The best stocks to own aren't always fast-growing, nor do they always need to come at a steep discount. Oftentimes investors discover that it's the steady dividend payer in a defensive sector like consumer staples that yields the best results.
If you invested $10,000 in Johnson & Johnson (JNJ) 30 years ago, you'd end up with close to $640,000 - a gain of over 6,315%! It may be a "boring" investment, but it's a profitable one. The extra kick dividends bring to the table shouldn't be overlooked.
Dividend stocks offer other advantages as well. Dividends provide a hedge against adverse price movements and defend against short sellers who have to pay back dividends paid out while they shorted the stock. Companies that pay dividends often accompany that action with share buybacks, which provides further price stability and downside protection.
Here are 3 consumer staple stocks that pay out a dividend yield of at least 3% and have active share repurchase plans in effect: General Electric (GE), Dr. Pepper Snapple Group (DPS), and Kraft Foods Group (KRFT).
First up on the list is the giant $258 billion conglomerate General Electric . The stock trades at 17 times earnings with an expected EPS growth rate of 7%, but that doesn't accurately show the company's true growth. GE has an aggressive share repurchase program to the tune of $2 billion in buyback every quarter, with an eye to expand that further in 2014. The reduction in shares gives actual EPS a boost to 10%. The company recently upped its dividend to $0.22 per quarter giving it a yield of about 3.4%. The considerable decrease in outstanding shares over the next few years should make valuation ratios like P/E, and the stock price, more attractive every quarter.
Dr. Pepper Snapple Group is a $10 billion beverage company that trades at 16 times earnings with expected EPS growth of about 7%. For 2013, the company repurchased $400 million worth of stock. Since 2010, the company has bought back 62.5 million shares for a cost of nearly $2.4 billion. The company increased its dividend by 7.9% to $1.64 per share for 2014 giving the stock a dividend yield of 3.2%. Dr. Pepper Snapple Group first started paying a dividend in 2009. Since then it has increased the dividend 173% and maintains a payout ratio of just 50%, allowing the company to continue dividend hikes and share repurchases.
Kraft Foods Group , a $32 billion company, trades at 17 times earnings and experienced EPS growth this year of 22%. The company, recently spun-off from Mondelez International (MDLZ), initiated a $3 billion stock buyback program with no set expiration date. Although $600 million came from pension contributions, the company posted free cash flow of $1.5 billion rather than the $1 billion expected for 2013. Kraft pays a dividend of $2.10 annually giving the stock a hefty yield of 3.8%. The amount was raised 5% from last year, which was the first year the company operated independently.
Interested investors should buy into any pullbacks from these stocks. Risks include a sudden rise in interest rates which could negatively impact dividend payers on a relative risk basis.