The Best Dividend Stocks For January 2022
Summary
- We start out with a short list of guidelines that make it easier to identify dividend stocks that are still worth investing in right now.
- The popularity of large cap dividend growth stocks has driven their valuations to worrisome levels. Only a handful of large Cap dividend stocks are still worth considering.
- We look at my recent large cap conviction buys, the stocks I hold that are still worth buying, and one riskier dividend stock purchase I have high hopes for.
- Screening the Nasdaq Dividend Achievers Index turned up some lesser-known small and mid-cap dividend growth stocks worth considering because of their enhanced potential for both earnings and dividend growth.
pcess609/iStock via Getty Images
I was recently asked, what are the best dividend stocks to buy right now as we begin 2022? We all know which stocks we wish we had bought last year or before. Back testing will tell you that. But there are dozens of conflicting opinions about the best way to pick the stocks that people will someday wish they had bought now. Still, I'll give it a try.
If you were to be guided by the recommendations you usually see trending on Seeking Alpha you might conclude that any such list should begin with AT&T (T), AbbVie (ABBV), and REITs like Realty Income (O). Rarely does a day go by without coverage of these relatively-high paying equities trending.
I own shares in AbbVie and Realty Income and have been happy with those investments, but I bought them at much better prices than the market offers today. Like every other large cap stock whose valuation hasn't soared to indefensible heights, they face well-known challenges: the Humira patent cliff for AbbVie and rising interest rates for all REITs that depend on accessing a continuous stream of borrowed money.
AT&T is typical of another kind of dividend stock, the high yielding stocks that always look like their prices make them screaming value buys that never see their prices rise to where valuation suggests it belongs. Investors forget that a high dividend only goes so far when a stock's price continues to drop. Investors who heeded my November 2020 warning and avoided this portfolio killer, avoided suffering a 14.69% share price loss which even the stock's 7%+ dividend did not make up for.
AT&T's Performance Since I Warned It was a Serial Abuser
Source: Seeking Alpha
Another stock that falls into the same category is Altria (MO). Everyone who bought between October of 2014 and June of 2019 and held it until now is underwater on its price. So are many who bought after that time with the exception of those who bought shares during the COVID-19 swoon. Yes, they have earned dividends that made up for some of this pain, but they are exposed to the same danger of seeing the stock price drop even further as holders of AT&T experienced if changes in their business needs make them have to lower the dividend.
Oil companies fall into the same category. They pay a high dividend, but everyone who bought and held Exxon Mobil (XOM) at any time after September of 2010 is now underwater on price, with the exception, again, of those who bought during the 2020 Covid-19 swoon. Yes they got a higher dividend and it has grown. But Fastgraphs tells us that Exxon Mobil's dividend in 2010 was only 2.38%. You could have earned a 1.81% dividend at the same time if you had invested in a fund or ETF that tracks the S&P 500. When you consider the difference that the price appreciation could have made in your life there is no way to defend the investment in Exxon Mobil.
Exxon Mobil Total Return Over the Last 10 Years
Source: fastgraphs.com
Investors would have done better buying a 10-year treasury note which was paying 1.97% in January of 2012. Credit union CDs were available paying rates another percent higher or more.
And don't let the current high dividend fool you into buying Exxon Mobil now. That dividend yield is high only because the price has tanked so badly, not because the company is rewarding investors. Investors who bought an S&P 500 index fund in 2010 saw the cash amount of their dividend per share rise about 160% between 2010 and the end of 2021, with the exact percentage dependent on the fund's expense ratio. The cash value per share of the Exxon Mobil dividend per share has only risen by 101% over the same period. And there have been too many years when that dividend was higher than the company's earnings per share.
The lesson here? Dividends far higher than market averages are almost always a sign that a company has been a rotten investment for a very long time. That high dividend is all it has left to seduce new investors and if something happens to that dividend, you will suffer serious harm to the remaining capital locked up in your shares with which you could buy better stocks.
My Criteria for Recommending a Dividend Stock
With that painful lesson in mind, let's look at some of the other principles that the last decade have taught me about investing in dividend stocks.
When I begin to search for the kind of income stocks that won't leave me feeling like a fool a decade later, I look for the following:
- A history of dividend payments at least 10 years long or more.
- Dividends that aren't so high they suggest the company has no other qualities that would attract investors.
