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Are you just starting to build an all-important dividend portfolio and need some help separating the wheat from the chaff? Well, our team of Foolish dividend experts think the following three dividend plays would form a solid basis for any income-generating portfolio.
Andres Cardenal: Investors taking their first steps in the market typically want to make sure that their capital is well-protected and invested in solid assets. With this in mind, an ETF such as Vanguard Dividend Appreciation ETF (VIG 0.66%) is a remarkably smart vehicle to consider.
The fund invests in a basket of 185 companies that have proved their financial strength by raising dividends over the past 10 years or more. The portfolio includes many of the most renowned companies in multiple sectors, featuring names such as Johnson & Johnson, Coca-Cola, Microsoft, and 3M, among several others. The ETF is focused on dividend growth, not dividend yield, so it pays a modest yield of 2.15%. On the other hand, fundamental quality is as strong as it gets.
Companies in the portfolio are among the most solid dividend stocks around, and diversification in a wide variety of economic sectors provides an additional layer of strength to the ETF. When one economic sector is lagging, chances are that better performance from other industries will provide stability to the ETF as a whole.
Importantly, Vanguard Dividend Appreciation ETF charges a remarkably low annual expense ratio of 0.09%, which is 91% lower than the average expense ratio of funds with similar holdings. So investors in this ETF are getting access to the benefits of diversification for a conveniently low cost.
Steve Symington: I think beginning investors would be wise to first form a solid group of core stocks to offer relative stability as they build their portfolios. And you'll be hard-pressed to find a business more suited to that end than Starbucks (SBUX 0.45%).
There's no disputing that the $80 billion coffee giant is an industry leader, with its massive global store base of 25,000 locations. But it also enjoys multiple global growth catalysts, including plans to increase its number of stores in China by 70%, to 3,400, by 2019. In addition, Starbucks not only consistently identifies innovative ways to boost comparable-store sales (for example, expanding sales of non-coffee items such as food and tea products), but it also regularly creates supplemental growth opportunities such as its recently expanded relationship with Keurig Green Mountain, through which the company expects to sell roughly 1.5 billion Starbucks K-Cups this year, or a 20% increase over 2015.
Starbucks also generated healthy operating cash flow of just over $3.9 billion over the past 12 months. And last quarter alone, Starbucks used some of that cash flow to take advantage of market volatility by astutely increasing its share-repurchase activity, returning a company-record $1.6 billion to shareholders. That's not to mention Starbucks' healthy $0.20-per-share quarterly dividend, which has quadrupled over the past six years and yields around 1.46% annually as of this writing.
All told, given Starbucks' willingness to opportunistically return capital to shareholders, as well as its proven ability to creatively generate top- and bottom-line growth, I think beginning investors can rest easy owning a piece of this solid business.
George Budwell: While Gilead Sciences (GILD -0.51%) is a relative newcomer to the dividend game, investors just starting to build an income-generating portfolio shouldn't overlook this blue-chip biotech. Of course, the elephant in the room is Gilead's declining hepatitis-C sales that have weighed heavily on the biotech's shares of late. After all, the so-called "warehousing effect" of hep-C patients appears to be coming to an end, and the entrance of multiple competitive threats has forced Gilead to offer payers deep discounts for both Sovaldi and Harvoni.
Even so, Gilead remains a top player in the lucrative HIV space, where it just launched yet another potential blockbuster drug, called Descovy. In fact, Gilead has recently launched three new tenofovir alafenamide-based HIV drugs (Descovy, Genvoya, and Odefsey) that should help shore up its top line as its hep-C revenues flatten out.
Apart from its dominant share of the massive HIV and hep-C markets, Gilead sports a payout ratio of 14.7% -- extremely low for a biopharma stock at the moment -- implying that it should have no problems covering its dividend going forward -- despite these growing concerns about its hep-C sales. Gilead stock currently pays an annual dividend of $1.88 and yields 2.23% at the current stock price. The bottom line here is that Gilead's dividend should be sustainable for the long term, making it a worthwhile pick for beginning investors.
