The S&P 500 index is offering investors a tiny 1.2% dividend yield. But you can enjoy significantly higher yields from industry-leading companies in the energy, healthcare, and consumer staples sectors without taking on a substantial amount of risk. Here’s why Chevron(NYSE: CVX), Bristol Myers Squibb(NYSE: BMY), and Clorox(NYSE: CLX) could be the smartest places for you to invest $1,000 right now.
Chevron’s dividend yield is 4.5%, and the payout has been increased annually for 38 consecutive years. While both of those are exciting numbers, the dividend streak is the more impressive figure. That’s because the company operates in the highly volatile energy sector, and it has achieved this streak thanks largely to its elite business model.
First, Chevron is diversified across the entire energy value chain. This helps to even out financial performance through the energy cycle. Second, the company has long focused on having a rock-solid balance sheet (the debt-to-equity ratio is a very low 0.22). The company has proved that it not only can survive the ups and downs of commodity prices, but that it also can thrive despite the industry’s inherent volatility.
Because energy is vital to the global economy, most investors should have some exposure to it. A $1,000 investment in Chevron, which will net you around six shares of the stock, is a fairly low-risk way to get that exposure.
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Pharmaceutical giant Bristol Myers Squibb is currently offering a 4.7% yield. The dividend hasn’t been increased every single year for decades, like Chevron’s dividend, but it has trended largely higher over time. What’s exciting about Bristol Myers Squibb today is that investors are punishing it for what are, essentially, normal business dynamics.
Their primary concern appears to be the patent expirations the company is facing in the next few years. Patent protections are, by design, time-limited, so expirations are a very common occurrence.
The problem is that these so-called patent cliffs result in dramatic declines in revenue and profit from important drugs. But Bristol Myers’ long history of success is clear evidence that it knows how to manage these situations and continue to thrive over the long term.
The company’s own pipeline of drug candidates, or acquisitions it may make, will be the solution to the problem. That is no different from every other time before, when the company has dealt with a patent cliff.
If you can think long term, now is an opportunity to put $1,000 to work, buying around 19 shares of the stock, while others remain fearful. A nearly 85% payout ratio may lead the most-conservative dividend investors to avoid the stock, but given the reliable dividend history, that shouldn’t be a disqualifying stat for most.
Clorox is an iconic brand manager in the consumer staples sector, with a lofty 4.9% dividend yield today. The big story here on the dividend, however, is the fact that the company is just a couple of years away from achieving Dividend King status (50 or more consecutive annual dividend increases). So it has been an incredibly consistent business.
What’s interesting about Clorox is that it is focused on brands, not product categories. A few examples will highlight this dynamic. The company’s namesake brand is in cleaning products. Its Burt’s Bees brand sells lip balm and makeup. The Glad brand makes plastic bags. Fresh Step is a major player in the kitty litter market. And Hidden Valley produces salad dressing.
There’s no rhyme or reason here other than the fact that these brands are all leaders in the niches they serve. Clorox’s success is driven by its brand management skills and its sharpshooter approach.
Currently, the stock is unloved on Wall Street, and $1,000 will enable you to purchase nine shares. The company faces real problems, including rising costs, the fallout from a data breach, and the risks associated with implementing a new computer system. However, with such a long history of success, being a contrarian and buying Clorox while others are fearful seems like a smart risk-reward trade-off.
There’s a saying among investors that Wall Street is a voting machine in the short term but a weighing machine over the long term. Essentially, investors’ short-term fears can sometimes lead to long-term buying opportunities. That seems to be the case today with high-yield stocks such as Chevron, Bristol Myers Squibb, and Clorox. The smart choice is to buy before other investors catch on to the opportunity.
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Reuben Gregg Brewer has positions in Clorox. The Motley Fool has positions in and recommends Bristol Myers Squibb and Chevron. The Motley Fool has a disclosure policy.
