Seeking Alpha

3 Of My Top Dividend Stocks For 2020

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Includes: CSCO, MPW, SBUX
by: Mark Roussin
Mark Roussin
Long-term horizon, dividend growth investing, REITs, portfolio strategy
Summary

After a memorable run for stocks in 2019, the year 2020 is likely to be a lot more rocky due to a slew of uncertain events we will face.

The three dividend stocks contain yields that range from 1.86% to 5.02%.

Today, I will discuss three dividend stocks I like to outperform the market in 2020.

Now that 2019 is behind us, we are leaving behind an incredible year in terms of performance when it comes to stocks. On the year, the S&P 500 finished up 30+%, making it the best single-year gains since 2013 and before that since 1997.

This bull run we are experiencing has been going for more than 10 years now, but some cracks in the economy are beginning to show and many are expecting a recession to hit in the next 12-18 months. Valuations across the board for many stocks have reached extreme valuations, which should make investors hesitant when looking to invest new money.

Economists do not expect 2020 to see big gains like we did in 2019, and many are looking for gains closer to 4% to 6%, per a CNBC survey. The maximum target in the survey expects gains of roughly 8% for the year.

The reason for the slower growth is due to a slowing growth within the economy combined with various uncertainties that are ongoing. The biggest elephant in the room is the ongoing trade war between the two biggest economies in the world, the US and China. Though a “Phase One” deal was recently reached, not much substance has come out of it and there are plenty of discussions still to take place before a full trade agreement is in place.

The actions of the Fed in 2020 will be under the watchful eye of investors; after quickly raising rates four times in 2018, we saw the Fed reverse course in 2019 with three rate cuts. According to notes and discussions from the Fed’s final 2019 meeting, the Fed plan for 2020 is to keep rates unchanged.

A couple of other uncertainties that are on the horizon are global tensions with North Korea and the Middle East. 2020 also is setup to be a big showdown for the Presidential Election, which could sway investors one way or another depending on the likely outcome.

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Photo Credit

A Quick Look At 3 Of My Top Dividend Picks For 2020

In the following section, I will briefly discuss three of my favorite dividend stocks for 2020. One pick is from the technology sector, one from the consumer sector, and one specialty REIT.

Cisco Systems, Inc. (CSCO)

Cisco Systems designs, manufactures, and sells Internet Protocol based networking and other products related to the communications and information technology industry worldwide. The company operates in a business that has been able to produce strong free cash flows over the years leading to strong dividend growth as well.

The company has increased their free cash flow margins over the year from 20% in 2011 to nearly 29% today. These strong cash flows have led to an average 14% increase in the dividend each year.

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Source: YCharts

Based on recent history, the company has announced a dividend increase in the coming quarter. Assuming a 10% increase, which is in line with the prior-year increase, the dividend yield would be 3.22%. At the current dividend, the company maintains a dividend payout ratio of only 44%, leaving plenty of room for the company’s board to continue increasing the annual dividend moving forward.

CSCO shares have drastically underperformed the market this year by increasing 11% to the S&P 500 index’s nearly 30% gains. This has provided investors a buying opportunity in this blue-chip name. The company maintains a strong AA- rated balance sheet that is worthy of a spot in your long-term portfolio.

Here is a look at the company’s FAST Graphs chart.

Source: FAST Graphs

Starbucks Corporation (SBUX)

Starbucks is a name near and dear to many of our hearts both in the investing community and the coffee drinkers' community. The company has done a fine job of late innovating fun new offerings for customers that have helped drive growth.

When long-time CEO Howard Schultz, who strategically turned a small coffee chain in Seattle into a global leader, decided to retire in mid-2018, many investors, including myself at the time, had concerns. SBUX investors had seen how this played out in years prior when Mr. Schultz stepped away from Starbucks only to return years later to save the company. Since Mr. Schultz left the company completely in June 2018, the stock has risen roughly 70% under CEO Kevin Johnson’s leadership.

Starbucks has long had a strong loyalty base, one that it has seen grow to 17.6 million active members in the US. This is key for the company due to the fact that these loyalty members tend to spend more than non-loyalty members. China now has 4,000+ stores in the country and that combined with its delivery partnership with Alibaba (NYSE:BABA) has been a major plus.

Starbucks has been a strong dividend growth stock over the years, raising their dividend an average of 23% per year over the course of the past five years. The stock maintains strong cash flows and maintains a payout ratio of 58%, which is close to the company’s goal, in order to maintain healthy dividend increases in the years ahead.

Here is a look at the company’s FAST Graphs chart.

Source: FAST Graphs

Medical Property Trust Inc. (MPW)

I am now going to transition from traditional dividend stocks to REITs. Medical Properties Trust is the only pure-play hospital REIT trading in the market today. Medical Properties Trust, Inc. is a self-advised REIT that provides capital to hospital operators around the world, with a primary focus in the U.S. MPW is currently the second-largest non-governmental owner of hospital beds in the U.S. The company’s approach to financing allows owners of hospitals to unlock the value of their underlying real estate, primarily through sale leaseback transactions.

The company owns a well-diversified portfolio of 349 properties. The primary asset type for the company is focused on “General Acute Care Hospitals”, but show some diversification into other specialty hospitals, including inpatient rehabilitation and long-term acute care.

This is an exciting time for MPW as they continue to grow their portfolio having closed $3.7 billion in transactions year-to-date. The investments in Australia and Switzerland are a first for the company as they continue to expand in the US and Germany as well. On the company’s Q3 earnings call, CEO Edward Aldag, Jr. mentioned the company still has a pipeline of more than $5 billion in potential transactions they are actively working on.

Due to the regulatory standards, building new hospitals must pass through more hoops than that of say senior housing and the effects are well reflected in the demand/supply dynamics. In the long scheme of things, this should result in less volatility for operations as well as landlords, which bodes well for MPW.

The other reason I like MPW is due to the uncertain nature of the economy in 2020 and an investment in healthcare tends to be a defensive play, especially when it is focused on hospitals.

Here is a look at the company’s FAST Graphs chart.

Source: FAST Graphs

MPW yields a dividend of 5% with a payout ratio of 81%, which gives management plenty of room for future dividend growth. I like the prospects of MPW moving forward based on their strong acquisitions, which have been at cap rates closer to 8% combined with their healthy spreads.

Investor Takeaway

In conclusion, the year 2020 will be surrounded by plenty of uncertainty combined with a slowing economy, which could derail our record-breaking bull run we have experienced once and for all. Trade wars, global unrest in Hong Kong, global tensions with the likes of Iran and North Korea, throw in a Presidential election and a lot can happen in 2020 so it is important for investors to be prepared.

As such, I provided three of my favorite dividend stocks for 2020 and beyond. Cisco is a blue-chip name that is innovating and is very necessary in today’s technology intensive environment we live in. Starbucks continues to grow and defy the odds. China has been a major focus for the company, but a mainland competitor has presented itself, so it will be interesting to see things play out. The last name I left you with is one of my favorite REITs, Medical Property Trust. MPW is a pure play on hospitals, which is a defensive sector. The company boasts a strong portfolio with a high-yield dividend of 5%.

Note: I hope you all enjoyed the article and found it informative. As always, I look forward to reading and responding to your comments below and feel free to leave any feedback. Happy Investing!

Disclosure: I am/we are long SBUX, MPW. 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.

Additional disclosure:
Author’s Disclaimer: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.