Last year’s best-performing Fortune 500 stocks had something in common: They didn’t pay dividends. The top two companies, Netflix (NFLX) and Amazon.com (AMZN) (up 134% and 118%, respectively, in 2015), were the epitome of momentum stocks that, until recently, were all the rage with investors—stocks to own because they were on a hot streak, not stocks to rely on for long-term growth and security.
Since then, though, last year’s winners have stumbled: Netflix shares are down more than 17% year to date, and while Amazon’s stock has recovered recently (up 6% for the year), it was down as much as 24% amid market volatility earlier this year. Both stocks have underperformed slower-growth dividend-paying companies like Johnson & Johnson (JNJ) (up 14%) and Cummins (CMI) (up 29%) as investors have sought safety in such “predictable growers,” says Franklin Templeton’s Don Taylor. “I would make an argument that that will continue—I don’t see that catalyst changing,” he adds.
With that in mind, we screened the Fortune 500 to find the best dividend stocks to buy now—companies that had yields greater than the S&P 500 average of 2.15%, and that had increased their dividends at a rate of 10% or more for at least the past three years (because dividend growth stocks have a history of beating the market over time).
We asked investing pros for help whittling down the 89 companies that survived our screen to those whose shares were still somewhat cheap relative to their potential, and came up with a compelling list of five quality stocks that offer value, security, and yes, even growth. After all, “The majority of companies in the Fortune 500 are likely to be around in 10, 20 years from now,” says John Buckingham, chief investment officer of Al Frank Asset Management. Here are the best ones to buy now. (Visit our new Fortune 500 list to learn more about these firms and the rest of America’s biggest companies.)
Fortune 500 rank: 25
Forward P/E: 18.6
Dividend yield: 2.9%
3-year dividend growth rate: 16%
Microsoft’s $26.2 billion acquisition of LinkedIn (LNKD), announced earlier this month, inspired some criticism that the technology giant had overpaid for the professional networking tool. But Microsoft (MSFT), which for the last two quarters has ranked among the top 10 dividend payers in the world in terms of dollars paid out to shareholders, according to the Henderson Global Dividend Study, is likely to return even more capital to shareholders once the deal closes, says Don Taylor, who manages the Franklin Rising Dividends Fund. “There’s no doubt in my mind that you will have double-digit dividend increases for a long time to come,” he says.
Microsoft, which Taylor says already has an “impeccable balance sheet,” isn’t likely to take more than a minimal earnings hit from the LinkedIn transaction, which it is financing through low-interest-rate debt—a much cheaper alternative than repatriating (and paying tax on) its overseas cash horde to pay for the deal. Though Microsoft’s earnings per share shrunk nearly 44% in 2015—further declines this year are one reason the stock has sold off recently—Wall Street is betting that the trend is about to reverse, forecasting EPS growth of almost 45% in fiscal 2016. As Microsoft’s cloud business—second only to Amazon Web Services, Taylor says—continues to grow and the company reaps benefits from combining with LinkedIn over the next year, “you’ll start to see the earnings growth that we haven’t seen in recent years,” says Taylor, who recently added to his Microsoft stake.
2. Prudential Financial
Fortune 500 rank: 50
Forward P/E: 7.4
Dividend yield: 3.8%
3-year dividend growth rate: 21%
Prudential Financial (PRU) offers a particularly attractive combination that these days is rarely found outside the financial sector: A dividend yielding double what a 30-year Treasury bond currently pays, and a single-digit price-to-earnings ratio that’s less than half the S&P 500 average.
