My Top 5 Dividend Stocks For Young Investors

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Includes: AAPL, AMZN, BX, CELG, CL, CMCSA, DIS, FB, GOOGL, HASI, JNJ, KO, MA, MSFT, NKE, NNN, NVDA, PG, SBUX, STOR, T, TWX, V, WHR, XLK
by: Nicholas Ward

Summary

In this piece I talk about my favorite potential stock picks for younger investors just starting out.

I put together an evenly weighted $25,000 portfolio for this hypothetical young investor. The portfolio's yield ended up being 2.04%.

This was a fun exercise for me to work on. I hope that you include your list of dividend growth companies for young investors in the comment section below.

A couple of months ago, I remember reading a piece written by fellow Seeking Alpha contributor, Damon Verial, titled, “Top 5 Dividend Stocks For Young Investors”. As a young investor myself, I was drawn to this premise and enjoyed reading Mr. Verial’s piece. However, as interesting as it was to hear his story and learn about some of his stock selection methods, I didn’t agree with a single one of his picks. Since then, I’ve wanted to write a “Top Stocks For Young Investors” type piece myself, but got sidetracked with work and several other more actionable ideas during recent weeks. Well, fast forward to mid-July and I’ve got a bit of time on my hands. What’s more, in recent weeks, somewhat coincidentally, I’ve had a couple of my contemporaries come to me, explaining that they’ve got a bit of cash stashed away, and would like to start investing with it. I’m always flattered when people seek out my opinion with regard to the stock market. I love portfolio management and spend a great deal of time and energy honing my craft as an investor. With that said, I always caution these people, whether they be friends or family or simply followers here at Seeking Alpha, that I am not a professional in the financial industry and am not in a position to give them investment advice. In my opinion, every portfolio is highly subjective. What’s right for me may not be right for you. We all have different dreams and goals and financial situations and obligations. We all have different tastes and timelines and risk tolerances. No two investors are the same, but that’s OK. The market is a vast expanse and there are many ways to skin the cat with regard to seeking financial freedom. But, even with all of that in mind, I still wanted to put together my own article in the same vein as Mr. Verial’s, putting together a list of my favorite potential picks for a young investor in today’s market. I’ve structured my piece a bit differently, but all in all, the idea is the same. In the comment section below, I hope that you’ll list your own as well. This premise should make for a great, entertaining, debate.

A Hypothetical Situation:

When thinking about how I wanted to put this piece together, I decided to go ahead and mimic a young investor who was just starting out. This situation is somewhat similar to several that I’ve been asked about and I imagine it’s a situation that many younger investors can relate to.

The investor has $25,000.00 saved up and has decided that the meager interest being generated by his/her savings account isn’t getting the job done. He/she realizes that the market is hovering near all-time highs and fears that the current bull market is rather mature, but still understands that over the long-term, the stock market has proven itself, again and again, to be the best wealth generator available. This investor has avoided putting the money work in the markets for over a year now, waiting for a pullback. He/She is becoming impatient and has decided that due to his/her long-term time horizon it’s more about time in the market, rather than trying to time the market, and now is the time to take the plunge. I’m 27, so I’ll go ahead and say that this young investor is 27 years old as well. Even though he/she is young, he/she doesn’t have the stomach for some of the high flying momentum driven stocks of the day; he/she is intrigued by their growth potential but ultimately understands that there is no such thing as a free lunch and get rich quick schemes are likely too good to be true. He/she wants to begin building a balanced, well-diversified portfolio with his/her twenty-five grand. He/she plans on adding to this foundation on a regular basis moving forward on his/her journey towards eventual (hopefully) financial freedom. And last, but certainly not least, he/she is drawn to the idea of dividend growth stocks. He/she understands the power of compound interest and hopes to eventually live off of his/her dividend income stream so that he/she never has to touch his/her principle, which could serve as a part of his/her legacy to his/her future family when he/she is dead and gone. This idea gives him/her peace of mind, knowing that loved ones will be taken care of by the portfolio he/she has built long after he/she is able to provide for them.

So, Where To Start?

Admittedly, it was difficult for me to think about putting together a long-term oriented portfolio without several of my favorite, non-dividend paying names included. I consider myself to be a dividend growth investor; however, I own large positions in companies like Alphabet (GOOGL), Facebook (FB), and Celgene (CELG), even though they don’t contribute to my income stream, because of their long-term growth potential. With that said, there are also growth names that pay a dividend and keeping in-line with the original thesis that Mr. Verial embarked upon, I will stay true to the 100% dividend growth theme.

