Three Dividend Stocks to Buy, and Two to Consider

By Kyle Farrah - September 18, 2012 | Tickers: AFL, ADM, ADP, HRB, WFC | 0 Comments

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43% of the markets returns came from reinvested dividends between 1990, and 2010. That fact, along with the incredibly low rates of returns that bonds currently offer make investing in dividend stocks a smart choice for many investors.

Here are five dividend stocks to consider adding to your portfolio. Three are dividend aristocrats – companies that have grown their dividend payout each year for the last 25 years or more. The other two stocks are not dividend aristocrats, but may provide good investment opportunities anyway.

H&R Block (NYSE: HRB)

The high yielding, tax preparation service stock provides an interesting opportunity for investors. The company currently yields 4.8%, and has been buying back shares. Unfortunately the company is seeing declining earnings growth as many tax filers are starting to prepare their own taxes with the help of tax software such as Turbo Tax or Intuit. H&R Block will likely continue to see a decline in its revenue, earnings, and its dividend. It is possible however that this company may be cheap enough to buy even in the face of declining profitability. Either way I’m staying on the sidelines here.

Automatic Data Processing (NASDAQ: ADP)

This payment processing company has consistently grown its dividend. Over the last 10 years its dividend has seen a compound annual growth rate (CAGR) of 12.24%, and the company has grown its EPS over the same time period by 6.7% CAGR. Not bad considering the ’08 crisis, and the low interest rate environment we are currently in. A significant portion of ADP’s profits come from investing money held for customers. With interest rates being as low as they are ADP has not been able to collect as much off of the float as it would otherwise be able to under a different interest rate environment. If rates rise ADP should be able to increase its profitability more than it has in the past. While the stock does not look cheap at over 20 times earnings, it definitely beats being in Treasuries! I’ll look to get long the stock on a pullback.

Aflac (NYSE: AFL)

Keeping with the idea of profiting on a rise in interest rates is Aflac. The insurance giant has consistently grown its dividend over the years, and currently trades at a very attractive price of only 9 times earnings. Like all insurance companies Aflac benefits from higher interest rates, because they can collect more money off of the float. While interest rates don’t appear to be going up anytime soon (The Fed has made that fairly clear), they will have to increase eventually. Aflac stands to benefit when interest rates do rise. This is a good buy for the long run.

Archer Daniels Midland (NYSE: ADM)

ADM has consistently raised its dividend since 1975. At less than 10 times next year’s earnings, a dividend yield of 2.55%, and a CAGR on its dividend of 8.87% this food product behemoth looks cheap. On the negative side the company has extremely low margins. If anything happens to the company, or the industry ADM’s profitability may go down substantially. Also the company relies heavily on Government subsidies, specifically in corn. If these subsidies go away ADM will be negatively impacted. The verdict? Buy ADM. The company is cheap, financially strong, and consistently grows its dividend.

Wells Fargo (NYSE: WFC)

Like H&R Block, Wells Fargo is not a dividend aristocrat, but it does have a lot of reasons for investors to feel bullish. This Buffet owned company yields about 2.5% and has grown its dividend at a CAGR of 6.3% since 1970. Its book value and EPS have grown even quicker at a 9% CAGR making this company incredibly cheap at only 12 times earnings. While the stock is not quite as cheap as many of its competitors, its consistent and high growth rate, along with the Buffett endorsement make this dividend stock a perfect fit for the yield seeking investor.

Conclusion

Dividend stocks can help make investors wealthy over the long run, especially when the dividends are growing. The prospects for Aflac, ADM, and Wells Fargo look good, and H&R Block as well as ADP are definitely worth looking into, especially on a pullback. I expect these stocks to continue to outperform the broader market in the years ahead.

To read about other dividend stocks visit the authors blog.

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