2021 was a strong year for stocks. The one-year returns for the three major indices are as follows: Dow Jones 20%, Nasdaq 24%, and the S&P 500 29%. All three ended the year near the all-time high. Even with equity valuation high, there are still conservative dividend stocks where you can generate a strong income.
But while it’s been a good year for the indexes, dividend stocks have been flat for months. The SPDR S&P Dividend ETF (SDY), which tracks the performance of the High Yield Dividend Aristocrats Index, is trading at levels it first hit in May 2021.
Some of the best traditional dividend-paying sectors, including energy, finance and industrials, which took it on the chin during the pandemic and were the worst-performing S&P 500 sectors during the early recovery, were some of the top performers in 2021. The high dividend-paying sector of real estate was also a leading performer, although utilities certainly lagged for the year.
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Technology has led the market higher since the lows of March. People rely on it more than even during the pandemic and technology stocks have thrived. But several strong dividend-paying sectors rely on the real economy, which is still being hampered by the continuing lockdown restrictions.
But things are changing fast.
Since the first vaccine announcement, energy and finance have been the best-performing market sectors by far. A vaccine means the end of the pandemic and lockdowns. The end of lockdowns mean a full recovery can take hold. Although persistent high inflation (and the Fed response) and ongoing conflict in Europe have been weighing on the market, energy in particular has remained strong thus far this year.
It may just be the beginning for these red-hot sectors, as we will likely see a more full recovery take hold in 2022. Many high-dividend stocks are still cheap in an expensive market.
It’s also worth noting that interest rates are ridiculously low and rising rates are bad news for bonds. Investors will have practically no place else to go but dividend stocks to get a decent income. And the best income stocks currently offer great value and newfound momentum.
Here are a few good conservative dividend stocks to consider.
Conservative Dividend Stock #1: Chevron (CVX)
Chevron (CVX) is one of the world’s largest integrated energy companies, with operations throughout the world. The company is involved in every facet of the energy industry but it is heavily skewed toward the upstream segment, oil and gas production and exploration.
It has a huge and growing presence in the Permian basin, the largest shale oil producing region in the U.S. and the fastest growing oil region in the world.
Chevron is a low-cost producer that can quickly turn a profit as things improve. It got lean and mean before the pandemic and entered the year in better financial shape than its peers. Although it is exposed to commodity prices, it has been quick to recover and has outperformed other large oil companies through the pandemic and into the recent recovery.
It won’t be the most profitable energy company to own. But it is among the safest. And it pays a fat dividend that’s safe.
Conservative Dividend Stock #2: U.S. Bancorp (USB)
U.S. Bancorp (USB) is the fifth largest bank in the United States and the country’s largest regional bank with over 3,000 bank branches in 25 states in the Western and Northern U.S. The Minneapolis bank was founded in 1863 and now has more than 70,000 employees and $567 billion in assets.
USB should be another big beneficiary of the post-pandemic market. Banks took it on the chin in 2020 as lockdowns hurt business. But bank performed well in 2021 and should do well in 2022 as interest spreads improve.
While it offers many services, revenues are generated primarily from net interest income (NII), which is the rate spread between the cost of money and the loan interest charged to customers. Spreads should significantly improve in a more complete recovery as demand for loans drives up longer-term interest rates.
USB is also among the most profitable and well-run big banks in the country, with industry leading profitability measures. The bank is already profitable in this tough environment and should turn a much higher profit very quickly as things improve. It also pays one of the best yields of any big bank in the sector.
Conservative Dividend Stock #3: Realty Income (O)
Realty Income (O) is one of the highest-quality and best-run REITs on the market. Cash flow from a conservative portfolio of 6,500 properties has enabled the company to amass a phenomenal track record of paying dividends—to such an extent that Realty Income actually has the audacity to refer to itself as “The Monthly Dividend Company.”
Despite trouble at a very small percentage of its properties (namely movie theaters and fitness centers), the REIT actually grew year-over-year revenues in the first nine months of last year. The stock has been unjustifiably held back because of its association with retail properties. As a result, the stock is still trading below pre-pandemic highs.
But investors should warm to one of the best income stocks ever as the economy improves. Here are some things to like about this stock.
- 15% average annual total return since 1994
- 604 consecutive monthly dividends
- 5% annual dividend growth since 1994
- Sky-high credit ratings
Conservative Dividend Stock #4: AbbVie Inc. (ABBV)
AbbVie is a cutting-edge company specializing in small molecule drugs. Since AbbVie’s spinoff from Abbott Laboratories (ABT) in 2013, it has grown into the eight largest pharmaceutical company in the world, primarily on the strength of its blockbuster biologic autoimmune drug Humira, which is the world’s number one drug by far with annual sales of about $19 billion.
But the stock is cheap. ABBV is selling at a microscopic ten times forward earnings.
It’s cheap because of fears about competition for its blockbuster Humira drug. But this company has one of the very best pipelines of newly launched drugs and soon-to-be-approved new drugs in the business that should overcome the revenue slippage.
The market seems to agree. ABBV returned over 26% in 2021 and is up 13% YTD. It has a huge longer-term tailwind as the population ages, a great valuation and now momentum as well.
Tom Hutchinson, Chief Analyst of Cabot Dividend Investor, is a Wall Street veteran with extensive experience in multiple areas within the financial world. His advisory is geared to providing you both high income and peace of mind. If you’re retired or thinking about retirement, this advisory is designed for you.Learn More