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3 Dividend Stocks to Help You Manage Risk

Posted on Thursday, July 25th, 2019 by Chris Markoch

If you’re not completely comfortable with the direction that stocks are heading, you’re not alone. While it's very difficult to predict a market top, many investors think that stocks may be ready for a correction. However, right now stocks are the place to be for investors who seek growth. As you know, dividend stocks provide investors with the opportunity for capital appreciation along with the security of a regular dividend that not only provides a benefit for income-oriented investors but gives growth investors a hedge against risk.

However, one of the challenges of investing in dividend stocks is that yields have a negative correlation with stock prices (i.e. as stock prices climb, dividend yields go down). But if you’re an experienced dividend investor you know that a healthy dividend yield does not always mean that the dividend is safe, or that it will continue to grow over time. Choosing the right dividend stocks is all about managing risk. Let’s take a look at three dividend stocks that can help you manage risk without sacrificing growth.

Dividend stocks can deliver both growth and income

The first stock to look at is Visa (NYSE: V). The company reported its quarterly earnings on July 23. Although they beat on both the top and bottom lines, the stock took an initial downturn before turning positive in after-hours trading. The company currently has a not-so-exciting yield of 0.6%. But Visa is a reminder of why investors need to look beyond the dividend yield number and look at the growth in the dividend itself. The company has seen its payout grow from 10 cents to 25 cents over the past six years. Another reason to believe that Visa’s dividend is secure is that they only pay out 19 percent of their profits as dividends. This gives them plenty of room to increase their payout over time, which Visa has pledged to do at a rate that is projected to be over three times the median growth of the 1,200 largest dividend payers. And the world’s largest payment processor delivers growth as well as income. The stock has more than tripled in value since 2014 due in large part to the revenues that have grown by 62 percent and an 83 percent increase in profits. For the year, Visa’s stock is up over 25%.

Good dividend stocks are fundamentally sound

Another dividend stock to consider is Chemed (NYSE: CHE). Chemed is a company that has two very different subsidiaries. Vitas Healthcare provides hospice-care services in 14 states and the District of Columbia. Their other business is Roto-Rooter – a provider of home and business plumbing and water cleanup services. From a fundamental standpoint, the company does an efficient job of increasing profits from its operations. For example, in 2018 it turned $1.8 billion of sales into $205.5 million in earnings. Although the company has a current dividend yield of 0.3% they have a 30-cent dividend payout that is approximately 10 percent of the company's profits and just about the same percentage of the company's levered free cash flow. These percentages mean that Chemed has a lot of room to continue to increase its dividend beyond the 50% payout growth of the last five years. CHE's stock is up over 25% year-to-date. They are scheduled to report their second-quarter earnings on July 26.

A small but growing dividend stock

Investing in dividend stocks does not mean that investors can’t go after emerging growth markets. That’s the case with Zoetis (NYSE: ZTS) – a company that is a leader in delivering medicines targeting pets and livestock. The global health care market for animals is projected to experience nearly 6 percent annual growth through 2026. Those projections would make it an approximately $70 billion market. Zoetis, which was a subsidiary of Pfizer until 2013, has grown its dividend payout by 152% since becoming its own entity. That includes a 30 percent growth for the first dividend that they paid in 2019. But what’s better news for investors is that only 20 percent of their profits are being used to grow that dividend which currently has a yield of 0.57%. And the company has a levered free cash flow that is more than 11 times what they need to sustain their dividend. The company's stock has grown nearly 30 percent in 2019 and is scheduled to release its second-quarter earnings on August 6.

Slow and steady is a solid strategy

One of the biggest mistakes made by dividend investors is to chase after the highest yield they can get. But as we've shown here, the yield is a poor indicator of the security of the dividend. It’s extremely important to understand the company’s fundamentals. Like many things, slow and steady is often the better strategy. While that may not mean buying stock in companies that have the highest current yield, they do generally offer a yield that is stable and secure.

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