5 Dividend Stocks that BEAT the SCHD

Hey Bowtie Nation, Joseph Hogue back with another look at the Schwab Dividend ETF, the SEHD, one of my favorite dividend funds, but where last week I showed you how to beat it. In that video, we created a Frankenstein's monster of the dividend fund, taking parts from the SEHD to create a 15-stock portfolio with a higher dividend and fundamentals to grow that dividend. But then afterwards, I started thinking, why are we limiting ourselves only to stocks within the SEHD ETF? Pulling out those best 15 stocks in the SEHD gave us a 5.3% dividend, a 50% bump in the payout from that broader fund, but also earnings and revenue growth that blows the SEHD away. But then by going further, screening for stocks outside the 99 dividend stocks in the SEHD, I've put together a 5-stock list that will do even better. These 5 stocks boost that dividend yield to 5.8%, a 65% bump from the SEHD, along with the fundamentals and the proven dividend growth to put more money in your pocket. Let's get started with our first stock, Enterprise Products Partners, ticker EPD, with its 7.2% dividend. Stick around and I'll show you how to find the best dividend stocks and how many to hold in your portfolio. EPD is a fully integrated midstream company, meaning it has exposure to everything between those explorers and the retailers, including 50,000 miles of pipeline, storage, gas processing, and chemicals. It's more diversified than most midstream energy companies and has the financial weight to leverage its size for higher returns. Return on invested capital has remained above 13% even in the worst collapse of oil prices, so you know you've got a dividend stock here that you don't have to worry about. Now that said, dividend growth hasn't set the world on fire at just 3.5% a year over the last 5, but it is the highest yield on our list at over 7%, and the stock has produced an 8.5% annual return, so you're getting that cash flow plus a little return kicker on this one. EPD has a great history for dividend increases and has recently made the champions list with its 25th year of consecutive payment increases, so you can count on this one. Next, all you out there in the nation are going to recognize this, a favorite energy stock of ours, Diamondback Energy, ticker FANG, with its 6% dividend. Diamondback and other energy stocks have banked on a record U.S. oil production over the last five years, and no other area has benefited as much from the Permian Basin where the company has its assets. Despite a slowing economy, dual conflicts in Ukraine and Israel have kept oil prices higher, and that's contributing to higher earnings here. Diamondback expects to turn just 3% growth in oil production into a big earnings bump, and a 7% increase in the base dividend this year. Here FANG is an industry leader in cash flow generation, producing one of the highest cash flow margins in its peer group, and gets more out of its spending. The bottom chart here shows the company gets 41 times its capital spending in oil production, well above these other companies in the industry. That's the kind of efficiency that is going to continue to generate those cash flows and grow the dividend. That 50% earnings growth and 25% revenue growth the company booked last quarter isn't likely to keep repeating, but the rest of these fundamentals look great. A payout ratio under 50% means Diamondback has plenty of room to grow its dividend and the It's also the cheapest on our list here, trading at just 9.4 times on a price-to-earnings basis. Folks, anytime you can get a stock growing like this for under 10 times P.E., it is something to consider. We'll get right back to our list, but I did want to highlight what I'm looking for in these stocks because it's not just the highest dividend yield. We want to make sure you're getting a good price for the stocks and that they have those fundamentals to keep growing that payout. This basic data we can get from just about any investing platform. Here on Yahoo Finance, we see the dividend yield and the P.E. ratio on the stock summary page. Then we can go here to the statistics tab to find the rest. Up top here, you're going to find some of the other valuation measures we use, but if we scroll down, first here is the operating margin, which is that core measure of profitability. This shows how much of the revenue the company is turning into those operating profits, so what's left over after paying operating costs. Next from the income statement, we see the earnings and the revenue growth. Both of these are measured from the most recent quarter and over that one-year time period. I follow revenue growth more closely here because the higher sales growth compared to a company's competitors can signal a competitive advantage, or whether it's taking market share from its peers. Earnings growth is important too, because that's the bottom line profits, but there are