When thinking about how I wanted to break down this $25,000.00 portfolio, I decided that the easiest thing to do would be to simply break the money down evenly into five, $5,000.00 chunks. I own 70 or so companies in my personal portfolio, but I also spend hours every day tracking the market. Jim Cramer talks all of the time about how an individual investor likely shouldn’t own more than 10 or so positions, because of the time/energy/work required to keep up with the necessary due diligence of monitoring a DIY portfolio. I don’t always agree with Mr. Cramer, but in this instance, I’ll go ahead and side with him; 5 stocks seems like a reasonable start and this investor who can obviously expand their holdings moving forward as they become more comfortable with portfolio management.

So, when thinking about which 5 companies to include I had several priorities. Number one was long-term growth potential. A young investor isn’t likely to begin living off of his or her dividend income anytime soon, so while the income stream generated by the portfolio is important to compound over time, it’s the overall growth of the holdings that will help this investor create a large enough nest egg to eventually retire comfortably. Besides growth, I paid attention to the likelihood of future dividend growth as well as valuation in the present. The valuation bit was interesting for me to think about in this project; in my portfolio I’m constantly looking for wide margins of safety, but this is partially due to the fact that I know I have the option to generate returns by selling deep value stocks when their premiums return (or exceed) historical norms. I don’t expect this hypothetical investor to track the market on a daily basis though. Most of my friends who’re starting out investing have an interest in making money but don’t have time/energy to spend hours a day monitoring the markets. In this situation, we’re likely to be talking about a traditional buy and hold investor. Portfolio management isn’t this person’s full-time job, they’re not interested in tracking the market on a daily basis looking for the best in’s and out’s, they’re looking to start a collection of high-quality assets that will grow over time. Because of this, I was willing to sacrifice my strict value principles in several occasions knowing that in a decade or so, it wouldn’t matter all that much if I waited for another 5-10% downside to occur before initiating exposure.

So, without further adieu, here are my top 5 dividend growth stocks for a young investor. Like I said before, let me know what you think. Feel free to list your picks in the comment section below (even better, explain why you chose them). I’m hoping that this piece could serve as a jumping off point for those young investors thinking about putting money to work in the markets. The collective knowledge of the SA reader base has been so helpful to me in my development as a portfolio manager and I’m sure this can be the case for others as well.

Apple (AAPL)

Apple was one of the first companies that came to mind when I began thinking about this list. This company makes one of the world’s most popular products, is probably the world’s strongest brand name, generates massive cash flows, has enough cash on hand to buy just about any other company in the world that it would want to (I recently published this piece focused on AAPL’s cash hoard), and is quite generous to its shareholders with both dividends and buybacks. I expect AAPL to be one of the dividend aristocrats of the future and I personally look forward to taking the ride with the company along the way. AAPL is my second largest holding currently; if I’m willing to bet such a large portion of my personal savings on a company, it only makes sense to include it on the best dividend stocks for young investors, right? What’s more, unlike many stocks in the market today, I think AAPL is trading near its fair value, making it easier to include on this list than many other very high quality, but oftentimes, very overvalued companies that I also considered. I know that others don’t agree that at ~16x earnings AAPL is fairly valued and I’m sure this debate will rage on and on; however, I’m standing firm in my belief that due to this company’s immaculate balance sheet as well as its growing services business, over time, the market will become comfortable placing a higher multiple of shares meaning that an old-school hardware multiple is not representative of this company’s fair value. Apple appears to be an easy company for individual investors to understand. Peter Lynch talked about buying what you know. This helps investors maintain interest in their holdings and potentially removes desires to trade in and out of them. If I know one thing about the millennial generation, it’s that we know our smart phones.

Current Price: $149

Position size: 34 shares

Projected Annual Income: $85.68

NVIDIA (NVDA)

As I said before, if this wasn’t an article directed towards dividend growth investors, I surely would have included several of the famous F.A.N.G. names on this list. I think Facebook, Amazon, and Google (now, Alphabet) are all worthwhile holdings for young investors. I own all three and hope to continue to add to my exposure over time. I don’t own Netflix. I’ve never been able to justify the risk/reward associated with the valuation. I’ve actually replaced Netflix with NVIDIA as the “N” in my personal F.A.N.G.

