8 Quality Dividend Stocks for Durable Growth and Income

From “Dividend Aristocrats” to special situations, Ben Reynolds — along with his co-editors Bob Ciura and Nikolaos Sismanis ­– provides in-depth research on high-quality stocks through its four top-ranked newsletters.

As part of MoneyShow’s Top Picks 2021 report, these advisors highlight eight of their favorite stocks for the coming year.

AT&T  (T) is the second largest telecommunications business in the U.S. based on its $205 billion market cap. Scale is a critical competitive advantage in the industry. The cost of building a network large enough to compete with these industry giants is enormous.

The company’s durable competitive advantage — and shareholder friendliness — is on display with its long dividend history. AT&T has increased its dividend payments for 36 consecutive years.

While AT&T has a durable competitive advantage and has proven it prioritizes rewarding shareholders with rising dividends, the company is not growing quickly. Adjusted earnings per share have compounded at 5.1% annually from fiscal 2010 through fiscal 2019.

This level of growth is ahead of inflation and gives the company room to continue increasing dividends, but growth is not the main reason to own AT&T stock. The company’s high dividend yield of 7.2% will likely return more than underlying business growth for shareholders.

It’s rare to find a quality security with such a high yield in today’s generally overvalued market. And, the company’s high yield is well covered. AT&T is paying out just 64% of expected fiscal 2020 adjusted EPS of $3.25.

We believe AT&T to be undervalued. The stock is trading for a P/E ratio of only 8.8 times our 2020 adjusted EPS estimate. For comparison, the company’s P/E ratio over the last decade is 12.6.

With a high yield and an undervalued stock, AT&T makes a promising investment. The company is likely to continue paying its big dividend even during a recession, so investors are likely to be “paid to wait” for the company’s valuation multiple to rise to historical averages.

Walgreens Boots Alliance  (WBA) is the second largest publicly traded pharmaceutical retailer based on its market cap. There’s much to like about Walgreens as an investment today.

The company’s management is especially shareholder friendly. Walgreens has increased its dividend for 45 consecutive years, which makes it a Dividend Aristocrat. And, the company has reduced its share count by 4.2% annually from fiscal 2015 (August) through fiscal 2020.

As an established blue-chip stock, Walgreens isn’t going to grow its sales or earnings rapidly. With that said, Walgreens has grown its adjusted EPS at a solid but unspectacular rate of 6.7% annually from fiscal 2011 through fiscal 2020.

The company has struggled to grow recently due to pricing pressure and Covid-19. We believe the company will return to growth and generate adjusted EPS growth of around 5% annually over the next five years.

Where Walgreens really stands out as a promising investment is its low valuation and high yield. The stock is trading for a P/E ratio of just 8.0 based on our expected fiscal 2021 adjusted EPS of $4.98. The company’s historical average P/E over the last decade is around 15. We believe Walgreens to be trading at a steep discount to fair value.

Walgreens stock recently offered investors a high 4.7% dividend yield. The company’s dividend is well covered, coming in at under 40% of expected 2021 adjusted EPS. This low payout ratio combined with the company’s long history of dividend increases makes it likely that the company’s management elects to continue rising dividends going forward.

Walgreens is offering investors an opportunity to lock in a high yield at current prices. In addition, it’s likely the company continues to reward shareholders with dividend increases. And with a historically low P/E ratio, Walgreens stock offers the potential for capital gains if the valuation multiple returns to anywhere near its historical average.

AbbVie  (ABBV) is a pharmaceutical giant that was spun off from Abbott Laboratories  (ABT) in 2013. This has clearly worked to the benefit of shareholders, as AbbVie stock has more than tripled since being spun off.

Its flagship product is Humira, which is the world’s top-selling drug. Humira is now facing biosimilar competition in Europe, and will lose patent exclusivity in the U.S. in 2023. Fortunately, AbbVie has prepared for this outcome by investing heavily in new products, both internally and through acquisitions, to replenish its drug pipeline.

This has succeeded in providing AbbVie with continued growth. In the 2020 third quarter, AbbVie reported $12.9 billion in revenue, up 52% year-over-year thanks in large part to the $63 billion acquisition of Allergan, maker of Botox and many other successful products.

