7 High-Yield Dividend Stocks That Could Soar In 2020 (2024)

(Source: imgflip)

Due to reader requests, I've decided to break up my weekly "Best Dividend Stocks To Buy This Week" series into two parts.

One will be the weekly watch list article (with the best ideas for new money at any given time). The other will be a portfolio update.

To also make those more digestible, I'm breaking out the intro for the weekly series into a revised introduction and reference article on the 3 rules for using margin safely and profitably (which will no longer be included in those future articles).

To minimize reader confusion, I will be providing portfolio updates on a rotating tri-weekly schedule. This means an update every three weeks on:

• My retirement portfolio (where I keep 100% of my life savings) which just added two brand new companies
• The Best Dividend Aristocrats And Kings To Buy For The Next Decade
• My "What I'm Buying Next" series, including two fast-growing blue chips I'm buying this week.

Market Meltup Means Investors Need To Be Extra Disciplined And Careful

(Source: F.A.S.T Graphs, FactSet Research)

The market's meltup continues with stocks now up over 23% since the end of the May trade conflict-induced freakout. That's over just seven months representing a 37% CAGR total return.

The S&P 500's forward PE is now 18.8 or 15% above its 25-year average of 16.25.

The blended PE is 20.4 20% above its 18-year average (excludes tech bubble) of 17.0.

The rally is being driven largely by momentum traders, particularly in the five biggest tech names, which now account for 18% of the S&P 500.

Apple (AAPL) and Microsoft (MSFT) alone delivered 15% of the S&P 500's 31.5% gain last year.

For context 2019 was the 2nd best year for stocks in two decades and the 16th best year of all time.

(Source: Charlie Bilello)

Are we now at a very high pullback/correction risk? You bet.

(Source: Guggenheim Partners, Ned Davis Research)

Since both 1945 and 2009, we've averaged a 5+% pullback/correction every six months. That means historically speaking, the next pullback should begin by the end of April.

Of course, every downturn is different and stocks could always melt up all year as they did in 2017. December 2017 marked the 14th monthly gain in a row, and the peak decline that year was 2.7%, a mere dip from all-time highs.

Stocks Might Roar Higher For 10 More Years

In "The Investor Fallacy: Why Markets are Never “Due” for Anything" Nick Maggiulli, an Analytics Manager for Ritholtz Wealth Management, explains why the stock market might go up 300% to 450% over the next decade.

If history were to repeat itself in some meaningful way, the S&P 500 would be 4x higher by 2030 than where it is today." Nick Maggiulli, emphasis original

In that article Maggiulli shows that historically periods of strong decade rallies are followed by another 10 years of great returns.

Those 20-year mega rallies are often followed by a lost decade, which then sets up another two-decade super bull market. At least that's the case based on his research of the limited 20 year periods since 1936.

(Source: Ploutos)

While the 2010s rally was 88% justified by EPS growth and dividends, (buybacks accounted for 13% of EPS growth per Fed data and Ed Yardeni) a 300% to 450% rally over the coming decade would require investors to go absolutely mad.

15% to 19% CAGR returns over the next 10 years would likely result in even more extreme valuations than the tech bubble, which resulted in the famous lost decade that was bookended by two 50+% crashes.

Fortunately, prudent income investors don't have to speculate about what stocks will do this year or even the likelihood of either a lost decade or accelerating hyper-rally in the next 10 years.

(Source: quote fancy)

That's because, no matter how overvalued the broader market gets, something great is always on sale.

My Approach To Valuing And Recommending Stocks

See this article for an in-depth explanation of how and why I value companies and estimate realistic 5-year CAGR total return potentials.

In summary, here is what our valuation model is built on:

• 5-year average yield
• 13-year median yield
• 25-year average yield
• average P/E ratio
• average P/Owner Earnings (Buffett's version of FCF)
• average price/operating cash flow (FFO for REITs)
• average price/free cash flow
• average price/EBITDA
• average price/EBIT (pre-tax profit)

These metrics represent pretty much every company fundamental on which intrinsic value is based. Not every company can be usefully analyzed by each one (for example, EPS is meaningless for REITs, MLPs, yieldCos, and most LPs). But the idea is that each industry appropriate metric will give you an objective idea of what people have been willing to pay for a company.

