Investing is about the future not the past. While strategies and lesson from previous market cycles are always important, history seldom repeats itself in exact form.
The S&P 500 and its tracking exchange traded fund SPY (SPY), is up over 25% in the last year, but dividend stocks such as Altria (MO), Procter & Gamble (PG), and AT&T (T), have consistently been the best-performing stocks in the market.
Inflation and growth remains weak today, but central banks and governments are increasingly pursuing more aggressive stimulus policies. While monetary and fiscal stimulus has had mixed results over previous years, inflation levels are likely to rise at least slightly even if growth rates remain tepid as central bankers and politicians increasingly pursue more aggressive policies.
Many of the dividend stocks of the future will likely share many characteristics with the best-performing dividend stocks of the past. Still, with inflation and growth rates likely to rise in coming years, these stocks will also likely be more cyclical companies with strong pricing power as well.
GE (GE) is a company that should be a dividend stalwart of the future. While the company cut its dividend drastically in 2009 when the housing market crashed, today the company's business model is much more stable.
GE got nearly 70% of its revenue from GE capital during the housing bubble, but today the company gets nearly 70% of its revenue from its industrial divisions, and management continues to sell off assets from GE capital as well.
GE provides necessary services and products in industries such as healthcare, infrastructure and energy. The company has shown strong revenue growth the last eight quarters, and management raised its dividend by 13% in the last year. The company trades at nearly 13x average estimates of next year's earnings.
Mastercard (MA) is a nearly $57 billion dollar company with margins of over 50%, $5 billion in cash on the balance sheet, annual free cash flow of nearly $3 billion, and no debt.
MasterCard continues to initiate increasingly larger buybacks, and the company's strong margins and significant growth prospects should give management a lot of flexibility to maximize shareholder returns for years to come. The company trades at nearly 27x trailing earnings and nearly 18x average estimates for next year's earnings. The recent landmark class-action settlement Visa and Mastercard reached with national retailers and recently released Federal Reserve guidelines have been very favorable for the credit card industry as well. Mastercard has consistently grown at over 15% a year over the last several years, and analysts are projecting mid-double digit growth over the next five years.
Diamond Offshore (DO) is a deepwater driller that had to limit the company's dividend after the Macando spill and subsequent drilling moratorium. The stock trades at nearly 10x average estimates of next year's likely earnings.
Diamond Offshore operates on longer-term contracts and management has a very strong history of emphasizing shareholder returns with special and regular dividends. While oil prices will always be volatile, with the Middle East still volatile, new oil in increasingly difficult and expensive places, and emerging market growth likely to accelerate in coming years, oil prices should stay high for some time.
To conclude, history seldom repeats itself in exact form, and while the dividend stocks of the future will share characteristics with the best-performing dividend stocks of the past, new companies will likely emerge in a stronger economy with greater inflationary risks. While many traditional consumer staple companies in sectors such as tobacco, consumer products, and telecommunications, have been the best-performing dividend stocks of the past, past results aren't always indicative of future results.