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Environment, social and governance (ESG) investing. Socially responsible investing (SRI). Sustainable investing. These are some of the biggest investing buzzwords of the past few years, pointing to a movement by investors pushing companies to be more conscious about their impact on issues such as climate change, diversity, human rights and sustainability.
But ESG, SRI and the like are more than just buzzwords. They’re actually the principles behind several hot-performing stocks, as well as some of the more attractive dividend-yielding blue chips on Wall Street. And today, I’ll explain how some of these “do-gooder” stocks actually translate their principles into better profits, bigger share gains and fatter dividends that we can compound into retirement riches.
But first, let me show you how to screw up ESG investing.
There are literally dozens of SRI and ESG exchange-traded funds (ETFs) on the market, but one of the oldest is the iShares MSCI KLD 400 Social ETF, which at more than $1 billion in assets under management is also the largest such ETF you can buy. It invests in a simple index of roughly 400 companies that “have been screened for positive environmental, social, and governance characteristics.”
That sounds nice, but the end result is essentially just a broad large-cap growth fund that’s heavy in Microsoft, Facebook and Alphabet but has mostly tracked the S&P 500 for much of its life, and is actually sitting on lifetime underperformance on a total-return basis. Better still, even with a generous fee waiver, DSI’s 0.25% expense ratio is more than six times than what the iShares Core S&P 500 ETF costs.
A few ETFs are worth their expenses, but scores of them make the cardinal sin of lumping too many losers in with too few lunkers.
My suggestion with ESG? Make precise, surgical picks whose feel-good practices come in concert with outperformance and dividend growth. Here are a few:
AbbVie
Dividend Yield: 3.8%
AbbVie is an odd bird in the dividend growth world in that it essentially “shares” Dividend Aristocrat status with Abbott Laboratories – the healthcare company that spun off AbbVie in 2013.
Abbott Labs retained a diversified business spanning medical devices, generics and nutritional products. AbbVie essentially was the biopharmaceutical arm, responsible for treatments such as blockbuster arthritis drug Humira, hepatitis-C treatment Viekira Pak and testosterone replacement therapy AndroGel.
ABBV is also experiencing stellar growth in non-Hodgkin lymphoma treatment Imbruvica, which saw global revenues rocket 38% higher year-over-year in the company’s fiscal first quarter.
AbbVie has gained a spot in several ESG funds because of its commitment to sustainable healthcare solutions, and in fact earned the highest overall score in the Dow Jones Sustainability Index among 40 biotechnology stocks in 2017. That’s thanks in part to perfect scores in “Environmental Reporting” and “Policy Influence.”
But it also deserves a spot in dividend growth portfolios thanks to its 46-year streak of raising its annual payout. Moreover, it’s still an excellent source of potential growth, with analysts projecting 17% annual earnings growth for the next half-decade.
Starbucks
Dividend Yield: 2.1%
That Starbucks’ is an SRI stud is no secret. The company has made very public efforts on ethically purchased and responsibly produced coffee, minimizing its carbon footprint, not to mention launching a college program for its employees. The company even issued a $500 million “sustainability bond” to finance projects such as support programs for its coffee farmers.
Unfortunately, Starbucks’ shares have been decidedly decaffeinated for the past two years, delivering just 4% share growth against 30% gains for the S&P 500. But there’s reason to believe SBUX could be primed for a Grande performance.
Make that a Venti.
For one, Starbucks’ price is due to catch up to its rising dividend sooner than later. The stock’s price performance over the past decade has mostly tracked its dividend growth – exactly what we should expect out of dividend growth stocks – but shares have run out of steam lately, even though the payout certainly has not. In the past five years alone, Starbucks’ payout has burst by 130%, and continued upward pressure on the dividend should entice income investors sooner rather than later.
On top of that, Wall Street still loves Starbucks’ growth prospects, modelling 17% annual profit growth every year on average from now through 2023. A big driver of this should be the chain’s enormous China push, which includes a pledge to open 600 stores annually through 2022, at which point it should have a presence in about 100 new cities.
AvalonBay Communities
Dividend Yield: 3.5%
AvalonBay Communities is one of several real estate investment trusts (REITs) that have penetrated the ranks of the ESG-friendly.
AvalonBay is geographically diverse, boasting apartment communities in the Northeast, Mid-Atlantic, Pacific Northwest, and Northern and Southern California – and doing so across the Avalon, eaves by Avalon and AVA brands. As of the first quarter, AVB owned or held interest in 288 apartment communities containing 84,162 apartment homes, and also had 18 communities under construction that should contain 5,774 apartment homes when completed.
“How can a REIT be ‘responsible’?”, you ask? Well, the company itself specifically points out that operating high-density housing helps “contribute to more efficient land use patterns,” but it also ensures that its properties effectively use energy, water and other resources.
While those ESG practices help endear companies like AvalonBay to Millennials, the company itself is right in that generation’s wheelhouse. Millennials are prime tenants in AVB’s high-growth markets, and they are die-hard renters. Homeownership among people 35 and younger has dropped 18% since 2006, according to the Pew Research Center.
That’s helping AVB stay plenty profitable; the company grew core funds from operation (FFO) by 4.3% year-over-year for the first quarter to $2.18 per share. And AvalonBay isn’t shy about sharing its extra profits with investors. The REIT has pumped up its quarterly payout by 287% since it started paying out a regular dividend in 1994.
BlackRock
Yield: 2.0%
BlackRock is a global asset management company that offers not just branded mutual funds, but also ETFs under the popular iShares banner. And it’s doing its part to promote socially responsible investing in several ways.
For one, iShares offers legacy funds such as the aforementioned DSI. But it also has contributed to additional products, such as collaborating with JPMorgan on a suite of ESG indices geared toward fixed-income investors. Moreover, BlackRock pivoted pretty quickly following the Parkland, Florida shootings to launch new ESG ETFs that also backed out gunmakers such as American Outdoors and Sturm, Ruger.
Moreover, CEO Laurence Fink has made it a point to take CEOs of publicly traded companies to task on issues such as tax reform, pressing these leaders to publicly state how they planned to use the Washington-generated windfall.
Of course, BlackRock is doing more than just pounding the ESG space. It’s one of the low-cost leaders in the ETF world, which makes it a prime beneficiary as the industry continues to swell. That’s why Wall Street’s analysts are projecting a 24% pop in profits this year, and a 15% annual average for the next five year.
That should help fuel BlackRock’s dividend, which has exploded from $1 per share in 2004 to $10 per share last year.
Disclosure: none
