In the world of dividend stocks, yield is king. Of course, a business needs to have solid fundamentals, too, but a robust yield will pay investors quarter in and quarter out.
We asked three Motley Fool investors for their best dividend stock choices that currently yield above 2%, and they came back with 3M (NYSE: MMM), JPMorgan Chase (NYSE: JPM), and McDonald's (NYSE: MCD). Here's why they think these reliable dividend payers may be right for your portfolio.
Dividend stocks pay you money every quarter: what's not to love? Image source: Getty Images
Change can be good
John Bromels (3M):Hundred-year-old companies seldom look the same -- or even similar -- today as they did when they were founded. But 116-year-old 3M has a lengthy history of outperformance, and that trend should continue, even as big changes come to the materials science company.
Probably the biggest change is in the C-suite. Michael Roman, a 30-year veteran of the company, is scheduled to take over as CEO in July. Current CEO Inge Thulin is moving into a new position as executive chairman of the board, where he's expected to provide input on long-term strategy. That said, the company's winning combination of consistent innovation and healthy research and development (R&D) spending is expected to continue under Roman's tenure.
Roman will take the reins just after 3M's stock suffered a double-digit percentage loss earlier this year that briefly knocked the stock below $200 a share for the first time in a year. That might sound worrisome, particularly because it's largely thanks to an $850 million settlement with the state of Minnesota over PFOAs. PFOAs are toxic chemicals that have been causing all kinds of legal headaches to their former manufacturers. But that settlement, although large, ends a $5 billion lawsuit that would have had a much bigger impact on the company if it had lost at trial.
With the share price down, 3M's current yield is about 2.5%, and that yield has been increasing every year for more than a half-century. That makes now an excellent time to pick up shares of a consistent outperformer.
Good news and bad news for JPMorgan investors
Rich Smith (JPMorgan Chase): With more than $2.5 trillion in total assets, JPMorgan Chase is unarguably one of America's top banking stocks. The bank's 10.4% return on equity and 1% return on assets are both slightly above average for its industry, while its 38.6% operating profit margin outclasses all U.S. banks of similar size. JPMorgan has also historically been a pretty good dividend-paying stock -- but here's the thing:
JPMorgan's stock price has nearly doubled over the past five years. And since a stock's "dividend yield" is its annual dividend payout divided by its stock price, JPMorgan Chase's yield has actually been shrinking over this time period. In 2013, the stock's $1.44 dividend payout represented a dividend yield of 2.6%. Today's dividend of $2.18 per share is closer to 2.1%.
On the one hand, investors should be pleased with this -- a doubling in stock price being a very good thing. On the other hand, though, if you want to buy JPMorgan stock new, and enjoy a dividend yield over 2%, you may have to act quickly, before the stock's price pushes its dividend yield below 2%.
There is the possibility, of course, that JPMorgan will continue raising its dividend, as it's done for the past seven years straight. With only 31% of profits going to pay for dividend checks today, JPMorgan certainly has the ability -- and if its stock price keeps growing, growing the dividend, too, is the only way JP can keep its dividend yield competitive with the 2% yield that's the average on the S&P 500.
For dividend investors, that would be the best result of all.
The burger champ
Jeremy Bowman (McDonald's): IHOP's recent name change to IHOb (International House of Burgers) was a bizarre move, but it also highlighted a larger trend in restaurants. At a time when customers seem to be turning away from high-carb foods like pancakes, there's no simple menu item that has endured and demonstrated global popularity like the burger, and no company has been more successful selling them than McDonald's.
Today, of course, McDonald's is much more than a burger chain. Its all-day breakfast menu has threatened pancake-slingers like IHOP, and the company is moving aggressively into the future with kiosk ordering, a delivery partnership with Uber, and store revamps that give reason to believe the company's recent growth should continue. In fact, McDonald's calls this plan "Experience of the Future" as it updates 1,000 U.S. restaurants each quarter, which includes features like an improved drive-thru, curbside pickup, and a made-to-order Quarter Pounder, marking a departure from McDonald's historical preference for frozen beef.
CEO Steve Easterbrook has also unlocked more profits by refranchising restaurants in China and elsewhere around the globe, and the stock has soared since he took over in 2015 as shares are up 74% over the last three years. During a time when many of its peers have complained about a "restaurant recession," McDonald's has posted consistently strong comparable sales growth, outpacing its rivals.
As a dividend payer, the fast-food giant is no slouch either. It's a Dividend Aristocrat, having raised its payout annually since 1976. Today, it offers a yield of 2.4%. For a combination of growth, income, and security, it's hard to find a better choice than the Golden Arches.
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Jeremy Bowman has no position in any of the stocks mentioned. John Bromels has no position in any of the stocks mentioned. Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends 3M. The Motley Fool has a disclosure policy.