Separately, new products have boosted growth such as Imbruvica, which reported 9% sales growth last quarter. EPS rose 21% from the previous year’s quarter.

Even with the coronavirus pandemic, 2020 is set to be another strong year for AbbVie, as the company expects full-year adjusted EPS in a range of $10.47 to $10.49. We expect 3% annual EPS growth moving forward.

AbbVie qualifies as a Dividend Aristocrat due to its history under former parent company Abbott, which is also a Dividend Aristocrat. AbbVie has continued to raise its dividend since the spin off, including a hefty 10% raise in October.

AbbVie shares currently yield around 5%. The combination of EPS growth and dividends along with a small boost from an expanding valuation multiple are expected to deliver total returns above 9% per year. (Disclosure: The author is long ABBV.)

Income investors have long sought out Master Limited Partnerships because of their high yields. Many MLPs yield 5% or more, which is especially attractive in an environment of historically low interest rates.

The MLP space has seen many companies cutting or suspending their distributions during 2020. But Enterprise Products Partners  (EPD) has not only maintained its hefty distribution, recently yielding 8.8%, it has increased its distribution for 21 consecutive years.

One big reason for this is due to the company’s leading network of assets. Enterprise Products Partners’ assets include approximately 50,000 miles of pipelines, 260 million barrels of storage capacity for Natural Gas Liquids (NGL), crude oil, and other refined products; and 14 billion cubic feet of natural gas storage capacity.

Enterprise Products Partners also has a strong balance sheet including a relatively high credit rating of BBB+, which helps keep interest expense lower than many MLPs with weaker credit ratings.

Another factor helping to keep cash flow afloat is the company’s significant cost reductions. In 2021 and 2022, Enterprise Products sees growth capital expenditures of $1.6 billion and $800 million, respectively, compared with $2.9 billion expected to have been spent in 2020.

As a result, declines have been manageable this year. Over the first three quarters of 2020 combined, adjusted EBITDA and distributable cash flow declined 1.6% and 4.3%, respectively. We expect Enterprise Products to grow distributable cash flow by 5%-6% per year.

The company has performed relatively well, thanks in large part to its strong assets and healthy balance sheet. With a distribution coverage ratio of 1.7x in the third quarter, Enterprise Products Partners’ distribution appears highly secure, particularly if the U.S. economy recovers in 2021 and beyond. We expect the MLP to produce total returns above 13% per year moving forward.

Who would have thought that a Covid-19-sensitive company like Starbucks  (SBUX) would end the year with its stock at all-time highs, despite plummeting by around 40% during March’s selloff? The iconic Seattle-based coffee franchise was quick to adopt and excellently manage the ongoing pandemic.

Its high-quality management characteristics are well known, as the company has been treating its shareholders well for a long time. In fact, over the past decade, the stock has returned CAGR (compound annual growth rate) returns of 22.88%. Now beginning a new decade, we believe that Starbucks will continue to be an outperformer and once again deliver market-beating returns.

Once the economy normalizes, we expect Starbucks’ revenues to snowball due to its new store count. Not only should stores fill with happy customers, but over the past few quarters, the company has taken advantage of its ongoing pandemic to scale its digital order experience.

Based on the latest outlook, the stock is trading around 30 times its 2022 EPS in terms of its valuation. While this may not be the most attractive multiple of all time, especially for a forward year, Starbucks’ consistent shareholder value creation, AAA management, and top-tier capital return programs are more than enough to justify it.

As a reminder, since 2005, the company has retired more than one-quarter of its total shares outstanding. Hence, we remain bullish on Starbucks and consider it a top 2021 pick. Legendary investor Bill Ackman likely shares similar views, holding around 1% of the whole company through his hedge fund, Pershing Square, which holds around $7.7 billion in its public-equity holdings.

JPMorgan Chase  (JPM) is another top pick for 2021. Led by its world-famous CEO Jamie Dimon, JPMorgan has been by far the best performer amongst its big-bank peers over the past years, and we believe that this will continue to be the case.