This leads me to probably the highest risk/reward stock I’ve included on this list: NVDA. It seems to me that artificial intelligence/automation/machine learning is likely going to prove to be a secular growth trend for decades to come. NVDA also seems to one of, if not the outright leader in this space. NVDA also happens to be the leader in another very high growth space: video games (which, like smart phones, may fall into the “buy what you know” category for younger investors). NVDA growing its data center business quickly and has made headlines recently investing in security software. When you’re talking about technology on the cutting edge, you’re talking about risks. Disruption here can come quick, oftentimes without warning. NVDA shares trade with a hefty premium placed upon them by the market due to future growth expectations. If this growth doesn’t materialize, then an investing in NVDA today, at these elevated prices could prove to be a major mistake. However, I think a more likely outcome is that over the long-term, NVDA’s growth continues to impress as it solidifies itself as a leader in several HUGE markets, which could make an investor buying stock in the company today a very wealthy individual several decades down the road. NVDA shares aren’t for the faint hearted, but you oftentimes hear that younger investors can and should take outsized risks because they have their entire working lives ahead of them to make up for any early risks that don’t play out…this is why I’m long the company myself and why I’ve included it on this list.

Current Price: $164

Position size: 30 shares

Projected Annual Income: $16.80

Disney (DIS)

Speaking of AI/Automation/Machine Learning, in a few decades, when robots are doing the lion’s share of the work and human beings need something to do to fill their days, I assume content will play a major role. This sounds like a joke, but it may not be. Assuming that the future is Wall-E-esque, with robots making human lives more efficient and easier, rather than the dystopian Terminator/iRobot type scenarios that we’ve seen depicted in films, there will be much more free time and therefore, demand for content to fill those hours will increase drastically. I’ve harped on this for years now, but in my opinion, Disney is the king of content. In my personal portfolio, I’ve spread the wealth around a bit, owning shares of Comcast (CMCSA), Time Warner Inc. (TWX), as well as Amazon (AMZN), GOOGL, and FB in the digital media spaces. Disney is my largest individual holding and Time Warner is my 4th largest; these two individual companies make up over 10% of my holdings. This should show the level of bullishness that I have on the content producers. But, for the sake of this project, I had to choose one and the decision was easy.

Disney is a cyclical company due to its reliance on consumer spending, whether we’re talking about at the box office or at one of the Disney parks. This cyclicality has lead to several dividend freezes that have prohibited Disney from becoming a dividend aristocrat. I wouldn’t be surprised to see the dividend frozen again in the future during tough economic times. However, I would be surprised to see it cut and I think over the long-term, the dividend will be much, MUCH higher in 20 or 30 years than it is today (I have the same feelings with regard to the stock’s price as well). Disney’s IP is top notch. If Apple’s brand isn’t number one in the world, Disney’s may well be. I view this company as a very safe holding with solid growth potential as well. Also, after a bit of recent weakness, DIS’s valuation isn’t terrible at the moment, at ~17.5x 2017 expected EPS. This is lower than the company’s long-term normal P/E ratio of nearly 22x earnings. I think the shadow that the cord cutting issue has cast over DIS could turn out to be a great buying opportunity for long-term investors, which is why this is one of my favorite dividend growth stocks for young investors.

Current Price: $105

Position size: 48

Projected Annual Income: $74.88

AT&T (T)

When I was putting together this list of 5 companies in my head, I knew I wanted at least one high yielding company. I know I said that growth is the priority, but I think that having yield diversity, in terms of dividend yield and dividend growth potential is important for a long-term portfolio. Having one high yielding name can really boost the average yield of a portfolio. I’m also assuming that this young investor will be reinvesting dividends over time and the large cash flow created by a high yielding company can do wonders in terms of rebalancing the portfolio and/or building new positions with organic cash flows, especially if they’re selectively re-investing as they become more comfortable with the markets.

So, with all of that in mind, I considered several high yielding names. I thought about going with one of my favorite financial names, Blackstone (BX). However, I decided against it due to the massive run the stock has gone on recently (diminishing the margin of safety that an investor in the present would receive), the inconsistency of the distributions, and the K-1 issue, which complicates the matter from a shareholder’s perspective. I want this portfolio to be simple for the novice, theoretical investor.

