After watching the S&P 500 sink 14% during the fourth quarter of 2018, many investors may be looking to shift more of their money to dividend-paying stocks. A dependable stream of income from a quality dividend stock helps smooth out the ride for investors during a downturn.
But what dividend stocks should investors buy? Two ideas are Apple (NASDAQ: AAPL) and Costco (NASDAQ: COST). Both stocks are down meaningfully from their 52-week highs, giving investors attractive entry points into wonderful companies likely to pay dividends for decades to come.
Here's a closer look at both of these companies.
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Shares of tech giant Apple had already fallen in the months leading up to 2019 but they fell even further a few days into the year after management said its first-quarter revenue would be lower than expected. While there's good reason for investors to lower their expectations for the company's iPhone business after this news, the stock's 33% decline since Oct. 31 has more than priced in headwinds for the key segment. Now Apple trades with a price-to-earnings ratio of just 13 -- wildly low for a market leader with strong pricing power.
The decline in Apple's stock price in recent months means that the company's dividend yield has risen from 1.2% at the beginning of October to 1.9% today. And even this understates the payout investors will likely collect over the next 12 months because another dividend increase will likely be announced around the end of April or beginning of May. Apple has increased its dividend every year around that time since 2013.
Another key reason to like Apple as a dividend stock is the company's low payout ratio. The company is currently only paying out about 23% of its earnings in dividends, leaving plenty of room for more dividend growth in the coming years.
Membership warehouse retailer Costco has a dividend yield of just 1.1%. But this yield is better than it looks once investors factor in the company's occasional special dividends. The unscheduled dividends have become somewhat regular in recent years, with the company paying out three special dividends since 2012. These dividends were spaced approximately two years and one quarter apart from each other. If the company keeps up this pattern, a special dividend could be coming in the second half of 2019.
These special dividends are no joke. Costco's current quarterly dividend amounts to just $0.57, or $2.28 annually. But the special dividends that Costco paid out in 2012, 2015, and 2017, were $7, $5, and $7, respectively -- and these dividends came on top of the company's quarterly dividends.
Like Apple, Costco also has a low payout ratio of just 30%. This leaves room for both growth in the company's regular quarterly dividend and more special dividends.
Then there's Costco's strong business momentum, which was evident in the company's December sales update. Adjusted to exclude the impacts of gasoline prices and foreign exchange, comparable sales at Costco stores during the month were up 7%. Comparable e-commerce sales for the period rose 24%.
With both of these stocks, investors get an enduring company at a reasonable price and strong dividend growth potential.
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Daniel Sparks owns shares of Apple. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy.