Since the market highs in July, stocks have been under considerable pressure. Indeed, 10-year Treasury yields are at the highest level since the global financial crisis. As a result, investors now have an alternative with a higher yield and lower risk than dividend stocks.
However, over the long term, dividend stocks offer better returns. Particularly, dividend growth stocks can provide a higher return from an increasing dividend and capital appreciation. According to S&P Dow Jones Indices, since 1926, dividends have accounted for almost a third of total stock returns.
I started with the Dividend Aristocrat list to find the best dividend stock picks. These stocks have increased yearly dividends for the last 25 consecutive years. Then, I screened for those that have grown their dividends by over 5% in the previous one-year and five-year periods. Another requirement was that the payout ratio be below 40% to give enough room for future increases.
Lastly, you want to avoid overpaying even for the best dividend stocks. Thus, I included a valuation screen requiring a trailing price-to-earnings (P/E) not greater than 10. The screen produced the following promising dividend stocks.
Chevron (CVX)
In the energy sector, one of the best dividend stocks to buy is Chevron (NYSE:CVX). The integrated oil major is in a great position to deliver dividend growth. It has a strong balance sheet and diversified operations in oil and gas production, refining and chemicals.
Fundamentally, this energy giant has never been in better shape. In 2022, they reported a record $35 billion profit from soaring energy prices. And although crude oil prices declined to the 60s earlier this year, they have rebounded above $80. The only weakness has been in the chemicals business, which is experiencing a downturn this year.
Chevron’s prospects going forward are even more attractive. It has made two key acquisitions, Noble Energy and PDC Energy, over the last three years. These acquisitions have enhanced the company’s reserves and are accretive to earnings after considering cost synergies.
Additionally, Goldman analyst Neil Mehta expects several projects to come online and has upgraded CVX stock to a “buy” rating. Its Tengiz project in Kazakhstan is 98% complete, and some Gulf of Mexico projects are also coming online. An increase in production volumes in the 2024 -2026 period will significantly boost earnings, especially if oil prices remain above $80.
Given the robust fundamental backdrop, the dividend prospects are very attractive. CVX stock yields 3.8%, yet the payout ratio is a low 37%. The company has increased its dividend at a 6.2% annual rate over the last five years. With a 36-year record of consecutive increases, expect more dividend growth down the road.
In addition to dividends, the company also has a record $75 billion buyback. In short, this dividend stock is growing and focusing on shareholder returns. Yet it trades at a bargain trailing P/E of only 10.
Aflac (AFL)
Aflac (NYSE:AFL) is another stock that should be on your dividend stocks watchlist. The company offers supplemental health and life insurance in Japan and the U.S. In the U.S., it’s the number one supplemental health insurance provider.
This insurance stock has a consistent history of cash flow generation and capital returns. Through the years, it has rewarded shareholders with great dividends. Its 41 consecutive years of dividend increases is a record matched by only a handful of dividend stocks.
Although interest rates are rising, Aflac is a buy. Among insurance peers, the company is less vulnerable to rising interest rates. Its focus on supplemental health insurance reduces its earnings sensitivity to interest rates. And its fundamental prospects are positive.
In the second quarter of FY2023, it continued its rollout of WINGS cancer insurance and Child Endowment policies in Japan. Due to these new products, cancer insurance sales in the country increased 60% year-over-year. Meanwhile, in the U.S., it saw strong growth from agents and brokers.
In terms of returns, it paid out $252 million in dividends in the quarter. Additionally, it repurchased $700 million worth of shares. The company has adequate wiggle room to increase dividend payments further. Currently, it has a dividend yield of 2.3% and a payout ratio of only 22%. Regarding dividend growth, it has increased its dividend at an annualized rate of 10.1% in the last five years.
Archer-Daniels-Midland (ADM)
Archer-Daniels-Midland (NYSE:ADM) has been a key player in the agricultural commodities market. According to ETC Group, it’s one of the companies that dominates the global food supply chain and is the third largest agricultural commodity trader. Today, it’s still among the promising dividend stocks to buy.
It acquires, transports, stores, processes, and distributes agricultural commodities and food ingredients. The Chicago-based company is the world’s largest corn processor and oil seed business. Considering that the global population is still rising and the world needs to eat, the company’s future is bright.
From the dividend record, it’s clear this consumer defensive company operates in one of the most stable industries. The company has built a moat through its global distribution network that smaller peers can hardly match. To paint a picture of its scale, it originates more than 10% of the worldwide crop.
The company has a robust capital allocation framework for the strong cash flows it generates from distribution and processing. It allocates 30% to 40% of free cash flow to reinvestment and growth opportunities. Then, it returns the rest to shareholders.
Due to this framework, it holds an impressive 50-year record of dividend increases. Over the last five years, the dividend has grown at a 6.1% annualized rate. Last year, the company reported record profits due to inflation. And in true dividend aristocrat fashion, it increased the dividend by 12.5%.
Going forward, ADM is one of the most reliable dividend stocks. Given the defensive nature of its business and its global scale, it will grow its earnings as the population increases. Furthermore, it yields 2.2% and could increase the dividend substantially, given its low 23.1% payout ratio.
The stock deserves a higher multiple due to its stability and growth prospects. Yet it trades at a dirt cheap 10 trailing P/E. Buy this bargain stock for capital appreciation and dividend growth.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
