Top Dividend Stocks to Invest in Now: Stability and Income for a Defensive Portfolio

Introduction

Top Dividend Stocks to Invest in Now

Pfizer (PFE)

Pfizer, a pharmaceutical giant, boasts a market capitalization of $172 billion and a current price of $30.43. With a dividend yield of 5.5% and a history of 15 consecutive years of annual dividend increases, Pfizer is a strong contender for income-focused investors. Excluding declining COVID-related sales, Pfizer’s revenue grew by 14% year-over-year in Q2 2024. The company expects adjusted earnings between $2.45 and $2.65 per share, sufficient to cover its annual dividend payout of $1.68.

Ares Capital (ARCC)

Ares Capital, a leading business development company, offers a dividend yield of 9.2%. With 62% of its assets in first- and second-lien senior secured loans, Ares Capital adopts a conservative approach to lending. Only 1.5% of its portfolio is on non-accrual status, indicating strong repayment capabilities. The company’s dividend has increased by 14.3% over the past five years, making it a solid choice for long-term investors.

Duke Energy Corp (DUK)

Duke Energy, a major utility company, provides a quarterly dividend of $1.045 per share, reflecting a 2% increase from the previous rate. With a dividend yield of 3.7% and an expected average annual growth rate of 4%, Duke Energy is trading in line with Morningstar’s fair value estimate. The company’s stable revenue streams and strong market position make it an attractive option for income investors.

American Tower Corp (AMT)

American Tower, a global leader in wireless infrastructure, offers a dividend yield of 3%. Despite no growth expected in 2024, the company has an annualized dividend growth rate of 8.6% over the past five years. Trading just below its Morningstar fair value estimate, American Tower is poised for growth as it continues to reduce debt and invest in 5G infrastructure.

Wells Fargo & Co (WFC)

Wells Fargo, a prominent financial institution, recently increased its quarterly dividend payout to $0.40 per share, resulting in an annual rate of $1.60. With a dividend yield of 2.7% and an expected increase to $1.73 over the next four years, Wells Fargo is trading in line with Morningstar’s fair value estimate. The company’s strong financial performance and commitment to returning capital to shareholders make it a reliable choice for dividend investors.

Ford Motor Company (F)

Ford Motor Company, a leading automaker, offers a dividend yield of 5.54%. Despite recent challenges in its electric vehicle segment, Ford maintains a strong cash position with $20 billion in cash and cash equivalents. The company’s forward price-to-earnings (P/E) ratio of 5.7 represents a 24% discount compared to its average over the past five years, making it an attractive investment for long-term growth.

AT&T (T)

AT&T, a telecommunications giant, provides a dividend yield of 5.85%. The company has successfully reduced its net debt and continues to experience growth in wireless service revenue. With a low postpaid churn rate and ongoing investments in 5G infrastructure, AT&T is well-positioned for future growth while offering attractive yields to investors.

Stability and Income in a Defensive Portfolio

Dividend-paying stocks are a cornerstone of defensive portfolios, offering stability and consistent income, especially during uncertain market conditions. These stocks typically belong to sectors like healthcare, utilities, and consumer goods, where demand remains steady regardless of economic fluctuations. For instance, companies like Pfizer and Duke Energy provide reliable earnings and consistent dividend payments, making them attractive during potential downturns.

Characteristics of Strong Dividend-Paying Companies

Investors should look for the following characteristics in dividend-paying companies:

1. Consistent Payout History: Companies with a long history of consistent dividend payments demonstrate financial resilience and a commitment to returning cash to shareholders. For example, Pfizer has increased its dividend for 15 consecutive years.
2. Strong Balance Sheets: Financial stability is crucial for sustaining and growing dividends. Companies like Ares Capital and AT&T maintain strong balance sheets, enabling them to support high dividend yields and ongoing investments.
3. Diversified Operations: Companies with diversified business models can weather economic fluctuations better. For instance, American Tower’s global presence and investments in 5G infrastructure provide stable revenue streams.
4. Earnings Growth: Companies with strong earnings growth can continue to increase dividends. For example, Wells Fargo’s improved financial performance supports its dividend growth strategy.

Comparison to Other Income-Generating Assets

Dividend stocks offer a balance of risk and return, often outperforming non-payers and growth stocks in volatile markets. According to historical data, dividend stocks delivered an average annual return of 9.17% from 1973 to 2023, compared to 4.27% for non-payers. They also exhibit lower volatility, being 6% less volatile than the S&P 500, while non-payers are 18% more volatile.

Risk and Return

• Dividend Stocks: Provide both dividend income and potential stock price appreciation, making them attractive for income and growth. They are considered safer than high-growth stocks due to their cash dividends, which can help limit volatility.
• High-Yield Savings Accounts: Offer modest returns with very low risk, insured up to $250,000 per account type per bank.
• Money Market Funds: Typically safe, aiming to maintain a share value of $1, but not without risk if not managed properly.
• Corporate Bonds: Vary in risk; low-risk bonds come from large, profitable companies, while high-yield (junk) bonds carry substantial risk, including default risk.
• Treasury Securities: Generally very low risk, especially if held to maturity, but they can fluctuate in value if sold before maturity.

Practical Implications for Individual Investors

For individual investors, dividend-paying stocks offer a reliable source of income and potential for capital appreciation. By focusing on companies with consistent payout histories, strong balance sheets, and diversified operations, investors can build a defensive portfolio that provides stability and income during market downturns.

Actionable Strategies

1. Diversify Across Sectors: Invest in dividend-paying stocks from various sectors like healthcare, utilities, and consumer goods to mitigate risk.
2. Focus on Dividend Growth: Prioritize companies with a history of consistent dividend growth, such as Pfizer and Duke Energy.
3. Monitor Financial Health: Regularly assess the financial stability of dividend-paying companies to ensure they can sustain and grow their dividends.

Conclusion

Dividend-paying stocks are a valuable addition to any defensive portfolio, offering stability and consistent income amidst market volatility. By investing in top dividend stocks like Pfizer, Ares Capital, Duke Energy, American Tower, Wells Fargo, Ford, and AT&T, individual investors can achieve a balance of risk and return, ensuring financial resilience and growth potential. As economic conditions evolve, maintaining a focus on strong dividend-paying companies will help investors navigate uncertainties and secure reliable income streams.