brand. The company ended the most recent quarter with assets under management (AUM) of $445 billion.
The company’s AUM is diversified across various asset classes.
Source: Investor Presentation
In the 2019 first quarter, revenue of $406 million fell 3.3% from the same quarter a year ago. This revenue decline was partially due to declining assets, as consolidated AUM declined by 1%, primarily a reflection of stock market declines in the 2018 fourth quarter. The company also reported lower average management fees. Adjusted earnings-per-share of $0.73 also declined last quarter, by 6% from the $0.78 reported in the same period a year ago.
Eaton Vance’s competitive advantage is its brand reputation in the asset management industry. It has an attractive product lineup and low fees, which allows it to retain client assets even in a highly competitive environment in which many asset managers are slashing fees. Eaton Vance actually saw net inflows of $11.7 billion through the last four quarters.
Eaton Vance has a long history of dividend growth. The company has increased its dividend for 38 consecutive years, including a 13% increase in October 2018. Over that 38-year period, the company increased its dividend by 17% per year on average.
Eaton Vance stock is undervalued. Based on expected EPS of $3.36 for 2019, shares of Eaton Vance trade for a P/E ratio of 12.8x. Our fair value estimate is a P/E of 16x, equal to the 10-year average P/E ratio. Expansion of the valuation multiple to our fair value estimate would boost annual returns by 4.6% per year over the next five years.
Best Dividend Stock #4: Ameriprise Financial (AMP)
- Dividend Yield: 2.7%
Ameriprise Financial has a market capitalization of $20 billion, with nearly 10,000 employees and $900 billion in assets under management. The company’s operating segments include Advice & Wealth Management, Asset Management, Annuities, and Protection (insurance products). The company has annual sales of almost $13 billion.
Ameriprise Financial released financial results for the first quarter on 4/24/2019. The company earned $3.75 per share, which was $0.09 ahead of estimates and a 1.4% improvement from the same quarter a year ago. Revenue grew 0.2% to $3.1 billion, which was $92 million higher than expected.
Ameriprise Financial was able to produce a slight increase in earnings-per-share despite a higher tax rate. The Advice & Wealth Management segment improved 11% despite a slow beginning in trading for January following a volatile end to 2018.
Assets under management increased to $891 billion, but Asset Management operating revenues decreased 11% due to a combination of net outflows, lower average equity markets and unfavorable foreign exchange translation. Still, Ameriprise expects global AUM to grow at a 5% compound annual rate through 2020.
Source: Investor Presentation
Ameriprise Financial repurchased 2.8 million shares at an average price of $127 per share, which appears to be a quality use of capital given the current share price. The company also added $2.5 billion to its repurchase authorization that ends on 3/21/2021. That represents nearly 13% of the current market capitalization.
Ameriprise Financial agreed to sell tis Auto & Home Insurance Business for net proceeds of ~$950 million. This transaction is expected to close in the second half of the year.
Between 2007 and 2017, Ameriprise Financial compounded its earnings-per-share at a rate of approximately 12% per year. Looking ahead, we are forecasting for 8% earnings-per-share growth from this financial conglomerate. Earnings growth will be driven primarily from revenue growth and share repurchases.
Ameriprise stock trades for a P/E ratio of 9.5x, which is significantly below our fair value P/E ratio of 12.5x. Expansion of the P/E ratio could boost annual returns by 5.6% per year through 2024. Lastly, the stock has a current dividend yield of 2.7%, for total expected returns of 16.3% per year over the next five years.
Best Dividend Stock #3: Walgreens Boots Alliance (WBA)
- Dividend Yield: 3.2%
Walgreens Boots Alliance is the leading pharmacy retailer, with over 18,500 stores in 11 countries. It also operates one of the largest global pharmaceutical wholesale and distribution networks in the world, with more than 390 centers that deliver to nearly 230,000 pharmacies, doctors, health centers and hospitals each year.
Walgreens has increased its dividend for over 40 years in a row, making it a member of the Dividend Aristocrats Index.
You can view a longer discussion of Walgreens’ dividend safety in the following video:
In late June, Walgreens reported financial results for its fiscal third quarter. Walgreens’ results continued to show the industry challenges remain intact, but investors were at least relieved that the company was able to beat expectations. Walgreens surpassed analyst expectations for both revenue and adjusted earnings-per-share last quarter, showing signs of stabilization.
Prescriptions increased 2% and revenue increased 1% for the quarter. Retail pharmacy USA sales, which represents Walgreens’ biggest business, increased 3% for the quarter, on an adjusted basis.
Adjusted operating income fell 12% due to lower pharmacy margins, which were caused by reimbursement pressure, and lower front of store sales in the U.S.
Walgreens continues to be challenged by lower reimbursements and weak store traffic, but fortunately the pharmacy business remains healthy. Walgreens grew its retail pharmacy sales by more than 7% last quarter. Prescriptions and pharmacy retail will likely continue to generate growth, thanks to the the aging U.S. population and the corresponding need for health care.
Walgreens also has a plan to revitalize performance in its core retail pharmacy operation, through investments in digital capabilities and a renewed focus on cost efficiency. Walgreens plans to significantly cut costs in order to restore profit growth.
Source: Investor Presentation
While e-commerce retailers are a persistent threat, Walgreens still possesses durable competitive advantages. First, Walgreens has leading market share in pharmacy retail with thousands of store locations that provide convenience to consumers. This brand strength means customers keep coming back to Walgreens, providing the company with stable sales and growth.
