My Favorite Dividend Yield Stocks Of The S&P 500 (NYSE:EIX) (2024)

Dividend Stocks: Why Quality Investing Matters

When growth investing isn't working, and market volatility and inflation are eating into portfolio gains, dividend investing can offer an alternative way to invest and reduce portfolio risk and volatility. Dividend stocks can be fairly stable, and when they pay shareholders a yield even when the market is experiencing a downturn, dividend stocks can be very attractive.

Not only can dividend stocks hedge against inflation, but a stock with consistent dividend payments also can showcase quality. Blue-chip stocks tend to be considered quality companies as they have a large market capitalization and national reputation for reliability and tend to be profitable in good and bad times. A long-term track record of success is vital today, and dividend stocks can provide passive income while possessing a combination of critical characteristics:

1. Capital Appreciation Potential

2. Dividend Yield

3. Dividend Safety

4. Dividend Growth

5. Collectively strong on value, growth, profitability, earnings revisions, and momentum.

I published My Top 2023 Dividend Yield Monsters a little over a week ago, highlighting stocks with dividend yields ranging from 4.86% to 9.72%. My current three picks' yields are more moderate, offering room for future growth and a long track record of consecutive dividend payments. My Top Quant Dividend Stocks screen helps find stocks with strong dividends and offers a great resource that aims to reach a little outside of the parameters of the safest dividend stocks. These stocks can offer a combination of yield, capital appreciation potential, dividend growth, dividend safety, and solid overall fundamentals. Despite the markets being closed for President's Day, inflation data is crushing investor confidence. Soaring car prices hurt the disinflation narrative the jobs report highlighted the addition of 517,000 jobs, and a fall in unemployment, sending mixed signals in the fight against inflation. But one thing is for sure. Investors are still budgeting for every dollar, so building a stock portfolio that can generate income while hedging against potential downturns may be beneficial.

3 Dividend Stocks from the S&P 500 to Invest in

Where better-than-expected economic data recently signaled that a recession might be avoided, Morgan Stanley strategists offer a different view. With hawkish Fed and risk-reward signals for equities indicating "very poor," Morgan Stanley strategist Mike Wilson believes the S&P 500 could drop as much as 26% in the year's first half. Mike Wilson, whose bearish view in 2022 hit the mark spot on, was ranked the best portfolio strategist in the latest Institutional Investor survey in October 2022.

Greed Continues to Move the Markets

Despite greed moving the markets, since last week's CPI report, inflation swaps have jumped, indicating that the market believes inflation will be higher than expected. Unfortunately, this bodes poorly for the already hawkish Fed's idea of inflation hitting 2% by June, given swaps now indicate a jump of 80bps to 2.8%, compared to January's low of 2.03%.

Change in Fed Swaps

With uncertainty looming and potential inflation increasing, investors wanting to hedge against rising prices and interest rates should consider my three favorite dividend stocks from the S&P 500.

1. Prudential Financial, Inc. (NYSE:PRU)

• Market Capitalization: $37.16B

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• Dividend Safety Grade: B+

• Forward Dividend Yield: 4.92%

• Quant Rating: Strong Buy

Prudential Financial (PRU), the well-known life and health insurance financial company, is one of my top dividend picks. Prudential, often referred to as "The Rock," has a forward dividend yield of 4.92%. Prudential Financial's favorable underwriting has benefited from lower COVID-19 mortality and interest rates. Prudential's diversified product offerings can generate earnings from fees, net investment spreads, and a complementary mix of retirement and life insurance products that provide natural hedges from interest rates. In addition to a 2019 cost-saving initiative, PRU is well on its way to achieving its $750M run-rate savings. Recently raising its dividend by 4.2% to $1.25, Prudential Chairman and CEO Charles Lowrey stated:

"We continue to balance investments in the growth of our businesses with returning capital to our shareholders. During the fourth quarter, we returned more than $800 million to shareholders through dividends and share repurchases, for a total of over $7.5 billion since the beginning of 2021. For 2023, our Board has authorized up to $1 billion in share repurchases, as well as a 4% dividend increase beginning in the first quarter. This represents our 15th consecutive annual dividend increase."

In addition to exceeding its target of $750M in cost savings, Prudential showcases strong, divided grades, supported by a rock-solid balance sheet, strong growth, and profitability to substantiate its long history of dividend payments.

Prudential Growth and Profitability

Despite a disappointing earnings miss for Q4, Prudential still managed to return more than $800M to its shareholders compared to the $7.6M since the start of 2021. Over the last 90 days, 12 analysts also revised estimates up, resulting in an A- revisions grade. With 19 years of consecutive dividend payments, Prudential's ability to remain profitable and generate cash despite market volatility is impressive.