- Dividends that have risen most of the time except when prudent business management makes freezing or even stopping the dividend the best course for the company's continued profitability. TJX Companies (TJX) is a good example of a company that I continue to invest in. It chose to miss out on achieving Dividend Aristocrat status in 2020 rather than pay a dividend when the COVID-19 shutdowns provided a once in a century threat to its otherwise very profitable business. This was a sign it is run by capable management. It reinstated its dividends once conditions got better. The quality of the company's business and the likelihood that it will continue to be a quality business kept investors in the stock. I prefer a stock like this to one like Exxon Mobil that raises its dividend even when its earnings don't cover it.
- A price that gives it a P/E Ratio near or below its average P/E ratio over the past 5 and/or 10 years. I will stretch this rule and buy a stock with a price that gives it a P/E ratio above that long-term average if the company has been growing earnings and is expected to keep growing earnings at a rate that makes it likely that its earnings growth over the next year or two will make the P/E ratio catch up to the stock's current price.
- Generally rising earnings per share over an extended period. As I believe that standard valuation techniques are useful for screening mature dividend-paying stocks I look for companies whose earnings are not strongly cyclical, as I believe that the price of mature companies whose prices are not driven by momentum investors oscillates around its average P/E ratio over the long-term. With cyclical companies you can expect the price to rise and fall. Since I am a buy and hold investor investing largely in a taxable account, I don't want to have to attempt to trade in and out of these cyclical stocks at just the right time.
- An earnings growth rate high enough to beat inflation. This wasn't hard to find until this year as inflation has remained under 2% for a decade or more. But with inflation now running somewhere around 6.8% it has become a serious concern.
- Investment Quality Debt. I usually avoid companies with very high debt levels and/or credit ratings below BBB. The availability of long-term debt at extremely low rates the past few years has made evaluating debt harder as taking advantage of cheap rates can be a good business move. I don't mind debt if it was borrowed cheaply and used to for purchases that should improve the company's future earnings. CVS's (CVS) taking on of debt to buy Aetna falls into this category.
- Qualitative factors that don't show up in financial reports. These are harder to list as they often can only be described by saying, "You'll know it when you see it." But factors that keep me from investing are things like frequent changes in management, questionable management behavior, frequent business mission changes, a conglomerate structure with a hodge-podge of unrelated business lines, widely reported unethical corporate behavior, dependence on a limited number of faddy or outmoded products, and long-term labor problems caused by abusive behavior to employees.
- I look for Positive factors that are mostly the opposite of the factors just listed. I also do best when I stick with the old Peter Lynch recommended approach of both liking and having a pretty good sense for what it is that a company sells and who its customers are. I stay away from investing in companies whose businesses earn money doing things I can't understand.
Large Cap Dividend Stock Opportunities are Exhausted Now
Having stated those principles, it's time to look at what dividend stocks might be good investments now. The temptation is to just focus on finding dividend paying stocks with good valuations. But retirees desperate for income have bid up the prices of almost all well-known slow-growing but high quality, blue chip, large cap dividend stocks to where their valuations have become dangerously high.
Because the prices of these quality dividend-paying stocks have grown much faster than the cash value per share of their dividends, their dividend yields have dropped to such low levels, it's hard to see why you would buy them for income. Yields below 1% are not unusual and yields below 2% are common. The ProShares S&P 500 Dividend Aristocrat ETF currently is paying a dividend of only 1.90%. Is that yield worth taking the risk that high valuation implies?
The dividend stocks that are still well valued are either stocks of companies whose businesses are facing well-known, serious headwinds or ones that are in very cyclical sectors, Energy and Financials in particular. These are sectors that were in the doldrums until very recently when they have seen their earnings surge. So you have to be extremely careful if you invest in a stock in a cyclical sector to choose the stock of a company with an encouraging history of earnings growth, not just dividend growth.
REITs still offer investors some good opportunities, but they really are a different and unique kind of investment, which is why they are excluded from many large cap indexes by design. They are covered very well on Seeking Alpha by quite a few writers who only follow that sector, so I am not going to discuss them in this article.
Where I've Recently Put My Own Dividend-Investment Money
Rather than show you a list of large Cap stocks that screen well, but may or not be good investments, I'll take a different approach in this article and simply tell you what I've bought over the last few months that I believe might still be good buys for dividend investors going forward. There is a lot of advice out there from people who don't own the stocks they tell you to buy. If these recommendations turn out to be bad advice, I will suffer along with anyone who follows that advice. That doesn't mean these stocks won't do poorly going forward. My investing results over the last couple years mostly track the DOW and lag the S&P 500 due to my value tilt. But at least you can trust that when I say these are conviction buys I mean it.