I line up the expected and realistic growth rates of companies with time horizons of similar growth, thus minimizing the risk of "this time being different" and overestimating the intrinsic value of a company.

I maintain 10 total valuation lists, covering:

• 53 level 11/11 quality Super SWANs (the best dividend stocks in America which collectively have doubled the market's annual returns over the past 17 years)
• All the Dividend Kings
• All the Dividend Aristocrats
• All safe (level 8+ quality) midstream MLPs and C-corps
• All safe monthly dividend-paying stocks
• All DK model portfolio holdings
• Our Top Weekly Buy List
• Our Master Valuation/Total Return Potential List (360 companies and counting)

It's from these lists that I present three great dividend stocks that could be some of the best performers of 2020 and far beyond.

3 Safe Anti-Bubble Stocks For Generous Income And Market Smashing Return Potential

All three of these stocks are Dividend King's Deep Value portfolio holdings.

This 5% yielding portfolio (6% yield on cost) is all about pure Buffett style opportunistic buying of above-average quality companies when the market hates them most.

Deep Value's 10 Biggest Winners (Since July 2019)

(Source: Sharesight)

Our steady weekly buying has allowed us to score some impressive early gains.

Deep Value Total Returns Since Inception

(Source: Sharesight)

While value has had a great six months, our "quality first, valuation second, and prudent risk management always" approach has allowed us to outperform our benchmark, the Morningstar 4 star silver rated Vanguard Value ETF (VTV), by 40%. VTV has, over the last 15 years, been in the top 21% of value ETFs, indicating that our approach is working well so far.

Today I want to point out three coiled spring, anti-bubble stocks that are potentially poised for major gains in 2020 and far beyond.

(Sources: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, Gurufocus, YieldChart, Gordon Dividend Growth Model)

Energy Transfer: A Safe 9% Yielding Anti-Bubble Stock

(Source: F.A.S.T Graphs, FactSet Research)

Despite what the five-year MLP bear market might have you believe, MLPs are not money losers. At least if you buy them at attractive valuations with high margins of safety.

Energy Transfer has, since its IPO, beaten the market by 3% annually while delivering nearly double your initial investment worth of tax-deferred distributions. Its income stream was more than five times that of the S&P 500.

My idea of deep value investing is not cigar butt companies that are possibly headed for the grave and thus a stock price of zero, but above-average companies who are expected to keep growing cash flows and dividends over time.

(Source: investor presentation)

ET is now priced as if it will grow at -6% CAGR forever, and that's simply not likely.

Energy Transfer Growth Matrix

(Source: F.A.S.T Graphs, FactSet Research)

It's true that ET doesn't have a perfect record of hitting consensus results. But over two year periods, it meets or beats expectations 80% of the time since its IPO.

ET's margin of safety is currently 51% based on what real investors have paid for its distributions, operating cash flow, EBITDA and EBIT.

Energy Transfer Valuation Matrix

(Source: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, Gurufocus, YieldChart)

The Carnevale/Graham fair value rule of thumb, based on 200 years of historical market returns, says that 15 times earnings and cash flow are "reasonable and sound" valuations to pay for a stock. That's a nearly 7% earnings/cash flow yield that is likely to deliver 7+% CAGR long-term total returns.

Rather than assume ET will ever achieve such lofty multiples, I apply the consensus fundamental results to what investors have actually paid. Those multiples say Energy Transfer is worth between $17 and $35 this year. I use the average of $28 as my reasonable estimate of fair value based on this year's fundamentals.

Energy Transfer Growth Profile

• FactSet long-term growth consensus: 5.0% CAGR
• Factset consensus growth through 2022: 8.6% CAGR
• Reuters' 5-year growth consensus: 16.5% CAGR (outlier)
• Ycharts long-term growth consensus: 5.0% CAGR
• Historical growth rate: 15.1% CAGR over 14 years
• Realistic growth range: 2% to 6% CAGR
• Historical fair value: 4.0 to 4.5 EBITDA

This is what the 19 analysts covering ET expect in terms of growth. For my realistic growth range, I use the most conservative estimate (Morningstar's 2%) and 1% above the most common forecast, 5%.