just so many accounting shenanigans a company can use to make this look higher that you really have to be skeptical here. Next, we can scroll down and find the payout ratio, which remember, that's the percentage of the company's earnings it's using to pay that dividend is a great indicator of both dividend sustainability and growth. A company paying out 70 or 80% or more of its earnings isn't holding much back to reinvest in growth, so it might make growing the dividend difficult, and if earnings do fall, it could put that dividend in jeopardy, so we like to see the lowest payout ratio here compared to its peers. And we do this again because we're not just looking for stocks with the highest yield. We want companies that are growing their revenue and earnings, companies with some room in their payout ratio to grow that dividend even if earnings aren't increasing, and we want stocks trading at a discount. We want quality companies that are more than just that flashy high dividend yield. Now, once you've researched a group of stocks and found some you like, the question I always get is, well, how many dividend stocks should you buy? Between this and that last video on SEHD stocks, we have three options with 99 stocks in the SEHD ETF itself, 15 stocks in that best picks from the fund, and then 5 dividend stock groups in this video. Is 99 too many or is 5 too few? Research into how many stocks you need to spread out your risks generally only looks at the whole portfolio, so your entire portfolio to spread out your risk and not worry about any single stock. You need somewhere between 15 to 30 stocks here. But if we're talking in a specific group or a theme within your portfolio, that number is going to be lower because you're going to have stocks from those other groups as well. Of course, a fund like the SEHD is a ready-made approach, maximum diversification with those 99 stocks. But we saw in the previous video how a lot of those are holding you back from really getting all you can from your dividend stocks. On the other hand, holding just 5 dividend stocks from this video might be too few, putting too much risk in just 5 names. So I'd recommend anywhere from 10 to 15 dividend stocks combined with maybe 10 or 15 stocks in other themes like growth. Shares of Prudential Financial, ticker PRU, have been on the rebound of 35% in the past year and pay a 4.1% dividend yield. While Prudential has expanded into investment management, it's still mostly an insurance business with 50% of its earnings from the U.S. insurance and most of its international business from its Japan segment. Still, it is growing its investment management side with expansions into the emerging markets. With over 145 years in the insurance industry and $1.5 trillion in assets under management, the company is set up as a safe pick in financial services with a commitment to that shareholder cash return. Prudential has increased the dividend by 7% a year over the last five and just increased its payout for the 16th consecutive year. One of our favorite real estate stocks is next with WP Carry, ticker WPC, and its 5.9% dividend yield. WPC is a $13 billion real estate investment trust with almost 1,300 properties across 170 million square feet. And the reason this makes so many of my lists is its diversification. First, the company's real estate is spread across multiple property types. About a third of the rents come from industrial properties with another third from warehouses, but you've also got 21% from retail and another 15% from other types. So a crisis in any one property type isn't going to kill the company. WPC is also the most geographically diversified REIT I've seen with a full third of the rent from properties in Europe to smooth out that focus on US real estate. And again, it's that diversification across property type and location that makes WPC one of my favorite REITs, really reducing your risk in real estate, but keeping the high potential cashflow. The company collects over a billion dollars in rent and books 98% occupancy, over 172 million square feet of rentable space. And now with interest rates coming down, that could support property values and push the stock price higher. Now, one thing you do need to remember when looking at these real estate investment trusts, the real estate stocks is you can't use the same earnings or payout ratio data to analyze these. That's because they use depreciation expense on the income statement every year, a little tax trick where they lower the value of the real estate assets to save on taxes. But while it does lower their taxes, it also makes that income statement earnings look artificially low because the depreciation isn't an actual cash outflow. Okay, here I've gone all accounting nerd on you, but the upshot is you need to use a different set of numbers that show the reality of cashflow and its earnings. For that, we're going to go here to the National