Note however, that most of my stock investments are held in ETFs. My individual stock investments make up 27% of my total stock investment. That total investment in individual stocks is made up of 17 regular stocks and three REITs. My largest single stock holding, Lowe's (LOW), makes up only 3.2% of my stock portfolio. I also hold a lot of fixed income.
Huntington Bancshares
Huntington Bancshares (HBAN) is a regional bank headquartered in Columbus, Ohio that currently has a dividend yield of 4.02%. Like most banks, it is cyclical and it has taken on debt to acquire another Midwestern bank chain, TCF. What it has going for it that other banks don't right now, besides the higher, but not obscenely higher yield, is that it is predicted to grow earnings at a robust rate, at least for a while.
Source: fastgraphs.com
You can read a very good, detailed analysis of it published on Seeking Alpha last month by Daniel P. Varga here, so I won't repeat what he documented so well. I bought my shares in July and October.
I also bought more of two stocks I've owned for a while during the recent December dip. They were Lowe's and AbbVie. Lowe's dividend yield is only 1.26%, though, which would not interest most dividend-focused investors. I buy it mostly for its long-term growth potential.
There are two additional large cap stocks I currently hold that still look like good dividend prospects to me, though I didn't add to them during the December dip. The first is CVS. It will be a good buy if you believe that its current P/E of 12.79 is still unjustifiably low and don't mind that it froze its dividend for years after its Aetna acquisition. It is raising its dividend by 10% as of February of 2022.
The other is Kroger (KR). It has a 17-year long history of dividend growth and though it is expected to see earnings decline next year, after the extremely strong earnings growth it saw during the past two years, it is still very modestly valued with a P/E ratio of only 12.70. This P/E is still lower than its average relatively low P/E.
Kroger Price, P/E, Earnings and Dividend History
Source: fastgraphs.com
Fortune Brands Home & Security - a Possible Dividend Star of the Future?
Among the most august Dividend Aristocrats you will find Sherwin Williams (SHW). This is a stock that I and many other investors wish they had bought the day they bought their first stock. It has increased its dividend every year for 42 years. However, its dividend yield now is only a paltry .63% and has not been over 1.74% since 2010. This was not a problem for investors, as the stock has grown at a rate that has produced an annualized gain of 19.40% over the past 20 years. Ten thousand dollars invested in Sherwin Williams December of 2000 would now be worth $397,225.80. And that doesn't include the $16,380.07 of dividends it has paid over that period. The company is now ridiculously overvalued, with a blended P/E of over 41.03. So I wouldn't touch it now, but I sure would like to find another company that could grow like that.
Which brings me to my other recent large cap buy, a company with a nine-year history of dividend-growth and of impressive EPS growth, Fortune Brands Home & Security (FBHS).
FBHS: P/E Ratio, Price, and Earnings and Dividend History 
Source: fastgraphs.com
Since this stock started trading in 2011 it has racked up an annualized return of 20.06% not counting the dividends which if reinvested would have contributed to a 20.71% annualized return. It has paid a growing dividend since May of 2013. Fastgraphs for some reason doesn't show it, but FBHS has announced that it is raising its dividend by 7% in February.
Analysts predicted it will grow earnings about 11% over the next two years after achieving 36% growth during 2021. Like Sherwin Williams, Fortune Brands Home & Security sells boring items that are needed for every new and renovated home: locks, faucets, sinks, disposals, doors, decking, urethane millwork. It also sells dedicated security items like safes as well as commercial cabinets. It sells these products all over the world. These boring products don't have the sex appeal of the stocks Cathie Wood's ARK Innovation ETF (ARKK) buys, but even if they are as dull as watching paint dry, it is selling paint that produced Sherwin-Williams's decades of enviable returns.
That said, this is a riskier investment than the others I described. With a current yield of 1.06%, FBHS is also not a stock you buy if you are desperate for income, but if it even half lives up to expectations your total return could be quite satisfying. I consider it a gamble with good odds.
How Seeking Alpha's Quant Feature Ranks These Stocks
Here is how these large cap stocks look through the lens of the Seeking Alpha Portfolio features Dividend and Valuation screens. We will revisit how useful the Quant rankings turn out to be in a year and see how useful it would have been to use them as a guide to investing.
Psycho Analyst's Conviction Large Cap Buys and Holds Dividend Quality
Source: Seeking Alpha
Psycho Analyst's Conviction Large Cap Buys and Holds Valuation Metrics
Source: Seeking Alpha
Some Better Looking Mid-Cap and Small-Cap Dividend Stocks for 2022
Most of the dividend stocks that are heavily followed here on Seeking Alpha are large cap stocks. And those are the stocks whose returns dominate the various dividend ETFs, which are almost all market cap weighted.