2% to 3% organic growth is possible from ET's current plan to invest about $3 billion per year in high margin growth projects. Buying back stock, up to 8% per year with retained cash flow, is how ET can realistically hit 6% growth over time.

(Source: F.A.S.T Graphs, Factset Research)

Energy Transfer growing at 2% would be worth 4.5 times EBITDA per the Carnevale/Graham fair value formula, built into F.A.S.T Graphs. In fact, a company that never grows at all is worth about 4.5 times EBITDA according to the father of value investing.

Even if ET grows at 2% in Morningstar's worst-case scenario (no new growth projects beyond 2021 and just pipeline tariff raises of 2% per year) and returns to the low-end fair value, it can potentially deliver 160% total returns over the next five years.

(Source: F.A.S.T Graphs, Factset Research)

If ET grows cash flow by 6% annually and returns to the upper end of its fair value, it could nearly quadruple your investment over the next five years.

(Source: F.A.S.T Graphs, Factset Research)

Compare that to the 7% CAGR long-term consensus total return for the S&P 500, using Factset's 8.5% CAGR long-term consensus growth forecast and the 18-year average blended PE for stocks of 17.0.

Keep in mind that according to FactSet's John Butter's, over the last 20 years analysts have overestimated EPS growth for the S&P 500 by 1.8% to 3.8% per year, depending on whether or not we had a recession.

6% CAGR long-term returns are more likely, especially if we get a recession over the next five years. ET's conservative total return potential is likely to deliver about three times the returns of the broader market. The MLP's upper-end total return potential could quadruple the market's returns over that time.

(Source: F.A.S.T Graphs, Factset Research)

Apply ET's fair value EBITDA multiple to the 2022 consensus estimates, and you can see that over the medium-term this 9% yielding anti-bubble stock could deliver sensational returns should it return to fair value within three years.

Unum Group: One Of The Best Blue Chip Deep Value Stocks You've Never Heard Of

Unum is an insurance company founded in 1848 that operates in the US and UK. Here is what Unum sells

• long and short-term disability policies
• group life insurance
• accidental death policies
• supplementary insurance policies

Its clients are big corporations who use these policies as benefits for their employees.

• 5.8 forward PE
• 7.4% CAGR FactSet long-term growth consensus
• 0.69 PEG ratio

There are few blue chip companies you can buy today with a very safe dividend (5/5 safety) and a PEG ratio so far below 1.0. For context the S&P 500's PEG ratio is 2.2, meaning that Unum will let you potentially buy a unit of growth for 1/3 the price of the broader market.

Unum Growth Matrix

(Source: F.A.S.T Graphs, Factset Research)

And just like all the stocks I buy for our portfolios (and my retirement portfolio) Unum is not a sinking ship but expected to grow at a steady rate.

Unum Valuation Matrix

(Source: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, Gurufocus, YieldChart)

Unum is trading at $29 but is worth about $51 per share in 2020 and potentially $57 in 2021.

For 9/11 quality blue chips like Unum, a 30% margin of safety = a deep value "very strong buy". A 33% discount to fair value for most companies makes them anti-bubbles and UNM is at a 43% margin of safety right now.

What's this financial company's long-term outlook?

Unum Growth Profile

• FactSet long-term growth consensus: 7.4% CAGR
• Factset consensus growth through 2022: 6.0% CAGR
• Reuters' 5-year growth consensus: 5.5% CAGR
• Ycharts long-term growth consensus: 7.4% CAGR
• Historical growth rate: 3.9% CAGR over 20 years
• Realistic growth range: 4% to 8% CAGR
• Historical fair value: 8.5 to 9.5 PE

It's expected to grow at its historical rate or better, with most analysts expecting about 7% CAGR growth over time. That's compared to the S&P 500's historical 6% CAGR growth rate.

