Last year was an awful time for most stocks. The major equity indexes entered a bear market, and the growth stock-heavy Nasdaq (QQQ 0.85%) lost more than 25%. With a potential recession looming in 2023, a steady stream of growing dividends is like a warm blanket for investors. Some have been banking dividends for years, while others are taking a fresh look at the advantages of dividend stocks.
The advantages of dividend stocks include the following:
- Income to supplement our day jobs or retirement
- The opportunity to buy additional shares using a dividend reinvestment program (DRIP)
- Less volatility than growth stocks
AbbVie (ABBV -1.25%), Visa (V 1.14%), and Texas Instruments (TXN 0.97%) not only beat the S&P 500 (SPY 0.70%) in 2022 but managed positive returns over the past year when including their dividends, as shown below.
Let’s take a look at why.
Hair grows during a recession, too
Your barber might tell you they will be OK when the economy is rough; after all, hair keeps growing, and few of us will cut it ourselves. The same can be said of our medical needs. Prescription drugs are necessary, and companies like AbbVie are safe havens when the market goes haywire. That’s why I called it a top pick in early 2022.
AbbVie is best known for its blockbuster Humira franchise. Although Humira faces competition from biosimilars, the company shows strength across its portfolio. Rinvoq and Skyrizi are the newest up-and-comers expected to carry the torch. Combined sales hit $5.3 billion through third-quarter 2022, a 68% year-over-year (YOY) increase, and AbbVie has projected $15 billion in combined sales by 2025.
AbbVie has posted gains in sales of neuroscience and aesthetics products despite the adverse effects of the strong U.S. dollar on international revenue. Total sales through Q3 2022 rose 4%, reaching $42.9 billion. For this period, cash from operations remained strong at $17.5 billion (a 40% margin). The money was used to pay dividends ($7.5 billion), buy back stock ($1.5 billion), and pay down debt ($7.6 billion).
As shown below, AbbVie has raised the dividend each year since its inception, including a 5% raise last quarter. It yields 3.6%, which is more than many pharmaceutical peers.
This all adds up to a quality dividend stock that should reward shareholders for the long haul.
Don’t overlook Visa because of the small yield
“Someone’s sitting in the shade today because someone planted a tree a long time ago.” — Warren Buffett
Many dividend investors look past companies offering a small yield, but should they? Before dismissing a company like Visa, and its 1% yield, consider the dividend growth.
Visa went public in 2008 and closed at the equivalent of $14.13 on March 19, the first day of trading. At that time, it paid a quarterly dividend of about $0.025 cents. Because of its incredible business, the dividend has risen to $0.45 today, or $1.80 annually. Those who bought at $14.13 and held have a yield on cost of 13% and a mountain of capital gains to boot, as shown below.
The company’s major draws are its market dominance (along with rival Mastercard (MA 0.01%)), and fantastic margins, which create incredible free cash flow. Visa posted margins of 67% (operating) and 51% (profit) in fiscal 2022 ended Sept. 30.
The $18 billion in free cash flow generated means that more than 60 cents of every dollar of revenue drop into the company’s pocket to pay dividends, buy back stock, and reinvest in the business.
As the world continues to trend cashless and online sales gain market share, Visa still has a long runway ahead.
No one does cash flow better than Texas Instruments
Semiconductors (“chips”) have made headlines lately. First, the chip shortage hit auto manufacturers and caused vehicle prices to skyrocket. Fears over China’s intentions regarding Taiwan (where a huge percentage of chips are made) spurred the U.S. Congress to pass the CHIPS and Science Act, which offers incentives to increase domestic manufacturing. Long-term demand for semiconductors should benefit Texas Instruments for years.
The company makes money from industrial (41%), automotive (21%), consumer electronics (24%), and other markets and sells over 80,000 products to 100,000 customers. This diversity separates Texas Instruments from some other chipmakers, which rely heavily on a single industry or customer.
Cash management is the company’s biggest claim to fame. Texas Instruments has increased its dividend for 19 years in a row by 25%, compounded annually, and reduced the share count by 46%. It does this with terrific revenue and free cash flow growth.
Some investors are turning away from semiconductors for fear of a recession, but Texas Instruments has weathered recessions before. Long-term dividend growth investors should consider the company for its outstanding management, dividend growth history, and massive secular opportunity.