You Need Dividend Stocks Now. Here's Why – and Here Are 3 - iShares Select Dividend ETF (NASDAQ:DVY), Diageo (NYSE:DEO)

By James Early, BBAE Chief Investment Officer

You’d be a moron to invest in dividend stocks.

At least that’s what the data show this year: As I type, the S&P 500 is up 9.4%, yet the iShares Select Dividend ETF DVY is down 9.4%. (The S&P 500 equal-weight index splits the difference at -0.43%.)

But you might have been a moron to not invest in dividend stocks overall.

Why Dividend Stocks Outperform

A Financial Times chart, using data from Ned Davis Research and Hartford Funds, showed the growth of $100 invested in 1973 until February of 2021. Specifically:

$100 grew to $4,744 if invested in an equal-weighted S&P 500 index
$100 grew to $8,942 if invested in dividend-paying stocks generally
$100 grew to $14,405 if invested in dividend raisers or initiators

Morgan Housel noted that $1,000 invested in 1957 would have grown to $176,000 by 2006 in the S&P 500. But a strategy buying the 10 highest-yielders in the S&P 500 would have left you with $1,300,000.

I could go on with data supporting dividend investing. For 10 years, I ran what was probably the largest dividend advisory service in the world (and for five years, advised a similar service in London) and I was lucky to beat the market. Here’s an old audit report (although my picks were public anyway):

I penned a recent piece in Forbes, and also walked through some key charts on the BBAE website (I highly recommend you take a look at the last chart) about investing during high interest rates – and where rates go from here.

I’ll spare you a long article and say it directly: We’ve come through 12 or 13 of the most atypical periods ever for US equity markets. Uber-low rates pumped up the present values of unprofitable companies that weren’t projected to have earnings or cash flows until far into the future (see the table at the bottom of this article for a visual).

Those days are over.

Sure, we’ve got an AI boom at the moment. My prediction is that, as with most booms, we’ll see a few big winners and a lot of losers – both on the company and investor level. As I noted here, that’s how booms pretty much always end up.

AI isn’t an all-in portfolio strategy anyway.

If, roughly speaking, you’re younger than your mid-30s, you’ve probably only known a bull market, at least until 2022 came along. That’s not your fault. But if history is a guide – and the “this time is different” crowd has a long-term accuracy rate rounding to 0% – the next 5, 10, 15 or more years will be the era of further advances in AI and other new technologies against a backdrop of a more skeptical, cash flow-focused market.

I’m not telling you to avoid growth stocks. I’m just suggesting that a barbell approach of adding a conservative allocation – specifically, to dividend stocks – could create a nice counterweight in portfolios dominated by Tesla, AI, SaaS, cannabis, or whatever’s looked hot in recent years.

Three Dividend Stocks to Buy Now

Ok, I’m not really telling you to buy these stocks now, or even to buy them per se. You should make your own choices. They could be great for some people, and less great for others.

iShares Select Dividend ETF DVY. It doesn’t have to be this dividend ETF – there are more than 100 others – but this one has a reasonable-but-not-cheap 0.38% expense ratio, and an also-reasonable 107 holdings. Its trailing yield is almost 4% (that’s high!), its P/E is a very reasonable 11 – less than half the S&P 500’s current P/E ratio of 24 – and its beta of 0.74 indicates that it’s a bit “safer” than the market (well, beta loosely equates to safety, but it’s technically covariance with the market, which definitionally has a beta of 1).
Diageo DEO. With a 2% yield, Diageo may not impress dividend hardballs, but its premium alcohol brands like Johnnie Walker, Guinness, Captain Morgan (fun fact: I used to have facial hair like Captain Morgan), Tanqueray, Bailey’s, Smirnoff, and more impress consumers, especially in developing markets where status symbol purchases are in high demand. Globally, booze sales are growing faster than GDP, and revenue from Diageo’s super-premium segment has been growing by more than 20% per year. Diageo’s ROIC (return on invested capital; basically, the financial sine qua non of a business) is consistently in the mid-teens (thus nicely above any realistic cost of capital), and its operating profits are projected to grow by 6% to 9% per year through 2025. All good stuff. Diageo is what I call a “no thesis” company – it’s built strong brands and essentially just has to keep doing what it’s been doing to do well. Success doesn’t hinge on regulatory approval, Phase 3 trial results, or some other singular catalyst. With some swills requiring 15 years to age, it’s not as if aspiring entrants can spring up and quickly challenge Diageo, at least in aged liquor segments, to boot.
Unilever UL. You can’t make everything for everybody, but you can try, and Unilever comes close. I’m partial to their Fabio ads for I Can’t Believe It’s Not Butter! but this 3.4% yielder is so much more, with more than 400 brands including Vaseline, Dove soap, Q-tips (I shove them daily into my ears, warnings be damned), Hellman’s Mayonnaise, the Axe body spray so beloved of teenage boys, and more. A full 58% of sales are to emerging markets, and Unilever sells in 190 out of the globe’s 195 countries (Syria, United Arab Emirates, and Yemen are among the holdouts; I’m still trying to find the others). Beauty is 42% of Unilever’s revenue, food is 38%, and home care is 20%. The catalyst here – and if you’ve seen Unilever’s languishing stock price, you’re wondering what the catalyst is – is that activist investor Nelson Peltz joined the board and CEO Alan Jope will retire after 2023. Procter & Gamble PG is a similar company whose stock price was similarly languishing until new management came along – then it took off. This could be Unilever’s P&G moment.