(Source: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, Gurufocus, YieldChart)

Over the past 20 years, UNM has met or beaten its 12-month growth forecasts 100% of the time, and met its 24-month forecasts 100% of the time, within a reasonable margin of error.

(Source: F.A.S.T Graphs, Factset Research)

If Unum grows at the low end of its growth range and trades at the low end of its historical fair value, then it could still more than double your investment over the next five years.

This conservative return potential is double the S&P 500's bullish five-year forecast.

(Source: F.A.S.T Graphs, Factset Research)

If UNM grows slightly faster than most analysts expect and returns to the upper end of its fair value range, then it could deliver over 20% CAGR total returns over the next half-decade.

Such is the power of an anti-bubble blue chip yielding a very safe 4%. It allows you to potentially achieve long-term returns on par with the greatest investors in history.

Not by taking undue risk, such as hoping and praying for a decade of irrational multiple expansion, but merely by buying "fat pitch" blue chips that are irrationally priced.

(Source: imgflip)

Over the next three years, if UNM returns to fair value by 2022 and grows as expected, it could deliver even more impressive returns, of over 100%.

(Source: F.A.S.T Graphs, Factset Research)

Foot Locker: Priced For Permanent Negative Growth That's Not Likely To Happen

Foot Locker has been struggling in recent years due to the rise of e-commerce which explains why the market hates it so much.

However, the chain of sports apparel and shows, branded under Foot Locker, Kids Foot Locker, Lady Foot Locker, Champs Sports, Footaction, Runners Point, Sidestep, and SIX:02, has a turnaround plan that analysts believe will return it to decent growth over time.

(Source: F.A.S.T Graphs, Factset Research)

The company's track record as a dividend growth stock is excellent. Had you invested $10,000 in 1999 then you'd have recouped nearly double that in dividends alone. Your total returns would have been double that of the broader market.

Foot Locker's turnaround plans are expected to result in a big hit to cash flow in 2020.

(Source: F.A.S.T Graphs, Factset Research)

However, even with a 10% dividend hike expected by analysts, its FCF payout ratio is forecast to peak this year at a safe 45.5%.

Next year and beyond cash flow is expected to grow robustly. That's expected to allow the dividend to grow at doubled digits through 2022, as it has for the past decade.

• Dividend Growth Streak: 9 years
• 5-year dividend growth rate: 12% CAGR

Over the last 15 years, Footlocker grew at 7.5% CAGR which is what most analysts expect in the future.

Foot Locker Valuation Matrix

(Source: F.A.S.T Graphs, FactSet Research, Reuters', Ycharts, Gurufocus, YieldChart)

Apply the market-determined fair value multiples of dividends, cash flow, and earnings over that time period to this year's consensus results, and you get a fair value range of $53 to $72. The average of $61 is what I consider a reasonable estimate of Foot Locker's fundamental fair value this year.

At $39 there is no question that Foot Locker is undervalued, by 36% per my model, making it a very strong buy anti-bubble stock.

Footlocker Growth Profile

• FactSet long-term growth consensus: 7.9% CAGR
• Factset consensus growth through 2022: 7.5% CAGR
• Reuters' 5-year growth consensus: 7.4% CAGR
• Ycharts long-term growth consensus: 8.0% CAGR
• Historical growth rate: 13.4% CAGR over 20 years
• Realistic growth range: 4% to 9% CAGR
• Historical fair value: 14 to 15 PE

Foot Locker historically trades at 14 to 15 times earnings, in-line with the Carnavale/Graham fair value rule of thumb.

• forward PE: 8.0
• FactSet long-term growth forecast: 7.9%
• PEG: 1.01 vs 2.2 S&P 500

Buying Foot Locker at eight times forward earnings represents an earnings yield of 12.5%. According to Goldman Sachs, since 2000 the average earnings yield risk premium (inverse S&P 500 PE - 10-year treasury yield) was 3.7%.