Then I moved on to the REIT space. I’ve been buying shares of STORE Capital (STOR) and National Retail Properties (NNN) recently, but I ultimately decided that the growth potential of the REITs was too low for such a high percentage (20%) of a younger investor’s portfolio. I thought about another REIT, Hannon Armstrong Sustainable Infrastructure Capital (HASI), which is a favorite of mine and offers what I believe to be better growth in terms of both capital appreciation and income growth. HASI’s yield is ~1% higher than the more retail oriented REITs previously discussed. This 6% yield was tempting, but ultimately, I stuck to my guns regarding 20% being too much REIT exposure for a younger investor’s portfolio.

At the end of the day, when thinking about high yield names, I decided to go with a recently beaten down name that plays into the content oriented macro-trend that I believe in so strongly: AT&T. In a potentially overvalued market with many high-quality names trading at or near their 52 week or even all-time highs, it’s difficult to find attractive value. I think that after recent weakness, T is offering fair value at the very least, if not better. What’s more, because of the stock price weakness, T’s dividend yield has risen to 5.4% (this is actually higher than most utilities/high-quality REITs, at the moment). This is a hefty yield, which I believe to be quite reliable. I don’t expect to see outsized dividend growth from T. T’s 5-year dividend growth rate is 2.22% and I don’t expect to see this change much in the short-term. Unfortunately, this is below the average inflation rate. I never really want to see one of my dividend growers being outpaced by inflation; however, I can imagine a future after the Time Warner deal closes when T’s cash flows increase, the company pays down its debt load and then, is able to be more generous with shareholder returns.

I’m obviously bullish on TWX and its future growth prospects and I really like this move by AT&T adding the content component to its already top notch distribution system. Right now, I think T faces interest rate headwinds as well as political hurdles involving the TWX deal. I still expect the merger to go through and once it does, I think a lot of this controversy surrounding unfair competition and the politically driven CNN disputes will die down as TWX is absorbed into the much larger business that is AT&T. Let’s be real, if you buy into the content is king argument, then once the new season of Game of Thrones really gets rolling, I’m sure that the massive viewership numbers that HBO posts with this prime time show will help to assuage investors who are bearish on the TWX deal. HBO has already talked about Game of Thrones related spin-offs and this, combined with the DC Film Universe which has gained massive success with Wonder Woman in recent months gives this company two crown jewels in the content space to go along with the more traditional, data driven distribution system that T is currently known for with its wireless division.

Current Price: $36.25

Position size: 138

Projected Annual Income: $270.48

Nike (NKE)

I’m going to be honest, the first four picks on this list were fairly easy to make. They all came to mind quickly with few questions/concerns involved. But, once it got down to the final spot, I had a really hard time determining the last company that I would include. I own so many high-quality companies and it almost felt wrong making a ‘best of’ list that left them out. So, before I get to Nike, which ended up being my selection, I wanted to quickly go over the list of companies that I strongly considered, as a bit of an honorable mention category.

Whirlpool (WHR):

This is one of my favorite deep value, cyclical plays. With that said, I know it’s best to buy these types of companies when they’re trading at lows, and not nights, so WHR didn’t make the cut. It’s worth noting that Barons recently had nice things to say about this company and its capital returns program. Although it didn’t make it onto this list, I’m long the stock and I hope Baron’s bullish thesis plays out that way.

MasterCard (MA) & Visa (V):

I considered both of the major credit card companies as a fin-tech play. Both MA and V provide investors with great growth in terms of earnings, revenues, and dividends. The world seems to be moving in a cashless direction, with paper money falling out of favor for more efficient and convenient digital transactions. I think these two companies have bullish tailwinds behind them, but I do worry about disruption in the fin-tech space, especially coming from the big dogs in Silicon Valley, Alphabet and Apple which have both taken steps to move into the digital payments arena and I’m sure they won’t be the last. I’ll admit that I don’t understand them as well as I should, but I assume that cryptocurrencies potentially pose a threat to the likes of V and MA as well, though I don’t see this as a major concern at the moment. Lastly, both of these companies offer very small (albeit very fast growing) dividend yields, so there would have been an overlap with NVDA as far as yield diversification goes if I had included either one of them.

