Bank of America's best dividend stocks.
Long-term investors know that dividends can have a major impact on returns over time. When the stock market is struggling to make gains like it has in 2018, dividends are a reliable source of income. However, dividends are only beneficial if the underlying stock is a high-quality stock. Bank of America Corp. (ticker: BAC) recently screened to find the highest-quality dividend stocks in its coverage universe. The analyst team identified following seven stocks as the only ones with a quality grade of "A" and a dividend yield at or above the S&P 500's average of 1.8 percent.
Automatic Data Processing (ADP)
Automatic Data Processing has a dividend yield of 1.8 percent, a free-cash-flow-to-dividend ratio of 1.8, a return on equity of 43.7 percent and a debt-equity ratio of just 0.5 percent. Following the company's recent analyst day, its first since 2015, analyst Jason Kupferberg says ADP expects to outperform the growth of the overall market in each of its operating segments in coming quarters. In addition, Kupferberg says the company has completed a wise transition to a more technology-centric business and has increased its efficiency in recent years, paving the way for long-term margin expansion.
C.H. Robinson Worldwide (CHRW)
C.H. Robinson has a dividend yield of 2.1 percent, a FCF-dividend ratio of 2.3, a ROE of 37.5 and a debt-equity ratio of 0.9. Bank of America analyst Ken Hoexter says the company should benefit from cyclical improvements in short-term shipping rates, which will more than offset long-term revenue pressures. C.H. Robinson projects a long-term annual revenue growth rate of between 7 and 12 percent, and the company generates an impressive return on investment of greater than 20 percent. Hoexter is expecting earnings per share to grow to $5 in 2019.
Emerson Electric Co. (EMR)
Emerson Electric has a dividend yield of 2.7 percent, a FCF-dividend ratio of 1.7, a ROE of 21.5 percent and a debt-equity ratio of 0.6. Analyst Andrew Obin says years of restructuring and improvements will soon start paying off for patient investors. Obin says today's Emerson is essentially an industrial automation company, with its automation segment accounting for about two-thirds of the company's revenue. Plenty of companies are aggressively investing in modernizing their processes, and Obin says Emerson stock should trade at a premium earnings multiple compared to its industrial peers.
Genuine Parts Co. (GPC)
Genuine Parts has a dividend yield of 3 percent, a FCF-dividend ratio of 1.6, a ROE of 18.8 percent and a debt-equity ratio of 0.9. Analyst Elizabeth Suzuki says Genuine Parts is a simpler, cleaner company following the recently announced spin-off of its office products division. Now that the company has divested its worst-performing business, Suzuki says the stock deserves to trade at a higher earnings multiple. She says Genuine Parts' remaining two segments, auto parts and industrial/electrical, have historically been large, relatively stable businesses.
NextEra Energy (NEE)
NextEra Energy has a dividend yield of 2.4 percent, a FCF-dividend ratio of 3.3, a ROE of 28.3 percent and a debt-equity ratio of 1. Analyst Julien Dumoulin-Smith says NextEra has an exceptionally strong balance sheet and is one of the best-positioned utility stocks. Dumoulin-Smith is projecting annual EPS growth of around 8 percent, the high end of management's guidance range. Even with NEE stock priced at a premium to the rest of the sector, Dumoulin-Smith says the full value of NextEra's high-quality assets are not yet reflected in the share price.
Procter & Gamble Co. (PG)
Procter & Gamble has a dividend yield of 3.8 percent, a FCF-dividend ratio of 1.2, a ROE of 18.6 percent and a debt-equity ratio of 0.6. Analyst Olivia Tong says Procter & Gamble has a diversified portfolio of products and market-leading, multi-billion-dollar brands. She says the company's size, scale and global reach create a competitive moat, insulating the company from competition. Tong says sales may be at risk in the near-term given pricing pressures in some of Procter & Gamble's main markets, but the company has plenty of opportunities for cost-cutting to offset potential margin compression.
United Technologies Corp. (UTX)
United Technologies has a dividend yield of 2.2 percent, a FCF-dividend ratio of 2.1, a ROE of 15.4 percent and a debt-equity ratio of 0.9. Analyst Ronald Epstein says United Technologies is an underappreciated aerospace powerhouse. In addition to United's balanced growth, Epstein says the company has strong market positioning in the global infrastructure, aerospace and defense markets. Epstein says United's diversified business provides protection for investors during cyclical market downturns, and the company's conservative balance sheet allows United to aggressively pursue share buybacks and even mergers or acquisitions.
Wayne Duggan is a freelance investment strategy reporter with a focus on energy and emerging market stocks. He has a degree in brain and cognitive sciences from the Massachusetts Institute of Technology and specializes in the psychological challenges of investing. He is a senior financial market reporter for Benzinga and has contributed financial market analysis to Motley Fool, Seeking Alpha and InvestorPlace. He is also the author of the book "Beating Wall Street With Common Sense," which focuses on the practical strategies he has used to outperform the stock market. You can follow him on Twitter @DugganSense, check out his latest content at tradingcommonsense.com or email him at firstname.lastname@example.org.