Association of REITs or NAREIT, a great resource for analyzing real estate stocks. And here under the REIT data dropdown, we'll click on REIT market data and then look for this monthly REITWatch report. This is a giant report with a lot of data, but if you search for the ticker of the stock you're looking for, here we'll look for GLPI, one I'll highlight later, and you're going to find the tables towards the bottom of the report. Here we're looking at funds from operations or FFO. That's the core measure of earnings for a real estate stock, that measure that backs out the depreciation that skews the income statement lower. Here we can see the report shows us price to FFO, so a valuation measure we can use instead of that price to earnings ratio. We see the FFO growth for how fast the company is growing that core cash flow, and then the FFO payout ratio to see how much of funds from operations are being used to pay the dividend. For WP Carry here, we can see that it's trading for about 12 times on a price to FFO basis, which is a little more than the average for the group. That's something you're going to see with a lot of these stocks though. Investors are just willing to pay more for these quality stocks, so often the PE ratio or this price to FFO will be higher. We also see that WPC is growing its funds from operations at just 1.88%, which is above the average, but not great. It's paying out 62% of its FFO as a dividend, which as well as being below the average, it leaves a lot of room for growth. For WPC, we do see in these summary stats that the FFO growth is craptastic at just 1.9%, but I do expect that to improve. WPC is hard to beat for that high dividend yield plus the safety in the company's diversified business model. I'm going to show you that next dividend stock and then the stats for the entire group, how it beats the SCHD ETF, but even better is when you can get that cashflow every month to pay the bills. Check out this video next for the 7 monthly dividend stocks with yields as high as 16% to pay your rent, along with what turned out to be some hilarious GPT images. I've highlighted gaming and leisure properties ticker GLPI on the channel before with its 6% dividend yield and strong growth. The company owns 65 properties in 20 states, many without a competitor for more than 60 miles. Its casinos are operated by some of the biggest names like Caesars, Boyd, and Penn National with gaming and over 15,000 hotel rooms. And besides that growth and gambling that we're just starting to see across the U.S., I really like the company's strategy here. It contracts with operators on a triple net basis, so the casinos pay all the costs, including maintenance. Here, like we did with WPC, we can find the data on GLPI in the REIT Watch report. We see that GLPI is trading for just under 14 times on a price-to-FFO basis, which is below the average for gaming REITs and well below the average for other property types. While the FFO growth here of 4.1% is higher than WPC and this other gaming REIT, it is on the low side and we see that GLPI is paying out 72% of its FFO for that dividend, so we've got a faster FFO growth with GLPI, though the singular focus on gaming properties would be more risky than WPC's diversification, especially in a recession. But I like both for a portfolio, for higher yield and great real estate exposure. And here's how that entire list stacks up against the SEHD fund, a dividend yield of 5.8%, which is very nearly twice what you get on the SEHD. More importantly, though, it's also got the earnings and the revenue growth that can keep those dividends heading higher versus the stocks in the SEHD that aren't growing at all. Now, the average here does exclude Prudential's earnings growth because that's obviously an outlier, but still a healthy 17% annual growth. Comparing the five here against the monster dividend ETF we created last week, we even beat that on yield, though the earnings growth is a little slower here because of those few real estate investment stocks. The payout ratio is closer to the SEHD, but again, because of the few of the real estate stocks and energy stocks are set up to mostly pay out all their profits to investors. But then here, look at the operating margin, even higher than both the SEHD and that 15-stock group. These five companies are converting 40% of their sales into operating profits. That's an efficiency that is going to continue to turn the revenue growth into earnings and into higher dividends. Stay up to date on all the stock market news, trends, and strategies you need to see with the Weekly Bowtie, our free newsletter with the invite link in the description below. Or click on the video to the right to see the seven monthly dividend stocks that will pay your rent. Don't forget to join the Let's Talk Money community by tapping that subscribe button and clicking the bell notification. Transcribed by https://otter.ai