Published on August 4th, 2017
This is a guest contribution from Josh Wilson, a Millennial who’s working to grow his portfolio, save for the future, and become a thought leader in the personal finance space through the site Family Faith Finance.
As the stock market continues its relentless climb to record highs, investors grow increasingly wary of its next big move, which, based on typical market cycles, is likely to be down. So, what’s a conservative investor to do?
Equities are a vital part of any long-term investment strategy that seeks to outperform inflation and grow assets for future financial security. The answer lies in high quality dividend stocks. Companies that consistently pay dividends over a long period of time are considered to be more stable, offering investors the benefit of a current return regardless of the direction of its stock.
Generally dividend-paying stocks have performed better than the broad market and the dividends they pay have provided nearly 50% of the total stock market return over the last two decades. Some of the best dividend-paying stocks are in the financial sector and have a history of increasing their dividends, which increases portfolio stability.
Discover Financial Services
Discover Financial Services (DFS) is the holding company for well-known brands, such as Discover Card, Diners Club, Pulse network. It is the third-largest issuer of credit cards and one of the largest private student loan lenders. Discover is also a major player in online banking services. Its total revenue for 2016 was $10.5 billion and its net income was $2.33 billion. As of July 30, 2017, its stock price is trading at $60.67 a share, which is down from its historic high of $72 from Dec 2017. Many stock analysts view this as a terrific buying opportunity for a great dividend-paying stock.
In June, Discover announced a dividend increase to $1.40 a share, a 16.7% increase from its prior dividend of $1.20. That is the eighth dividend increase since the company went public in 2007. During the financial crisis it lowered its dividend slightly in 2009 and 2010, but, unlike some dividend-paying companies, Discover continued to pay dividends during difficult times.
The company has doubled its revenues across all business lines since 2007 with it biggest gains occurring in its online banking operations. The Discover online bank has grown assets at a rate of 5% a year, reaching total deposits of $37 billion in 2016. Its lending operations are expanding at a healthy clip with volume growing in its student loans, mortgage, and personal loans.
Discover is well diversified and can expect to improve profit margins as interest rates increase and regulations decrease over the coming years. Although its stock price has declined by 15% in 2017, analysts consider the stock, which is trading at 10.5x earnings to be cheap relative to its earnings potential.
Its diversification offers investors an element of protection against adverse economic conditions as it continues on its current growth track. In the meantime, investors can enjoy a 2.32% yield from a dividend that can be expected to grow over time.
Recognized for its prestigious charge card lineup, American Express Company (AXP), is multinational corporation with one of the most recognized brands in the world. As of Dec 2016, AMEX has 110 million cards in force with each spending an average of $17,000 per year. While it continues to grow its credit and charge card operations, AMEX is using its brand heft to become a major player in the online banking realm. In 2016, it reported $5.4 billion of net income on $33.8 billion of revenue. Its stock price recently traded at $82 a share giving it a market capitalization of $75 billion.
In June, AMEX announced a dividend increase from $1.28 a share to $1.40 effective for the third quarter. It is currently yielding 1.51%. Over its long dividend-paying history, AMEX has earned the loyalty of shareholders with frequent dividend increases and its refusal to cut dividends even during turbulent times. Unlike most financial institutions, which cut dividends during the financial crisis, AMEX kept its dividend level in 2010 and 2011. It resumed dividend increases in 2012 and has increased dividends at a rate of 13.10% since. Although revenue growth has slowed in recent years, AMEX has strived to maintain its dividend strength by buying back its own shares on several occasions.
AMEX revenues have slowed in recent years, thanks in some part to Costco’s decision to end its partnership in 2014. Its stock price fell to $53 a share on Jan 1, 2017 from a peak of $94 18 months earlier. It stock has since recovered, hitting a recent high of $85 on July 31, 2017. Although its credit card revenues are being challenged by its closest competitors, AMEX has managed to meet or beat earnings expectations over the last two years. While its earnings growth prospects are somewhat subdued, analysts are confident AMEX will find a way to maintain its solid record of dividend growth at least for the foreseeable future.
SunTrust Bank (NYSE: STI) is one of the largest regional banks in the United States with a footprint covering the fast-growing Southeast and Mid-Atlantic states. SunTrust is well-diversified among many banking, investing and lending operations. As of March 31, 2017, SunTrust had total assets of $206 billion. In 2016, SunTrust reported $1.9 billion of net income of $9.1 billion of revenue. As of July 31, 2017, its stock was trading at $56 a share giving it a market capitalization of $27.85 billion.
In April 2017, the company announced a dividend increase from $1.04 a share to $1.60, a whopping 54% increase effective in the third quarter. The current dividend yield is 1.84%. Because of its strong capital position and its attention to shareholder value, SunTrust has been able to increase its dividend each of the last six years.
Thanks to increasing loan demand, a relatively low debt to equity and effective expense management, SunTrust expects earnings growth to continue at a rate of 5.9% per year. On top of a 1.84% dividend yield, that can be very promising for shareholders.