The virtues of dividends in investing are well known by now: Reinvested dividends account for 32% of the returns of the S&P 500 since 1926, according to S&P itself.
“Companies use stable and increasing dividends as a signal of confidence in their firm’s prospects, while market participants consider such track records as a sign of corporate maturity and balance sheet strength,” S&P Global Research Director Smita Chirputkar said in a report.
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That said, not all dividend strategies are created equal. One big way to go wrong is by chasing newly weakened companies that sport high dividend yields only because of recent reversals in their stock price, which usually points to underlying problems in the business. In turn, those problems lead, often enough, to further declines in stock prices and endanger the dividend itself.
Nearly all the following companies have at least a 2% dividend yield, a history of 10% annual earnings growth and a low beta, a measure of a stock’s volatility. A beta of 1 means a stock is as volatile as the broader market — only one stock listed below has a beta above 1. Beyond those qualifications, a number of the following companies are also members of the S&P’s Dividend Aristocrats, a group of more than 60 stocks in the S&P 500 that have boosted dividends every year for a quarter century or more.
Without further ado, here are seven low-risk dividend stocks to buy:
| Dividend stock | Trailing dividend yield (as of July 25) | Beta |
| Home Depot Inc. (ticker: HD) | 2.6% | 0.95 |
| Paychex Inc. (PAYX) | 2.7% | 0.98 |
| NextEra Energy Inc. (NEE) | 2.5% | 0.46 |
| Abbvie Inc. (ABBV) | 4.2% | 0.54 |
| Wells Fargo & Co. (WFC) | 2.6% | 1.13 |
| Realty Income Corp. (O) | 4.8% | 0.79 |
| Microsoft Corp. (MSFT) | 0.8% | 0.91 |
Home Depot Inc. (HD)
A relatively steady grower despite being in a cyclical industry, Home Depot sports a 2.6% yield and its stock has risen around 66% since July 2018 despite a flirtation with recession, rising interest rates and a housing downturn. With traders expecting the Federal Reserve to begin cutting interest rates by early next year, look for Home Depot’s dividend to stay secure and its prospects for profit growth to improve after a tough post-pandemic stretch. Rival Lowe’s Cos. Inc. (LOW), similarly, is on the Dividend Aristocrats list and also stands to benefit as lower rates spur a bump in home improvement activity, but its yield is only 1.9%.
Yield: 2.6% Beta: 0.95
Paychex Inc. (PAYX)
With a 2.7% dividend and an 80% gain over the past five years, Paychex came up a little bit better than rival Automatic Data Processing Inc.’s (ADP) 2.1% yield and an 85% gain, but it’s basically an investor’s personal choice. Both stand to benefit from sustained high employment levels and job growth as fears of a recession continue to recede.
Yield: 2.7% Beta: 0.98
NextEra Energy Inc. (NEE)
Utilities are a popular choice for dividend players, but they tend to do poorly when interest rates are higher and the higher dividend that utilities offer is easier to find in bonds or certificates of deposit. But the industry whose adage is “nothing changes” is actually changing fast these days, as electricity moves rapidly away from coal and natural gas and toward renewable energy.
NextEra is a leader in that push. It owns Florida Power & Light, but the stock gets its real juice from producing wind and solar energy and selling it to other utilities. A Dividend Aristocrat, its shares have taken some lumps as rates have risen, falling 6.5% in the past 12 months. But it’s up around 81% in the last five years, not counting its yield, which is now 2.5%. The transition to renewables, and NextEra’s steady profits, are a bigger deal than rate hikes, especially since the hikes are expected to end soon.
The combination of the coming rate easing and the inexorable move into renewables — which provides about a third of earnings now, and will benefit from a backlog of 20.4 gigawatts of annual generating capacity ordered but not yet built — make it a good bet that earnings will grow.
Yield: 2.5% Beta: 0.46
Abbvie Inc. (ABBV)
Drug manufacturer AbbVie, which pays a 4.2% dividend, today offers more than triple the quarterly dividend payout it offered when it was spun off from Abbott Laboratories (ABT) more than a decade ago. When accounting for its corporate history as a part of Abbott Labs, ABBV stock is also a member of the Dividend Aristocrats.