Walgreens is also a strong long-term dividend growth stock, because of its recession-resistant business model. Consumers typically cannot forego purchasing medicine and filling prescriptions, even during a recession. Walgreens increased its adjusted earnings-per-share from 2007 through 2010, during the Great Recession.
Walgreens stock trades for a P/E ratio of 9.1x, using 2019 expected EPS of $6.02, which is significantly below our fair value estimate of 13.0x. Expansion of the valuation multiple could fuel 7.4% annual returns, as will expected EPS growth of 6% and the 3.2% dividend yield. Total returns are expected to reach 16.6% per year through 2024.
Best Dividend Stock #2: Bank OZK (OZK)
- Dividend Yield: 3.3%
Bank OZK, previously called Bank of the Ozarks, is a regional bank operating in multiple states including Arkansas, Florida, North Carolina, Texas, Alabama, South Carolina, New York and California. Bank OZK offers traditional banking services including checking, business banking, commercial loans, and mortgages. The stock has a market capitalization of $3.9 billion.
On April 17th, 2019 Bank OZK reported operating results for its 2019 first quarter. For the quarter, total interest income increased 15% year over year. But net income declined 2.2% to $110.7 million, as expenses increased faster than revenue.
Earnings-per-share came in at $0.86, a 2.3% decline compared to $0.88 in the year ago period. Returns on average assets, stockholders’ equity and tangible equity all declined modestly in the 2019 first quarter. Still, total loans increased 5.2% while tangible book value increased 22% to $24.73 per share.
We expect 8% annual earnings growth for the company over the next five years, comprised mainly of loan growth. Growth could be higher if not for the recent turn in Federal Reserve policy. The Fed has suspended interest rate increases, and may lower rates if the U.S. economy slows down. Rising interest rates are a positive catalyst for banks, although the continued growth of the U.S. economy should still provide a supportive environment for growth.
Bank OZK has generated consistent net interest income growth over the past five years. In fact, Bank OZK reported record net interest income in 17 of the past 20 quarters.
Source: Investor Presentation
Bank OZK is an attractive stock for value and income.
First, shares appear to be undervalued. Bank OZK is expected to generate EPS of $3.50 for 2019, equaling a P/E ratio of 8.3x. Our fair value estimate is a P/E ratio of 12.0x, which would result in a 7.7% positive impact to shareholder returns each year.
The stock also has a 3.3% dividend yield, and expected EPS growth of 8% per year, leading to total expected returns of 19.0% per year over the next five years.
In addition, the stock is particularly appealing for dividend growth. Bank OZK has increased its dividend for 36 consecutive quarters, including a recent 4.35% increase.
Best Dividend Stock #1: Brookfield Asset Management (BAM)
- Dividend Yield: 1.3%
Brookfield Asset Management is a leading global alternative asset manager and one of the largest global investors in real assets – which includes real estate, renewable power, infrastructure, and private equity. The company is headquartered in Toronto, Canada and manages a portfolio of public and private investment products for both institutional and retail clients.
It also manages four publicly-traded listed partnerships: Brookfield Property Partners (BPY), Brookfield Infrastructure Partners (BIP), Brookfield Renewable Partners (BEP), and Brookfield Business Partners (BBU). BAM becomes more valuable over time as it increases the earnings from its asset management activities and the value of its invested capital.
Indeed, Brookfield’s strong performance in 2018 indicates its successful investment strategy. They company registered double-digit growth rates across multiple metrics.
Source: Annual Meeting
Brookfield trades with a market capitalization of US$48 billion and is cross-listed on the New York Stock Exchange and the Toronto Stock Exchange.
Brookfield reported Q1 earnings on May 9. In Q1, net income fell 32% to $1.256 billion and funds from operations (FFO) fell 10% to $1.051 billion versus Q1 of 2018. On a per-share basis, net income fell 31% to $0.58 and FFO fell 10% to $1.04. Net income and FFO were negatively impacted by lower fee related earnings and lower realized disposition gains. Greater depreciation and amortization also impacted profits.
Fee related earnings took a hit largely because the company generated outsized performance fees in 2018 thanks to BBU stock and other securities portfolios doing particularly well. Looking at the last twelve months, net income per share was up 41% and FFO per share was essentially unchanged.
In March, Brookfield announced that it expected to acquire 62% Oaktree Capital Management by the end of Q3. Oaktree has a top-notch credit business, and the transaction will broaden Brookfield’s product offering. The combined company will have about $475 billion of assets under management and $2.5 billion of annual fee-related revenues. The transaction is expected to be accretive to Brookfield on a per-share basis.
At the end of Q1, Brookfield had $36 billion in capital available for deployment. The company’s recent growth has been nothing short of remarkable. Here are the company’s compounded rates of growth for various fundamental business metrics since 1999: book value, 12%; FFO per share, 16%; and assets under management, 18%.
Importantly, this growth has been done with very little shareholder dilution. Given the law of large numbers, we used a more conservative FFO growth rate of 12% in our forecast. Brookfield’s growth is likely to be bumpy, so some years may see much higher growth than the target and others, much lower.
In the meantime, Brookfield stock is significantly undervalued. Excluding the outliers of 2012 and 2013, Brookfield stock has traded at an average P/FFO of 11 over the last decade, which is also roughly the median of the valuation range. As a result, our fair price-to-funds-from-operations ratio is 12, which is higher than the average multiple of 11 and even more so than its current multiple of 9.0. Thus, we forecast a 6% tailwind to total returns from multiple expansion.
In addition to the 1.3% current dividend yield, total expected returns over the next five years exceed 19% per year, making Brookfield our top pick among stocks with Dividend Risk scores of A and expected annual returns above 10%.