Over the long run, 40% of stock-market gains come from dividends.
The “easy” gains of the early part of a bull market have been made, and stocks are more likely to move sideways. That means now is a good time to remember a frequently overlooked reality of investing: 40% of gains come from dividends over the long run.
Corporate insiders certainly agree. I track insider activity daily for my stock letter Brush Up on Stocks, and I’ve noticed solid insider buying in yield plays, relative to other groups.
Besides keeping the gains going in a sideways market, income-producing stocks offer two big advantages, points out John Buckingham of the Prudent Speculator stock letter, a value investor who favors dividend names. Dividend payers outperform non-dividend stocks over the long-run, meaning 20 years or more. And they do so with less volatility, he says.
With all of this in mind, I recently rounded up five promising yield stocks from Buckingham, insiders, and investment researcher Morningstar, paying close attention to cash flow, balance-sheet strength and yield.
Note that most of these names pay out more yield than certificates of deposit and offer the potential for capital appreciation as well, though there is risk to the downside, too, of course.
1. Verizon Communications (VZ); dividend yield 7.8%: Verizon VZ, +0.36% is the market leader in wireless with 40% share. Yet the stock is down almost 20% this year. That’s driven the yield up to attractive levels, and the dividend looks safe, Buckingham says. Investors might see decent capital appreciation, too.
One reason the stock is down is that the Wall Street Journal reported in July that phone companies have left miles of lead sheath cable in the ground around the U.S. — which may pose health risks. Morningstar analyst Michael Hodel says Verizon won’t face significant lead liabilities. He says capital spending to deal with the issue will be modest. The expected cost could knock $3 off his estimated fair value for the stock, to $54 a share. “We continue to believe the shares are very attractive,” he says.
The other challenge for Verizon is weak sales. Second-quarter operating revenue fell 3.5% to $32.6 billion and net income fell 10.3% to $4.8 billion. Buckingham, who suggests the stock to clients and subscribers, concedes that growth will remain stagnant. But he thinks the stock is way oversold.
Buckingham reasons that by now — given the maturity of end-markets — Verizon is similar to a low-growth utility. But it doesn’t trade like one, and it offers a much better yield. While Verizon has a forward p/e of 7.4, the S&P 500 Utilities Index trades for about 18 times forward earnings, and it pays out less than half of Verizon’s yield.
“Verizon pays twice the yield and it is trading at half the multiple,” says Buckingham. “You get a better yield, and you are going to get capital appreciation. But I don’t need huge capital appreciation if I am getting a 7.5% dividend yield.”
2. Foot Locker (FL); dividend yield 6.3%: Foot Locker FL, +0.60% says it “unlocks the “inner sneakerhead in all of us.” Sneakerheads locked their wallets in the first quarter, though, contributing to a slump in sales by 9% compared to the year before. The company also guided down sharply. That tanked the stock in May.
But Foot Locker has recovered from mishaps in the past, maintains Buckingham, who suggests this stock to clients and subscribers. The company has brand power and intends to connect better with consumers via more special events, product choice and an improved loyalty program. It is also closing weak stores, and improving online sales efforts. Buckingham thinks financial strength and profitability mean the dividend is safe. We’ll learn more when the company reports earnings on August 23.
Energy stocks are a strong buy. Even though energy prices are likely to go up from here, the group has performed poorly this year. Insiders love the sector. Given the group’s potential for stock gains, it’s a good place to shop for yield.
3. ONEOK (OKE) Dividend yield 5.8%: ONEOK OKE, +0.40% offers a “safe” way to invest in the expected robust growth in U.S. natural gas production as liquid natural gas (LNG) export plants come online over the next five to 10 years.
ONEOK provides a natural gas transport system that will connect midwestern supply to LNG exporters. About 90% of its business is fee based. So it is not exposed to energy price volatility. But it can see earnings growth as volumes pick up.
Here is another catalyst. Back in May, ONEOK bought Magellan Midstream Partners. It expects earnings accretion of 3% to 7% per year from 2025 through 2027, and free cash-flow per share accretion averaging more than 20% from 2024 through 2027.
In June OKE insiders, mostly the CEO, bought $1.8 million worth of stock at prices up to $61 — a bullish signal because of the size.
4. Civitas Resources (CIVI); dividend yield 9%: Civitas CIVI, +1.23% produces oil and gas in the DJ Basin in Colorado and the Permian Basin in Texas and New Mexico. It has been growing by making astute purchases of assets, most recently in the Permian in June. It is also a low-cost producer. “The stock does not reflect the value that management has created over the past few years by scooping up assets,” Buckingham says. Civitas stock sells for a forward p/e of just 6.2.
Financial websites show a yield of 2.6% for this energy producer. But that goes up to 9%, when you include the special dividend it pays out every quarter. Over the past four quarters, Civitas paid out dividends per share of $1.76, $1.95, $2.15 and $2.12, including the base dividend of 50 cents per quarter. “This company has rewarded shareholders substantially by making those special dividends,” says Buckingham. He predicts Civitas will continue to have the cash flow to make the special dividends.
5. Park Hotels & Resorts (PK); dividend yield 4.3%: No discussion of yield investing is complete without a nod to real estate investment trusts (REITs).
REITs own portfolios of properties such as office buildings, shopping centers, hotels, and apartments that generate income. Unlike regular companies, REITs have to pay out at least 90% of their income to investors in the form of distributions, or dividends. So they typically offer attractive yields.
That’s especially the case now since REIT stocks (called units) have been beaten down by rising interest rates, the risk of recession, fears of a credit crunch linked to the regional banking crisis, and concerns about commercial real estate.
Morningstar recently suggested seven attractively valued REITs. I’ll single out the play on the post-Covid travel binge — Park Hotels & Resorts PK, +1.66%, which is the second-largest U.S. lodging REIT. It focuses on high-end hotels operating under brands including Marriott, Hyatt, and IHG Hotels & Resorts.
Park Hotels has lodging in key U.S. travel destinations such as New York City, Washington, D.C., Chicago, New Orleans, Hawaii, Orlando, Key West and Miami Beach. “The company should continue to see strong growth as business and group travel to pre-pandemic levels,” says Morningstar analyst Kevin Brown. He puts a $26.50 fair value estimate on the stock, suggesting a possible double from here.
Beware that owning REITs can complicate matters at tax time. You should discuss this with a tax expert before owning a REIT in a taxable brokerage account.
Michael Brush is a columnist for MarketWatch. At the time of publication, he owned OKE. Brush has suggested VZ and OKE in his stock newsletter, Brush Up on Stocks. Follow him on X (formerly Twitter) @mbrushstocks
https://www.marketwatch.com/story/nows-the-time-to-own-dividend-paying-stocks-these-5-offer-up-to-a-9-yield-93209b54?mod=stocks