Microsoft (MSFT):

Speaking of tech big dogs, I strongly considered filling the last spot on this list with Microsoft. I recently mentioned MSFT as a core holding for me in an interview with SA Dividends and Income editor, Rebecca Corvino; however, right now I have concerns that MSFT has run too far too fast and therefore, I don’t feel comfortable including in on this list due to the premium valuation (this valuation will be the topic of my next article).

Starbucks (SBUX):

I didn’t like the fact that this list didn’t have a food related name on it. We all have to eat right? This fact makes investments in this industry rather stable over the long-term. Starbucks is one of my larger holdings so my mind went there first. SBUX has been a great dividend grower as of late and I don’t expect this to change. Some investors have even gone as far as to say that SBUX is an up and coming Coca-Cola (KO). Unlike KO and many of the more mature food and beverage names, SBUX is still providing significant top-line growth. With that said, SBUX’s valuation remains high and while I love the company, I don’t necessarily love the stock at these prices and when I’m putting together a list of only 5 names, I would have had to love both to include it.

Overpriced Aristocrats:

I also considered putting one of the tried and true dividend aristocrats on this list; a company like Procter & Gamble (PG) or Colgate-Palmolive (CL) or Johnson & Johnson (JNJ). These companies don’t offer the quick top-line growth that I would typically like to see from a top holding of a young investor with a long-term mindset; however, they do offer very secure, growing dividends that an investor could likely rely on for income for decades to come. An investment in one of the dividend growth aristocrats would be for stability and not for growth. I think having a stable base to rely upon is important; however, because of the fact that valuations of these types of companies have been driven higher than their long-term historical averages because of the current interest rate environment that we face, I’ve decided against it. There will come a time for young investors to invest in potentially overpriced dividend aristocrats, but since they likely don’t need the income in the present, today is not that day.

High Growth ETFs:

The last thing I considered filling this 5th spot was with a high growth ETF, like the Technology Sector Select ETF (XLK) or an emerging market ETF, which would give an investor exposure to high growth markets while paying a rising (yet unpredictable) income stream. I like this idea, but ultimately, decided against it because it didn’t seem to be fair to the original premise I set out to achieve: naming 5 individual dividend growth names for a hypothetical young investor to begin a portfolio with. Choosing an ETF would have drastically increased the diversification within this portfolio; however, it would have added much more work keeping track of the top holdings of the fund. A truly passive portfolio manager should strongly consider going this route; however, when I envisioned our young investor for this scenario, I pictured a novice stock picker. So, in the end, as much as I like the XLK or the EEM, I’ve decided against including them.

And that leads us back to the original selection: Nike.

When I started the process of writing this article a few weeks back Nike was trading about 10% lower than it sits today. The company exceeded expectations during its latest earnings report, which gave the stock a bump. I own the stock so I was happy to see it, but from the perspective of this portfolio, the news was a bit disappointing. However, I decided to keep Nike in the top 5 because of a couple of reasons. One, we’re back to Mr. Lynch’s buying what you know idea. Many millennials have grown up wearing the swoosh and I’m assuming this hypothetical investor has as well. Nike is a relatively simple company to follow, making it a nice place to start for a novice investor. This company does trade with a premium valuation, but its illustrious history, solid growth in the present, and above average dividend growth prospects help to justify it. And lastly, similarly to the argument for why I wanted to include a food stock in this list, I realized that although articles of clothing that are considered acceptable to wear are changing (and oftentimes becoming smaller), I can’t imagine a future where it’s acceptable to not wear them at all. I expect the civilized human race to always wear clothes (they do offer comfort/performance benefits, after all) and I expect Nike to continue to be a leader in the clothing/apparel space for years to come. Nike is a world leader in R&D/technology when it comes to its fabrics and designs. This, along with the very well established brand of the company, makes it a no-brainer long-term holding for me.

Current Price: $58

Position size: 86 shares

Projected Annual Income: $61.92

Overall Portfolio Value: $25,016.50

Overall Portfolio Dividend Yield: 2.04%

Disclosure: I am/we are long AAPL, GOOGL, NKE, T, TWX, DIS, NVDA, FB, JNJ, PG, AMZN, CELG, CMCSA, HASI, KO, MSFT, V, MA, NNN, STOR, SBUX, XLK, BX, WHR.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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