There’s a reason that Prudential Financial shares are so inexpensive—low interest rates have prevented the insurance company and its peers from getting much of a return on investing the money they collect in premiums (their “float”). But Prudential’s stock is even trading at a big discount compared to where it has typically traded historically (a P/E of about 11), says AFAM’s Buckingham. And even if the company’s earnings per share decline somewhat this year, as Wall Street expects, Prudential is still incredibly profitable, having nearly quadrupled its EPS to almost $10 last year. The company is also returning some of that capital to shareholders: It has increased its dividend more than 20% annually on average for the last three years. If and when interest rates do rise, as Buckingham expects they will eventually, Prudential is sure to benefit. In the meantime, it’s his favorite pick in the financial sector because, besides its “super inexpensive valuation and the generous dividend yield,” Prudential’s business has a reputation for quality around the globe: “It’s best of the breed,” he says.
3. Johnson Controls
Fortune 500 rank: 70
Forward P/E: 10.8
Dividend yield: 2.6%
3-year dividend growth rate: 15%
Johnson Controls (JCI) announced in January that it would merge with Tyco (TYC) to create a large diversified industrial company. But the market is still valuing Johnson Controls for its former business, auto supply, which typically commands a lower P/E. Taylor thinks that’s about to change as investors come to realize how much the company’s product portfolio has transformed—especially after Johnson spins off its automotive seating and interiors unit, Adient, in October. Johnson has a long tradition of increasing its dividend annually—the only years it froze (but didn’t cut) its payout were during the recession, when automakers hit rough times—and Taylor doesn’t see that stopping anytime soon. (He also likes another industrial, Honeywell (HON), but its yield, at 2% even, falls just below the S&P 500 average, and therefore it didn’t clear our screen.)
Fortune 500 rank: 3
Forward P/E: 11.7
Dividend yield: 2.3%
3-year dividend growth rate: 11%
Apple (AAPL) started paying a dividend again in 2012, for the first time since 1995. But since then it seems to have been making up for lost time: Its payout is already so large that Apple has rocketed up to become one of the top 10 dividend payers in the world, according to the Henderson Global Investors study. The stock has been stumbling lately, after Apple reported in April that iPhone sales declined for the first time ever, and its revenue from China plummeted. Concerns about further declines led Carl Icahn to sell his stake in the company completely. But while growth and momentum investors may have turned away from Apple, a different type of investor seeking value and yield are flocking to the stock—including Warren Buffett’s company Berkshire Hathaway (BRK-A), which has long had an affinity for dividend stocks. (The Oracle of Omaha himself didn’t buy Apple shares, but the fact that his deputy managers did speaks to their appeal to dividend investors.)
Though Wall Street is expecting lower sales and earnings for Apple in 2016, thanks in part to a disappointing uptake of its new Apple Watch, Buckingham thinks the stock is still “very much undervalued.” It’s “a quality name with a huge installed base of customers, rabid fans and the ability to completely revolutionize product categories,” he says. “Apple is important to the world and I don’t see Apple as evaporating into the ether, which is a concern, to be candid, with all of the other tech names.” (One other exception of a tech company he believes has enduring potential: Microsoft, No. 1 on this list.) In the meantime, he’s happy to wait to see what Apple comes up with next while collecting a hefty dividend that he believes “is likely to go higher.”
5. Cardinal Health
Fortune 500 rank: 21
Forward P/E: 14.3
Dividend yield: 2.3%
3-year dividend growth rate: 12%
Cardinal Health (CAH) sold off sharply in April after the drug distribution company reduced its best-case-scenario earnings forecast for this year. But the reasons for that—unfavorable foreign exchange rates and slightly lower generic drug prices—are unlikely to keep the stock down for long. Wall Street still expects the company to grow its sales 18% and earnings nearly 20% in the current fiscal year (ending this month), much faster than the growth of Cardinal’s competitors such as McKesson (MCK), which also has a much lower dividend yield. Cardinal is in the elite club of stocks known as the Dividend Aristocrats—those that have raised their dividend for the last 25 years in a row—which have trounced the S&P 500’s performance over the long term. Considering that Cardinal has been able to return more and more capital to shareholders even as it has been aggressively expanding, acquiring a generic drug distributor and Johnson & Johnson’s medical device business for more than $3 billion collectively last year, it will likely be a stock that investors turn to if the market gets rough.