The company’s traditional wholesale banking segment remains the best in the country, while its new investments into fintech should eventually pay off big time. As the fintech market keeps on expanding, JPM should be able to leverage its huge customer base and economies of scale to compete actively with “modern” players. For context, over the past four quarters, JPM has processed $1.5 trillion in gross transaction volume.

Despite having an AAA balance sheet and exposure to growth, though its fintech segment mentioned, for example, the stock is currently trading a relatively attractive valuation. Based on analyst expectations, the shares are trading at a forward P/E of 13.5. In our view, this multiple is remarkably attractive for such a quality company as JPM, which in addition, offers best-in-class capital returns.

JPMorgan features a five-year dividend-per-share CAGR (compound annual growth rate) of 16.17%, while management has bought back and retired around 21% of its stock over the past decade.

Earlier in the year, the Fed had limited banks’ buybacks in order to ensure that adequate liquidity is maintained. The Fed’s recent stress tests lifted most of its previously imposed restrictions. Just after the Fed’s announcement was released JPM published a new monster buyback program of $30 billion, which represents nearly 8% of its current market cap.

JPMorgan is not only a top-pick of ours moving into 2021. World-class hedge fund Knighthead Capital, for instance, holds the stock as its 4th largest holding amongst its $5.6 billion of discretionary assets under management.

Home Depot (HD) was founded more than 40 years ago back in 1978. Since that time it has grown into the leading home improvement retailer in the U.S. based on its market cap of $289 billion. Its impressive growth history is evidence of a durable competitive advantage. The company has size and scale in its industry. It can pressure suppliers for the best prices and give customers reasonable price.

Recessions have not been a major concern for Home Depot, including the Covid-19 related economic downturn. People spending more time at home has led to greater sales for the home retailer, as more attention is paid to home projects that need completion.

Overall, we expect Home Depot to compound its EPS at around 9% annually moving forward. This is actually well below annualized adjusted EPS growth of 17.7% from fiscal 2015 through 2019. Our EPS growth estimate could easily prove to be too conservative.

Home Depot stock currently offers investors a 2.2% dividend yield. While this yield isn’t high, it is extremely likely to grow over time. Home Depot has a payout ratio of just 51% using our expected adjusted EPS of $11.70 for fiscal 2020. Additionally, the company has increased its dividend for 11 consecutive years.

We believe Home Depot to be a long-term buy and hold for investors looking for rising passive income over time. The company’s 11-year dividend increase streak coupled with its reasonable payout ratio and strong growth performance — even during a difficult period — is compelling evidence that the dividend will rise considerably over time.

The Travelers Companies  (TRV) traces its origin back to 1864 when two businessmen founded the company in Connecticut. The firm offers a wide array of commercial, personal, and property insurance. Management has increased the dividend for 15 consecutive years.

This long streak of rising dividends is evidence of a durable competitive advantage. Travelers’ main competitive advantages are its scale and its brand, both of which have been built over the past 156 years.

The company is likely to continue increasing its dividend as it has a payout ratio of just 39% of expected fiscal 2020 adjusted earnings-per-share of $8.70. Travelers stock currently has a 2.5% dividend yield, which is in excess of the S&P 500’s current dividend yield of 1.6%.

While the dividend has been increasing over time, the company has also rewarded shareholders with sizeable share repurchases over time. Travelers has reduced its share count at a 5.6% annualized rate from fiscal 2010 through fiscal 2019.

As an insurance company, income from investments is important for Travelers. Low investment yields have hurt the bottom line. But, if interest rates rise, the company will likely generate greater investment income as it will be able to invest its float into higher yielding securities.

Overall, we expect Travelers to grow its EPS at around 8% annually over the next five years. This growth will come primarily from higher underwritten premium growth, better margins, and its well-funded buyback program. With that said, catastrophic losses in any one year could damper growth temporarily.

We believe Travelers will continue to reward shareholders with solid growth and rising dividends over time. The company’s proven business model has stood the test of time, which makes Travelers a favorable buy and long-term hold option for investors looking for rising passive income.