Prudential's 10-Year Dividend Growth Track Record

Not only does Prudential maintain $5.16B cash from operations, but it also maintains a $1.377 trillion AUM book of business. Seeking Alpha contributor Geoff Considine recently wrote "Prudential is engaged in a major cost-cutting effort, and management reported exceeding the planned $750 Million in cost savings a year ahead of schedule." As PRU management looks to the future, it anticipates a baseline EPS to be $0.59 per share higher than the current quarter, for an EPS of $3.01 due to higher variable investment income, better underwriting, and lower expenses. Although the stock is -12.70% over the last year, PRU has solid momentum and comes at a great discount.

Prudential Stock Valuation

On a longer-term uptrend, PRU has been experiencing an uptick in trading volume. Despite the stock trading slightly down YTD (-1%), its discounted valuation indicates potential for upside in 2023. PRU has a forward P/E ratio of 8.31x, a -16% difference from the sector. Forward EV/Sales and forward PEG ratio are more than a 40% difference to the sector, indicating that this stock is discounted and ripe for the picking, along with my financial pick, Truist.

2. Truist Financial Corporation (NYSE:TFC)

• Market Capitalization: $64.33B

• Dividend Safety Grade: C

• Forward Dividend Yield: 4.29%

• Quant Rating: Buy

Full-service regional banking firm Truist Financial Corporation offers a diversified product mix and a range of personal banking and insurance products, as well as wealth management. Rebranding itself TFC after a "core conversion" of former SunTrust Banks and BB&T bank customers, the merger took place in February 2019. Now one of the largest regional banks in the U.S., Truist's acquisition of BB&T's insurance brokerage and the network was an attractive aspect for the merger, making it approximately the seventh-largest broker in the U.S. by revenue.

Through acquisitions over the years, Truist Insurance Holding (TIH) has grown, and its lucrative insurance business, which Truist now owns 80%, following a recent 20% stake sold to Stone Capital Partners for $1.95B, the remaining operation is valued at $14.75B. Highlighted by fellow contributor Stephen Simpson,

"The deal includes a 6.5-year lock-up with an interesting twist at the end - at the end of the lock-up SPC has the right to request the sale or IPO of TIH, and if Truist declines, they're obliged to buy back the stake at market prices. This transaction values TIH at $14.75B, which is a healthy, if not generous, valuation. This enterprise value works out to a trailing EV/EBITDA of 17.2x against a group valuation of 17.7x and a trailing P/E of 27.4x versus a group multiple around 25.3x."

Not only does the insurance business add tremendous value to the company, but TFC also has solid growth and excellent profitability.

Truist Stock Growth and Profitability

Highlighted by A+ profitability which includes $12.35B cash on hand, Truist's Consumer Banking and Wealth divisions showcased strong results for Q4 2022 on the heels of improved digital engagement, including a 42% volume increase for Zelle transactions.

With an EPS of $1.30 that beat by $0.02 and revenue of $6.26B that eat by nearly 12% year-over-year, as Truist Chairman and CEO Bill Rogers indicated, "Robust loan growth, significant margin expansion, and good cost discipline," allowed for sequential increases in adjusted pre-provision net revenue. Boasting strong credit quality and a diverse business mix, Truist's overall capital position is strong, as highlighted by the ability to pay a strong dividend at $0.52 per share. Truist's dividend grades are solid, offering more than 25 years of consecutive dividend payments and eight years of consecutive dividend growth.

With a moderate 4.29% forward dividend yield and a higher rate environment to draw on increasing fees and higher revenue as the economy recovers, a high rate environment is a win for the banking industry. Factor in a blossoming insurance business, and the current valuation makes the outlook and upside appear extremely favorable.

Truist Stock Valuation

After a difficult "transformational merger of equals," Truist completed its BB&T-SunTrust merger that began four years ago. With a one-year share price -of 24%, growing momentum has given way to a year-to-date price increase of 8% and the opportunity to monetize the insurance business.

Truist is trading at a relative discount. With an overall B+ valuation grade, the company showcases a forward P/E ratio of 9.95x compared to the sector's 10.36x, a forward PEG at -57.94% difference to the sector its trailing Price to Cash Flow is a 30% discount. Rising rates have enabled banks to benefit from strong tailwinds. Although fear of recession looms, the latest CPI data could benefit Truist, given a hawkish Fed and upside opportunities presented by monetizing Truist Insurance.