But I thought it might be interesting to see if perhaps there were any hidden gems lurking among smaller cap dividend stocks. In the past, I would have screened the stocks that are held in the S&P 400 and S&P 600 to find such stocks. But this time I thought I would take a different approach.
I was intrigued to recently discover an ETF that tracks the Nasdaq US Small Mid Cap Rising Dividend Achievers™ Index. It is the First Trust SMID Cap Rising Dividend Achievers ETF (SDVY). It has only been in operation since 2017 and is small, with only $437.6 million in assets. Its expense ratio, 0.60%, is too high to interest me, especially as it has under-performed the Schwab US Dividend Equity ETF (SCHD) throughout its brief existence.
But given the limits of growth that face huge large cap dividend growth stocks, it seems likely SDVY's holdings, which are all stocks of small and mid-cap companies with strong dividend potential, might indeed hold some of the dividend achievers of the future. Given their modest market caps, many of these stocks must have lots of room to grow their businesses and thus their dividends and earnings.
So I downloaded the list of SDVY's holdings, uploaded the tickers into Fastgraphs, and extracted the 54 stocks in that list that had a 10-year history of dividend growth. I then looked more closely at the graphs Fastgraphs generates for each of these stocks so that I could get a feel for the stocks' pattern of earnings growth and valuation.
I eliminated the stocks that looked significantly overvalued based on their historical P/E ratios, those with very cyclical earnings histories, and those with very small dividends that didn't strike me as having other characteristics that would make them worth checking out.
I then created a Seeking Alpha portfolio out of the stocks that passed this rough screen and eliminated those with Quant Ratings below 3.00.
Next I checked out the Dividend tab of Seeking Alpha's Portfolio and eliminated a few stocks that had low scores for Dividend Safety or for a combination of Dividend Safety and Dividend Growth. I did not eliminate stocks with poor scores for yield if the earnings growth of the company was strong.
Below you can see the eight stocks that made it through these steps. They are sorted by their Seeking Alpha Quant Ratings.
Selected Small & Mid cap "Rising Dividend Achievers" Dividend Scores
Source: Seeking Alpha
Below you see important valuation metrics for these same stocks, as reported in Seeking Alpha's Portfolio feature.
Selected Small & Mid cap "Rising Dividend Achievers" Valuation
Standout Small and Mid-Cap Stocks
One stock that made it through this screen, Williams-Sonoma (WSM), earns an asterisk. That's because though it has an excellent long-term growth history and 20 years of annualized performance that was more than double that of the S&P 500, analysts' forecasts for its future growth are negative.
The Seeking Alpha Quant score that makes it look like a good buy appears to lean heavily on backtesting, so I would be cautious about investing in Williams-Sonoma right now. I have found analysts' forecasts to often be way too optimistic. When they forecast consecutive dropping earnings it is likely that the actual decrease in earnings will be worse. Williams-Sonoma may well be properly priced. It's 1.67% dividend is not worth taking a risk for.
Source: fastgraphs.com
Three of the stocks that made it through these screens are ones I have been following for more than a year, either because I own them or because they have been on my watchlist. So I will give you some color on them below. But the other stocks on this list, chemical company Celanese (CE), industrial machinery company Crane (CR), investment banker Evercore (EVR) and lumber product company UFP Industries (UFPI) also look to be very worthy of deeper investigation if you are willing to venture away from the well-trodden path of large cap dividend investing.
Snap-on (SNA)
The stock that currently rates the most highly in this group according to Seeking Alpha's Quant scores is one I have owned since August of 2020 when it presented an irresistible value: Snap-on. After I bought it, it soared. But it has recently seen its price drop to where it again appears well-valued. This is probably because investors believe that rising rates might pose a threat to the way it finances the franchises it sells to Snap-on vendors. I have written about it at length in an earlier article, This Blue Collar Stock Gets Overlooked in a Hoodie World. But with its unusually high credit rating and relatively low level of debt, it looks just fine to me. I bought more this past October.
It has been among the very smallest small-cap stocks, but with the S&P's definition of "Large Cap" increasing every year, it no longer is. This may cause it to drop out of some large cap indexes, though it will become a more significant factor in mid cap indexes.
Snap-on P/E, Price, Earnings and Dividend History
Source: fastgraphs.com
Whirlpool (WHR)
I have had Whirlpool on my Watchlist for a while but never pulled the trigger, which is a shame as it has performed very well for patient buyers who bought it during the long stint of under-performance that began in 2018. Unlike Snap-on, its performance hasn't beat the S&P 500 over an extended period of time, as it grows earnings relatively slowly. But it is predicted to increase its earnings going forward and is worth a deeper look. Technically it is a large cap stock with a $14 billion market cap, but among the very smallest now that the S&P 500 uses $13.1 billion as its lower cutoff.
