3 Dividend Stocks to Power Through Earnings Season


The 9 Best Stocks to Buy for the Next DecadeThe 9 Best Stocks to Buy for the Next Decade
Source: Shutterstock

Investors are increasingly hyped up when it comes to earnings season. At least that’s the hope and prayer for the folks over at CNBC that need all the excitement that they can get to lure viewers. And while some corporate chieftains, including JP Morgan’s (NYSE:JPM) Jamie Dimon and Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) Warren Buffett are campaigning to end quarterly reporting, earnings season is really just a normal update on how business is going for companies.

And earnings season comes, of course, every quarter — quarter after quarter — year after year. And for the last quarter of 2018, out of the 505 stocks that make up the S&P 500 Index, 358 have released their report cards for the quarter.

And the news is pretty good. Sales overall were up on average by 6.88% and earnings were up on average by 14.20%.

It’s no wonder that the S&P 500 is up by 10% year-to-date and we’re only in February. And that’s after last quarter’s selloff on fears that the earnings were as good as they were going to get and that growth was only going to be just good, and not spectacular.

But there are plenty of companies that aren’t on the list of over-hyped stocks that jump and fall on every little morsel of opinions from talking heads on CNBC, particularly during quarterly reporting times. They tend to be dependable businesses and are focused on longer-term shareholders and not day traders. And they pay nice dividends.

Each of the following dividend stocks I’m going to explore below has already filed its quarterlies with continued good results without fanfare.

Assets Pay

I’ll start with one of my favorite industries — fund management. Fund management is all about assets under management (AUM). The more AUM, the more fee income that a company will earn. The goal is to keep AUM stable to increasing and fee income will follow. You don’t have to be spectacular in managing the assets (although it helps), but you do have to be good at keeping and raising more AUM.

One of the best in this market is AllianceBernstein (NYSE:AB). It has ample AUM, which is up to $550 billion after AB gained $800 million in the last quarter. That is boosting fee income nicely and feeding an ample dividend.

AllianceBernstein (AB) Assets Under Management

Dividend Stocks AllianceBernstein (AB) Assets Under Management

Source: Bloomberg

The dividend distribution is currently 64 cents for a yield of 8.29%. And that distribution is rising over the past five years by an average annual gain of 12.62%.

Shares have generated a return of 101.02% over the past five years — amply outperforming the S&P 500 Index. It makes for one of the better dividend stocks to buy under $33.

Powered Up

Utilities make for one of the most reliable stock sectors for both longer-term growth and regular to rising income. They serve that function particularly well during times of market strife due to the reliability of demand for their core products and services.

If you think that they underperform the general stock market, you’d be wrong. Over the past 20 years, U.S. utility stocks, as tracked by the S&P Utilities Total Return Index, have outperformed the general stock market as tracked by the S&P 500 Index.

The market for utilities isn’t about sacrificing return for just dividend income, rather, it can be a potent rival for the returns you expect from more growth-oriented stocks.

What’s more, utilities can be a great defensive counterweight in your portfolio.

For example, during the market rout from October to year-end 2018, the S&P 500 was down, heavily, by 14.28%. But during that same time, utilities managed to outperform with a positive return of 1.66%

This is all thanks to the combination of reliable core business assets and higher dividend payments that utilities represent.

Of course, not all utilities are the same and neither are all dividend stocks. They can include a host of essential services including electricity, natural gas and water. And they are comprised of both regulated and unregulated businesses.

Regulated business means that the companies have contracts set with specific rates for gas, electricity and water that are set by local public utility commissions (PUCs).

This means that the companies with regulated markets must lobby local PUC officials for acceptable rates that take into consideration the cost of providing the services as well as the capital costs of the operations for the services.

In addition, PUCs, along with other regulatory bodies, must approve any expansion of regulated services, including new plants and transmission or other conveyance lines. And they also need to gain approvals for payments for upkeep and repairs. All of this takes a wide array of skillsets by management to make the most for shareholders while keeping customers and their PUCs content. This includes negotiating and lobbying as well as budgeting and market supply-and-demand forecasting.