3. Edison International (NYSE:EIX)

• Market Capitalization: $25.81B

• Dividend Safety Grade: A

• Forward Dividend Yield: 4.36%

• Quant Rating: Buy

With the markets starting to roll over, "let's get defensive" has some reinvigorated meaning. The nation's largest electric utility holding company Edison International (EIX) delivers electricity to approximately 15 million residential and commercial customers across Southern, Central, and Coastal California. EIX benefits from California's gas ban, leading the clean energy transformation by offering long-term growth potential and cash flow that indicate better than showcased valuation. EIX boasts significant financial flexibility with an operating cash flow of +361% compared to its sector peers. Its cash hoard of $2.54B and $6B investment plan are also projected for an average annual earnings growth of 6% from 2023 to 2026. Set to report earnings this week, EIX's Q3 results were excellent.

Edison International Stock Growth and Profitability

With an EPS of $1.48, beating by $0.01, and revenue of $5.23B, beating by $164.61M, EIX is committed to delivering long-term EPS growth of 5% to 7% for 2025. Possessing somewhat of a monopoly in California, Edison's utilities offer efficient scale advantages and exclusive rights to customers, along with lower wildfire risk than its competitor PG&E.

Like many utility companies benefiting from a surge in prices, Edison extended their surge as freezing temperatures resulted in soaring spot gas prices, with some reaching heights not seen since December 2000. Benefiting from favorable tailwinds, EIX raised its dividend by 5.4% to $0.7375/share. With 18 consecutive years of dividend growth and excellent dividend safety, EIX offers the best dividend scorecard of my three picks.

With a 4.36% forward dividend yield and offering industry-leading programs for electrification, according to its Q3 2022 investor presentation, "EIX has double-digit total return potential, supported by a leadership role in clean energy transition…9-11% total return opportunity before potential P/E multiple expansion driven by estimated 65-70% wildfire risk reduction." Not only is Edison +11% over the last year, but the stock trades at a discount on forward P/E, which is -20% to the sector, and forward PEG is a 6.63% difference. Given the sector's ability to capture upside in a down market, proven to hedge against inflation, and offer recession-resilient features should we experience a recession in 2023, this stock is one to consider for portfolios.

Conclusion

Dividend stocks are a great way to hedge against inflation, especially companies like PRU, TFC, and EIX that are collectively strong on fundamentals like valuation, growth, and profitability and offer benefits during periods of high inflation. Each of these stocks offers a steady income stream with a longstanding track of consecutive dividend payments, at least a 4% forward dividend yield, solid overall dividend scores, and a significant excess cash flow.

The ability to diversify a portfolio with dividend stocks is an opportunity for investors to thrive in a rising or falling environment. Dividend stocks offer quality without sacrificing growth amid market swings. As we've seen over the last two years, investment sentiment can quickly move from greed to fear amid uncertainty.

Consider my three favorite dividend yield stocks from the S&P 500 that offer solid value. Their strong profitability and dividend safety grades help ensure shareholders that these stocks' dividend payout should remain consistent. If you prefer alternate dividend stocks or want to customize your picks into more desirable defensive sectors, considering Seeking Alpha's Ratings Screener tool.

Steven Cress, Quant Team

Steven Cress is the Head of Quantitative Strategies and Market Data at Seeking Alpha. Steve is also the creator of the platform’s quantitative stock rating system and many of the analytical tools on Seeking Alpha. His contributions form the cornerstone of the Seeking Alpha Quant Rating system, designed to interpret data for investors and offer insights on investment directions, thereby saving valuable time for users. He is also the Founder and Co-Manager of Alpha Picks, a systematic stock recommendation tool designed to help long-term investors create a best-in-class portfolio.

Steve is passionate and dedicated to removing emotional biases from investment decisions. Utilizing a data-driven approach, he leverages sophisticated algorithms and technologies to simplify complex, laborious investment research, creating an easy-to-follow, daily updated grading system for stock trading recommendations. His presentations are ideal for a variety of settings, including podcasts, webinars, financial forums, corporate meetings, investment leadership gatherings, and larger public events.

Steve was previously the Founder and CEO of CressCap Investment Research until its acquisition by Seeking Alpha in 2018 for its unparalleled quant analysis and market data capabilities. Prior to that, he had also founded the quant hedge fund Cress Capital Management, after spending most of his career running a proprietary trading desk at Morgan Stanley and leading international business development at Northern Trust.

With over 30 years of experience in equity research, quantitative strategies, and portfolio management, Steve is well-positioned to speak on a wide range of investment topics.