Whirlpool owns a large number of the world's most popular large appliance brands, including Whirlpool, Maytag, KitchenAid, JennAir, Amana, Roper, Affresh, Gladiator, Swash, everydrop, Speed Queen, Hotpoint, Bauknecht, Indesit, Ignis, Privileg, Consul, Eslabon de Lujo, Brastemp, Acros, Ariston, Diqua, and Royalstar.
Though Whirlpool is classed by GICS as a Consumer Discretionary stock, those of you who have had your refrigerator or washing machine break down know that there is no discretion involved in fixing or replacing it. Consumers are forced to buy appliances and buy replacement parts for these appliances no matter what the economy is doing. Though supply chain issues may pose a threat to earnings over the short term, that seems to be priced into its current valuation. This company should be steadily selling product long after you are gone.
Whirlpool P/E, Price, Earnings and Dividend History
Source: Seeking Alpha
Brunswick (BC)
This stock doesn't score as highly using Seeking Alpha's Quant Score for dividends as its yield is low. But its dividend is safe and growing. More to the point, the company's earnings have been growing at a double-digit rate for quite a while. After reviewing it for this article, I bought a full position today.
As you can see from the Fastgraphs history graph below, it suffered a period in which it had losses instead of earnings after the Financial Crisis in 2008, probably because it sells expensive boats and boating accessories which require financing. But even when its earnings turned into losses, its share price held up relatively well. It went on to produce twice the return of the S&P 500 for investors who bought it at the end of 2008. Its price has stagnated during 2021, which makes it look undervalued right now. But it is still expected to grow at double-digit rates over the next couple years.
Brunswick has been in the boating business since 1845. It makes boats of all kinds, motor boat motors, and parts and supplies for various boating needs. Even a landlubber like me recognized some of its brands: Mercury motor boat engines and Boston Whaler fiberglass boats. There are dozens more.
Brunswick is an authentic mid-cap stock.
Brunswick P/E, Price, Earnings and Dividend History
Source: fastgraphs.com
Conclusion: There are Still a Very Few Values Out There Mostly in Small Caps You Haven't Heard Discussed Much
Obviously it is risky to invest in stocks that aren't the ones that generate the most chatter on investing social media sites like this one. But it is likely that whatever real bargains remain in the market probably are to be found among the stocks that no one notices. With that in mind, if you are a dividend investor looking for new investment ideas I hope you found some of interest here.
Are Dividend-Focused ETFs a Better Choice?
If you don't have the energy or interest needed to follow and research individual stocks, you might just be better off buying a dividend-focused ETF that applies some kind of value screen to the stocks it holds while maintaining a low expense ratio. The Schwab US Dividend Equity ETF (SCHD) strikes me as the best of the large cap dividend ETFs because it is quite selective and gets rid of losers every year, and has a relatively high yield for a Dividend ETF.
None of these qualities are found in the very popular Vanguard Dividend Appreciation ETF (VIG) which has offered an under 2% yield for years. I have written about it here. The Vanguard High Dividend Yield (VYM) is full of the stocks of poor quality companies that pay low dividends despite its name, as I explain in an earlier article you can read here.
You can compare the performance of these dividend ETFs and the S&P 500 over the past decade when investors have flocked to dividend investing to make up for near-zero fixed income yields.
VIG, SCHD, VYM 10 Year Performance
SCHD's current yield of 2.79% is slightly higher than VYM's 2.77% and much better than VIG's 1.55%. But given how low those yields are compared to the kinds of safer fixed income rates we could see if the Fed rate ever got back to even the 2.25% it reached in 2018, I continue to be wary of expecting their total return to be positive.
That is why I continue to recommend that investors also look for robust earnings growth rate of the stocks they buy, not just the dividend growth rate or the current yield.
Happy New Year and May All Your Stocks Become Multi-Baggers!
This article was written by
Analyst’s Disclosure: I/we have a beneficial long position in the shares of ABBV, BC, CVS, FBHS, HBAN, KR, LOW, O, SCHD, SNA, TJX either through stock ownership, options, or other derivatives. 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.
I am not a certified investing professional. I am an ordinary investor with a lot of curiosity who researches stocks for my own investment goals and enjoys sharing what I learn with others. Don't invest in any stock you read about here or anywhere else without doing your own research. Make sure to look at both bullish and bearish arguments.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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