Income investors may feel left out as they watch growth stocks ride the rising tide of the Nasdaq Composite's epic 25.4% year-to-date gain. But veteran investors know that dividend investing isn't about outperforming an index by taking on a lot of risk. Rather, it's about taking on a lower amount of risk for a more secure reward.
Dividend stocks often underperform a raging bull market. But they are well suited for investors looking to supplement income in retirement, or anyone more focused on capital preservation than accumulation.
Here's why Phillips 66 (PSX 0.35%), the Utilities Select Sector SPDR Fund (XLU -0.29%), and the iShares Global Infrastructure ETF (IGF -0.25%) are three securities worth considering now.
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Fuel your passive income with Phillips 66
Scott Levine (Phillips 66): Schools closing the books on another year, ice cream trucks rolling through neighborhoods, baseball in full swing -- summer is here. And with it, many investors are looking for summer sales, hoping to strengthen their portfolios with compelling dividend stocks. One such stock that fits the bill is Phillips 66 and its forward-yielding dividend of 4.4%.
With a history that spans 140 years, Phillips 66 has emerged as a leading diversified energy company. In addition to operating midstream assets, Phillips 66 refines crude oil at 12 facilities, and it has approximately 7,2000 independently owned outlets in 48 states and Puerto Rico (plus 1,300 company- and dealer-owned outlets in Europe) where it markets gasoline, diesel, and aviation fuel.
Like its peers, Phillips 66 is subject to the boom and bust cycles of oil prices. However, while some energy stocks are unable to navigate the turbulent waters of commodity prices -- finding themselves in poor financial conditions and being inconsistent with their distributions -- Phillips 66 has steadily raised its dividend over the past decade while maintaining strong financial health. Should it return $4.20 per share to investors as it expects to do, Phillips 66 will have raised its dividend at a compound annual growth rate of 12.2% since 2013. Meanwhile, Phillips 66 sports an investment grade balance sheet, rated A3 and BBB+ by Moody's and S&P Global Ratings, respectively.
From numerous perspectives, shares of Phillips 66 appear attractively priced. The stock is currently changing hands at about 4.2 times operating cash flow -- notably lower than its five-year average multiple of 8.2. Similarly, the stock is valued at 3.6 times trailing earnings, representing a steep discount to its five-year average P/E ratio of 15.3 and the S&P 500's P/E of 24.3.
Bolster your investment income with utility stocks
Daniel Foelber (Utilities Select Sector SPDR Fund): The S&P 500 is up 11.6% year to date. But six of the 11 stock market sectors are actually down so far this year -- utilities being the second-worst performer behind energy.
With over $15 billion in net assets, the Utilities Select Sector SPDR Fund is one of the largest utility exchange-traded funds (ETFs) out there. The sell-off has pole-vaulted the fund's yield to 3.2% -- which is the third-highest sector yield behind the Energy Select Sector SPDR Fund and the Real Estate Select Sector SPDR Fund.
The fund does an excellent job of mirroring the allocation of the utility sector. The position sizing of each of the fund's top 10 holdings are within 10 basis points of the position sizing of the top 10 utility stocks in the sector -- making the fund one of the simplest ways to invest in the leading U.S. utilities. The Utilities Select Sector SPDR Fund is also one of the least expensive ways to invest in the sector because it only charges a 0.1% expense ratio.
Most of the fund's largest holdings are regulated electric utilities. For example, the three largest holdings, NextEra Energy, Southern Company, and Duke Energy, make up 30.7% of the ETF. These companies have near regional monopolies and work with government agencies to charge fair prices to consumers. The regulation aspect caps the upside potential of these utilities, but it also provides a steady stream of inflows that can be used to pay dividends.
Utilities are probably the most boring sector of the economy. But when it comes to passive income, boring can be your best friend. Many of the best and most reliable dividend stocks are cash cows that operate stodgy, low-growth business models. Companies like Procter & Gamble and Coca-Cola aren't going to wow investors with growth prospects. But they are going to do a marvelous job of supplementing income in retirement or simply being a low-risk opportunity for investors.
With a compelling yield and a low expense ratio, passive income-orientated investors should consider buying the dip on the Utilities Select Sector SPDR Fund.
Infrastructure is a critical part of the global economy
Lee Samaha (iShares Global Infrastructure ETF): Whether it's the need for developing countries to support their growth by building out infrastructure or the need for developed economies to maintain and upgrade existing infrastructure, the demand for spending in the industry is solid.
The paragraph above is the key argument behind feeling confident about the long-term prospects for investing in an infrastructure ETF, and the iShares offering is a useful way to do it. The ETF currently yields 2.5% and has a relatively low 0.4% expense ratio. It's a relatively diversified ETF both in terms of stocks (no one stock makes up more than 5% of its holdings) and geographic exposure (38.3% of its current holdings are in the U.S., with Canada, Australia, Spain, France, Mexico, and China holdings making up at least 5% each).
Moreover, it has exposure to utilities and transportation infrastructure (40% each, with energy making up the remaining 20%), relatively safe industries that tend to generate strong recurring earnings and cash flows to support the ETF's dividend. Examples include toll road companies, electric utilities, airports, and gas pipeline companies.
As such, the ETF offers a relatively safe way to invest and earn a decent passive income from the global stock market.