With drug companies, investors have to watch out for patent expirations, which is a risk for AbbVie because its long-running drug Humira, which is used to treat for Crohn’s disease and ulcerative colitis, will soon face generic competitors. But its drugs Skyrizi, Botox and Rinvoq brought in a combined $12.5 billion last year, alongside other billion-dollar drugs in the portfolio. Shares are up around 56% in the last five years. Add in dividends, and it has returned around 15% yearly for the past decade.
Yield: 4.2% Beta: 0.54
[See: 7 Best High-Dividend Mutual Funds.]
Wells Fargo & Co. (WFC)
There’s a playbook for dividend investors: Look first in sectors like utilities, financials, energy and consumer defensives. But high-dividend defensive stocks like Campbell Soup Co. (CPB) and Clorox Co. (CLX) have performed poorly in 2023 as recession fears dwindle, and this list already includes a utility. So some of the other sectors may be worth a look.
In finance, Wells Fargo is a counterintuitive name to consider, and is the only stock on this list with a beta of more than 1. Shares have mostly recovered from a big drop in March, when Silicon Valley Bank failed, but remain well below 2022 peaks on worries about commercial real estate exposure. Yet the San Francisco bank’s $1.5 billion of non-accruing office mortgages are a tiny fraction of its $945.9 billion of total loans outstanding. Morningstar says shares are trading around 25% below fair value on recession fears and put Wells on its list for the best dividend stocks.
The dividend looks safe, because funds from operations in the March quarter were nine times the amount needed to pay the dividend, and because management was confident enough to repurchase $4 billion of stock. The wild card: Wells is still emerging from a series of scandals that caused it to slash its quarterly dividend to 10 cents a share from 51 cents in 2020. The company has since restored about half of the big cut.
Yield: 2.6% Beta: 1.13
Realty Income Corp. (O)
Realty Income actually calls itself “The Monthly Dividend Company,” and its 4.8% yield is a little above the 4.4% it has averaged since it went public in 1994. It makes its money from warehouses and less-expensive space that chain stores like Walgreens Boots Alliance Inc. (WBA) rent — meaning the dividend is safer because the company’s not exposed to the office buildings at the center of concerns about post-pandemic commercial real estate. Realty Income claims to have paid 637 monthly dividends straight and to have increased its payout in 103 straight quarters.
Like all real estate investment trusts, it uses most of its cash flow from operations to cover its dividend, and the dividend looks safe because of Realty Income’s relatively light capital investment needs and cash flow that has nearly tripled since 2018. On the downside, shares have dropped this year on rising interest rates.
But this stock will pay you to wait for interest rates to come down again, which should pull shares back up. Even though analysts are nearly evenly split on whether Realty Income is a buy or a hold, consensus estimates hold that earnings will grow about 6% in 2024. With property occupancy at 99%, mortgage refinancing risk negligible, and almost no debt due this year or next, if interest rates begin to drop, Realty Income’s dividend will become harder to match elsewhere — and its cost of doing its leverage-dependent business will stay low.
Yield: 4.8% Beta: 0.79
Microsoft Corp. (MSFT)
The Colossus of Redmond, Washington is not a normal pick for a dividend list, and indeed its yield is a bare 0.8% after a 43% stock jump so far this year. The point of including Microsoft is to remind investors that value can be judged in many ways — and that the point of looking at dividends is to find grown-up, shareholder-return-focused businesses, which Microsoft is.
The ideal dividend-paying company combines the profit growth and steadiness that makes dividends possible with the payment of a dividend itself. And that is what Microsoft set out to demonstrate in 2003 when it broke with technology conventional wisdom that dividends made companies stagnate and launched its dividend. Last fiscal year it spent more than $20 billion on dividends and more than $18 billion repurchasing stock — another way to return cash to shareholders.
In 2003, Microsoft’s first dividend was 8 cents per share each quarter, and today it’s 68 cents. The yield has fallen over time, sure, but only because the success of the business has made the stock soar. That helped the dividend payout itself double in the last decade, even as the yield dropped. And with profits expected to grow more than 10% annually over the next five years, there’s likely more cash return to shareholders on the way.
The lesson is that the dividend matters, but the business matters even more. In the end, the business pays the dividend that investors count on.
Yield: 0.8% Beta: 0.91
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7 Low-Risk Dividend Stocks to Buy for a Choppy Market originally appeared on usnews.com
Update 07/26/23: This story was previously published at an earlier date and has been updated with new information.