Footlocker's earnings yield risk premium is 10.7% right now, or nearly three times what investors have historically received for owning risk assets like stocks.

It's true that Foot Locker doesn't always hit its forecasts. In fact, about 20% of the time it misses them. But nearly half of the time it beats expectations, and for an anti-bubble stock trading at eight times earnings? Well, that creates the potential for monster medium to long-term gains.

(Source: F.A.S.T Graphs, Factset Research)

If Foot Locker grows 1.5% slower than the most pessimistic consensus forecast and merely returns to the low end of fair value, it could deliver 16% CAGR total returns over the next five years.

The Graham fair value formula says that 15 times earnings, the upper fair value range for this company, is appropriate for a company growing between 3.25% and 15%.

(Source: F.A.S.T Graphs, Factset Research)

If Foot Locker grows slightly faster than expected, as it has done 36% of the time in the past two decades, then it could nearly quadruple your investment over five years. And that's merely returning to what Ben Graham and Chuck Carnevale consider fair value for most companies.

If Foot Locker becomes overvalued (all quality companies eventually do) then your potential gains will be even larger.

(Source: F.A.S.T Graphs, Factset Research)

Here is the three-year consensus return forecast for FL. If Foot Locker grows as expected (7.5% CAGR through 2022) and trades at its 15-year average (during which growth was also 7.5% CAGR), then it could deliver 35% CAGR total returns over the next three years.

(Source: F.A.S.T Graphs, Factset Research)

In contrast, the S&P 500, IF it achieves its expected 8.8% CAGR EPS growth (which is unlikely historically speaking), can realistically be expected to deliver eight times smaller gains.

For context, if the S&P 500 returns to its long-term (since 2002) average PE of 17, then by 2023 index fund investors could see just 13% total returns. Foot Locker realistically has the potential to deliver three times that return...every year...for the next three years.

Of course, the future is always uncertain which is why risk management is the #1 priority for all smart investors.

These are the risk management rules I use to run all my portfolios, both for Dividend Kings, and my retirement portfolio, which is 100% of my net worth.

What if none of these stocks meet your needs? Then that's where the rest of this article comes in. Let's take a look at three ways to screen quality companies for attractive valuations.

High Margin Of Safety: The Essence Of Risk Management

Due to a very busy schedule updating the Master List (which takes about five months) this week I don't be doing the standard valuation walk-through. But here is a valuable abbreviated version.

The Most Undervalued Stocks On The Master List

(Source: Dividend King's Master List)

Margin of safety is not just about great returns but about prudent risk management.

Meredith Corp (MDP), is the most undervalued company on our Master List, a stunning 60% discount to fair value.

MDP is a media company and a 26-year dividend streak champion. It's currently undergoing a turnaround involving its TIME acquisition that has caused the market to absolutely hate this stock.

• forward PE: 5.1
• FactSet long-term growth consensus: 4.4% CAGR
• PEG: 1.17
• Yield 7.2%

Deep Value Has Bought MDP 3 Times

(Source: F.A.S.T Graphs, Factset Research)

Note that MDP growing at 4% has a market-determined fair value PE of 13.8. It's currently trading at a blended PE of under five.

Both I and Deep Value has bought MDP three times now. We are paying such a low price that our forward earnings yield is 20%, and our earnings risk premium is 18.2%. That's five times the historical market risk premium, meaning we're being well compensated for the risk of MDP's turnaround thesis failing.

That includes an average safe (relative to most companies) dividend yielding over 7%. Analysts expect MDP to increase its dividend 5% in February 2020 and 2021. If that happens, our yield on cost will rise to 7.6% in 2020 and 8% in 2021.

That dividend alone is likely to fuel total returns that outperform the S&P 500 over the coming years.

(Source: F.A.S.T Graphs, Factset Research)

If MDP grows as expected and returns to the historical fair value for 4% growth, then we might see 40% CAGR total returns over the next three years.

7/11 quality companies are capped at 2.5% in our portfolios, a prudent risk management rule. But even if we end up with MDP as 2.5% of our portfolio then the consensus return potential of 40% CAGR could result in 1% annual total returns for our portfolios purely from this one anti-bubble stock alone.