Yet, at the same time, regulated business means that companies can conduct longer-term budgeting for capital expenditures as well as having better forecasting for revenues and profitability.

This means that utilities can provide smoother performance for shareholders, especially in challenging times. That adds stability for investors over the long term.

Then there is the unregulated part of the utility market. This can include wholesale provision of essential services for industries as well as for other local utility companies that will contract for gas, power or water.

This is where some companies can provide larger-scale services across local markets and even across the country. The companies in this space can provide the opportunity for investors to cash in on their success in markets with less regulatory oversight on rates.

One of the best utilities in the market is NextEra Energy (NYSE:NEE). The company is primarily comprised of two operating units that take advantage of both the regulated and unregulated power utility market.

Based in Florida, NextEra has its primarily regulated power company in Florida Power & Light. The operation provides power through a variety of generating sources, including natural gas, coal and oil, as well as nuclear power plants. Its customers number in the millions and are primarily residential customers, with some commercial customers.

In addition to its own power generation, it also contracts with external power generators that transmit power via the power grid to supplement its own power generation.

The other side of the company is Next Era Energy Resources. This division of NextEra provides unregulated wholesale power around the U.S. with some additional assets in Canada and Spain. Much of its power generation comes from traditional power plants, but increasingly wind and solar generation provide a large portion of its power. It has quickly become one of the largest renewable power generation companies.

In addition, NEE also has some petroleum and natural gas pipeline assets that take advantage of the company’s reach across the U.S. Revenues from the regulated FPL side of the company represent the larger sum of revenues, which continue to expand at a reliable three-year average of 1.58%. This makes for a steady cash flow for the company.

The company continues to focus more on the NEER division, which provides the namesake for the overall company. The idea is that the next era in power generation will be ever more focused on renewable energy sources. This is supported in that the revenues for the NEER unit have expanded to become 28.55% of overall revenue of the company.

The industry is benefiting from state and local legislation around the nation requiring that a portion of power be generated by renewable sources. In addition, NextEra’s renewable power expansion is also benefitting from Federal tax credits for renewable energy facilities. These come based on capacity and not just the amount of power generated. This means that the company can operate wind and solar facilities around the nation and not just in areas that are particularly sunny or windy.

NextEra Energy (NEE) Total Return

Dividend Stocks NextEra Energy (NEE) Total Return

Source: Bloomberg

The company is a stronger performer for investors. The return on its capital is running at 9.90%, while the return on investor’s equity is a whopping 21.30%. And this is resulting in the market recognizing its performance now and for the future. The shares have delivered a total return over the past five years of 127.76%.

Yielding 2.42%, it makes for a good buy under $185.

Pumping Profits

Petroleum has been one of the better markets for companies last quarter with sales gains for companies reporting of 12.14% (so far within the S&P 500) and earnings growth of 102.19%.

One of the more reliable segments of the petroleum market is in the midstream segment of the toll-takers of the pipeline market. And one of my favorites dividend stocks in this space is Plains GP Holdings (NYSE:PAGP), which has a great network of pipes and related assets throughout North America including the vital Permian Basin in the U.S.

Revenue continues to flow with gains over the trailing year of 29.90%. And the shares are valued at a huge bargain as they are trading currently at a 90% discount to the trailing sales of the company.

As a passthrough, the distributions are shielded from current income tax liabilities making the dividends all the more valuable on a tax-equivalent basis. With the current distribution of 30 cents per year, it yields 5.03%.

Plains GP Holdings (PAGP) Total Return

Dividend Stocks Plains GP Holdings (PAGP) Total Return

Source: Bloomberg

And the overall shares have been dependable for income and for an overall total return over the trailing twelve months of 12.29%. It makes for a good dividend paying toll-taker under $26.65.

All My Best,

Neil George

Neil George is the editor of Profitable Investing and does not have any holdings in the securities mentioned above.