Need dividends? The stocks with the highest interest rates are not necessarily your best choice. Quality counts. A company must not only be able to continue to fund its payouts, but must also be able to grow its dividend payments in the future.
If you have a few thousand dollars and are ready to make new income-generating investments, here are three of the smartest dividend stocks on the market to buy now.
There is no denying that the glory days of the pharmaceutical industry are in the past. This market has just become very crowded, both because of a number of similar drugs and a number of companies that make them. Merck (NYSE:MRK) is no exception.
What Merck may lack in raw growth power, it makes up for in smart portfolio management.
Take the best-selling drug Keytruda as an example. It’s on track to generate about $30 billion in revenue this year, up from nothing in 2013 when the oncology drug got its first approval (before several dozen more would be added). But Merck didn’t really develop it. It was acquired thanks to the 2009 acquisition of the biopharmaceutical company Organon, which came up with Keytruda’s winning formula in 2006, years before any approval and subsequent revenues. Previously, Merck’s breadwinner was arthritis treatment Remicade. Before that it was the successful asthma treatment Singulair, which was part of Schering-Plough’s portfolio when Merck bought it in 2009. Before Singulair, Merck’s flagship was the diabetes drug Januvia.
In this vein, even though Keytruda sales have never been stronger, the drugmaker has already made it a point to secure the development rights – at a bargain price, no less – to a cancer immunotherapy being developed by the Chinese LaNova Medicines and which only seems promising. a superior option to Keytruda.
The point is that Merck recognizes the inevitable end of the dominance of its best-selling drugs and is responding preemptively by next bestseller before it is a clear winner.
Merck’s track record of updating its drug portfolio with the right drugs early and often is a key reason the company has now been able to increase its dividend for fourteen years in a row. And more than a little. The quarterly payout per share of $0.44 ten years ago is now $0.77. That’s an annualized growth rate of almost 6%, which easily exceeds inflation over the same period. Merck stock itself is also up more than 70% during this period, with a recent significant sell-off.
Newcomers will jump on this ticker, while the forward-looking yield is 3.2%.
Anyone watching Sirius XM Holdings (NASDAQ: SIRI) probably already knows about the satellite radio platform, and Pandora’s parent company has been canceling paying subscribers since early 2020, which makes sense. While satellite radio offered clear value in its early years, the rise of broadband (and wireless broadband in particular) poses a clear threat to the company. Pandora is also a leading name in its part of the market, but streaming radio’s low barrier to entry and competitiveness Apple also bring clear challenges to the table. It’s not surprising that Sirius XM’s revenues have been stagnant for years.
What’s largely overlooked, however, is that Sirius XM Holdings is in the midst of a pretty serious overhaul that will dramatically change its business model for the better.
One of these key changes is the introduction of a completely free/ad-supported version of the satellite radio service available in select new cars. While this plan’s programming isn’t as robust as what’s available to paying customers, it’s an opportunity to monetize a group of consumers who might otherwise never become listeners.
The company is also improving its ability to serve the advertising-driven market. In June this year, Pandora became the first audio platform to adopt an advertising technology called Unified 2.0, an identity solution that helps advertisers deliver ads to listeners more accurately and effectively.
There’s still a lot of work to be done as the company enters this new, advertising-driven era (which isn’t abandoning its old business model, by the way). But given consumers’ growing tolerance for ads in their streaming video feeds — along with the company’s continued growth in programming options like the recent addition of programs hosted by football coach Bill Belichick and podcaster Alex Cooper — the near and distant future sees a lot better off. more promising than recent results have suggested.
By the way, you would buy this stock at an attractive forward-looking yield of 4.1%, based on a dividend that is increased for seven years in a row. The new and improved Sirius should be able to extend this growth streak indefinitely.
Finally, add Dominion energy (NYSE:D) on your list of smart dividend stocks to buy, while the forward-looking dividend yield is 4.6%. It would be hard to find much better than that from a company like this.
At first glance, Dominion Energy isn’t all that different from most of its electric utility competitors. The company serves 3.6 million homes and businesses in Virginia, North Carolina and South Carolina, plus another half-million natural gas customers in South Carolina. The company did $14.4 billion in business last year, giving it a fairly predictable net income of $2 billion.
Digging a little deeper, however, reveals that for the second year in a row, this utility paid out more in dividends than it actually earned per share. Moreover, the dividend has not been increased since the beginning of 2022. While both are ultimately the result of a strategic rethink rather than indicative of trouble, it’s still frustrating. Therefore, the stock is still below its 2022 peak despite the rally from last year’s low. The shares are currently priced at the level of ten years ago.
However, this may be one of those cases where the market is so fixated on a company’s disappointing past that it forgets to look to the future.
While Dominion is in no particular rush to increase the dividend, several major development projects are underway, some of which are nearing completion. For example, the construction of a floating wind turbine (called Charybdis) should be completed sometime early next year. At the same time, even as Dominion invests in new projects, it’s worth noting that the company also sold a few more assets last quarter (the North Carolina Public Company and the CVOW partnership with Stonepeak, to be specific), adding to a list of divestitures that have reduced debt by $21 billion. These are all part of a larger reconfiguration that, while annoying in the short term, will pay off in the long term.
More importantly for income-conscious investors, Dominion Energy’s current dividend payments aren’t really in jeopardy while you wait for them to rise, whenever that may be.
Of course, falling interest rates will only help this ticker in the meantime.
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See 3 “Double Down” Stocks »
*Stock Advisor returns November 25, 2024
James Brumley has no position in any of the stocks mentioned. The Motley Fool has and recommends positions in Apple and Merck. The Motley Fool recommends Dominion Energy. The Motley Fool has a disclosure policy.
The Smartest Dividend Stocks to Buy Now with $3,000 was originally published by The Motley Fool