If MDP were to implode and go to zero (we'd sell before it did) then we lose at most 2.5% of our capital, which our dividends could recoup in 4 to 5 months.

Low PE & High Earnings Yield: The Essence Of Valuation

The Lowest PE Stocks On The Master List

(Source: Dividend King's Master List)

ET and UNM are among the lowest PE or P/EBITDA stocks on the Master List.

So is Brookfield Property Partners (BPR)(BPY) which is one of my highest conviction REITs for 2020. In fact, it's 6% of my retirement portfolio and Dividend Kings owns it in our High-Yield Blue Chip Portfolio (4% position).

(Source: F.A.S.T Graphs, Factset Research)

BPR is an 8/11 above-average quality REIT that normally trades at 2.5 to 3.0 EBITDA. It's currently at 2.2 forward EBITDA and 23% undervalued, making it a good buy.

If it were to return to the midrange of its fair value range by 2021 and grow the 5.9% CAGR that analysts expect, then it could deliver 20% CAGR total returns over the next two years. How likely is BPR to achieve its EBITDA forecast?

Since its 2013 IPO, the REIT (or more specifically BPY, the LP version) has never missed expectations within a reasonable margin of error.

Low PEG: The Essence Of "Growth At A Reasonable Price"

Peter Lynch popularized the idea of a PEG of 1 that represents "growth at a reasonable price." For example, a company that can realistically grow 20% over time is worth 20 times earnings and cash flow, while a company that is growing at 15% or less is worth 15 (or its historical valuation).

How Much Your Money Will Grow Based On Company Growth Rate And Time Period

The power of exponential growth backs up Lynch's claims, as does the 29% CAGR total returns he delivered at Fidelity's Magellan fund from 1977 to 1991.

The Lowest PEG Stocks On The Master List

(Source: Dividend King's Master List)

Ally Financial (ALLY) was founded in 1919 as GMAC and is involved in mortgages, credit cards, and insurance.

It's currently trading at a 7.3 forward PE, creating a 0.58 PEG ratio due to 12.5% long-term expected growth (16% CAGR since its IPO).

10% to 15% is the realistic long-term growth rate, creating 12% to 21% CAGR long-term return potential over the next five years.

(Source: F.A.S.T Graphs, Factset Research)

If Ally grows as expected over the next three years, then a return to the mid-range of its 9 to 10 fair value PE could deliver 20% CAGR total returns. How likely is Ally to grow as expected?

Over the past 6 years, its met or beaten 12-month growth expectations 75% of the time. Over 2 years, it's always achieved its expected growth within a 20% margin of error.

Bottom Line: No Matter What The Market Is Doing You Never Have To Overpay For Quality Income Producing Assets

Just because the market is 15% to 20% overvalued doesn't mean you have to stop putting new money to work.

Energy Transfer, Unum Group, Foot Locker, Meredith Corp, Brookfield Realty (in either form), and Ally Financial all represent sound long-term dividend growth investments in a diversified and properly risk-managed portfolio today.

Each is expected to grow at a modest to rapid clip in the future and is trading at sufficient margins of safety to compensate shareholders for their respective risk profiles.

These six companies screened from our Master List, represent the essence of sound long-term investing, following in the footsteps of the greatest investors in history.

(Source: imgflip)

Rather than worry about what the market will do tomorrow, next month or even this year, we just focus on the fundamentals, dividends, earnings, and cash flow.

As long as we can purchase those with a high enough margin of safety, then time is on our side. Thus success becomes a matter of patience, discipline and letting competent management teams work hard so shareholders eventually won't have to.

(Source: AZ quotes)

The reason I spend so much time on the Master List (and all its daughter lists) is precisely to answer the question "what can I safely buy now?"

Whether the broader market is trading at a forward PE of 18.8 (today) or 13.7 (Dec 2018), a good watchlist is worth its weight in gold. Because it allows disciplined income investors to create their own luck by knowing what quality companies are on sale no matter what the broader market is doing.

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