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You may not like what I'm about to say, but stock market crashes and corrections are an inevitable and normal part of the investing cycle.
Last month, the widely followed S&P 500 and tech-heavy Nasdaq Composite endured their steepest corrections since the March 2020 pandemic-induced crash.
However, every crash, correction, and sizable pullback throughout history has represented an opportunity for patient investors to put their money to work in the stock market at a discount. It could be an especially perfect time to put your money to work in dividend stocks.
The answer to “Why dividend stocks?” is simple: They're moneymakers. Dividend stocks are almost always profitable, have time-tested operating models, and offer a rich history of outperformance, relative to non-dividend-paying stocks.
Back in 2013, J.P. Morgan Asset Management, a division of banking giant JPMorgan Chase, released a report comparing the performance of companies that initiated and grew their dividend to non-payers over a four-decade stretch (1972-2012). The results showed a 9.5% annualized gain over 40 years for the dividend stocks versus a meager 1.6% annualized gain for those that didn't pay a dividend.
Following the market's significant pullback, three dividend stocks stand out as having all the tools needed to make you richer in February, and well beyond.
Bank of America
The first dividend stock begging to be bought by income seekers in February is money-center giant Bank of America (NYSE:BAC).
Bank stocks are inherently cyclical. This means they struggle when the U.S. and/or global economy are in recession and thrive when the opposite is true. What's important to understand is that there's a large timeline disparity between economic expansions and recessions. Whereas contractions and recessions are often measured in months or quarters, periods of expansion last for years. Buying bank stocks like BofA often allows patient investors to take advantage of growing economies over time.
But there's another exciting reason why Bank of America stands out. Among money-center banks, none is more interest-sensitive than BofA. This distinction is important given that U.S. inflation is at a 40-year high, and the Federal Reserve appears ready to hike interest rates on multiple occasions in 2022 and 2023. According to Bank of America's fourth-quarter operating results, a 100-basis-point parallel shift in the interest rate yield curve would result in an estimated $6.5 billion in added net interest income over 12 months. In short, we're about to see extra interest income from outstanding variable-rate loans flow directly to BofA's bottom line and boost its earnings per share.
Investors should take notice of Bank of America's digitization efforts as well. Over the previous three years, the company's digital active user count has grown 5 million to 41 million, with the percentage of sales completed online or via mobile app surging to 49% from 31%. Because digital sales are considerably cheaper for the company than in-person and phone-based interactions, this digital shift has allowed BofA to consolidate some of its branches and reduce its expenses.
Though Bank of America's 1.8% yield isn't eye-popping, keep in mind that it offers one of the most generous shareholder return policies among big banks. With higher profits likely around the corner, look for BofA to boost its dividend and share repurchase program by midyear.
A second dividend stock that can make investors richer in February and well beyond is gold miner Kinross Gold (NYSE:KGC).
It probably goes without saying, but investors can't be bullish on gold stocks without having a positive outlook for the lustrous yellow metal. The good news is that gold does offer a favorable outlook. Historically low lending rates coupled with high inflation have made it very difficult for income investors to generate real-money returns. With gold serving as a hedge to inflation and fear, it should perform well throughout 2022.
On a more company-specific basis, Kinross Gold is set to benefit from production upgrades at a key mine. While the Tasiast mine in Mauritania has, at times, been more trouble than it's worth, this key asset could nearly double its gold output over the next two years. By the end of the first quarter, the Tasiast 21k project, which'll increase mine throughput to 21,000 tonnes per day, will be complete. By mid-2023, throughput will hit 24,000 tonnes per daily. Once the full ramp-up is complete, Tasiast will be a flagship asset with all-in sustaining costs of around $560 per gold ounce. This equates to a cash operating margin of more than $1,200/ounce, based on where physical gold stands today ($1,800/oz.).
Furthermore, Kinross Gold has a veritable mountain of projects in development. Later this year, production will begin at the La Coipa mine, with first production anticipated from Manh Choh and Udinsk in 2024 and late 2025, respectively. Between organic mine expansion and new assets coming online, Kinross expects gold equivalent ounce (GEO) production to rocket from 2.1 million in 2021 to 2.9 million GEO in 2023.
In addition to a healthy pipeline, Kinross Gold's assets offer reasonably long lifespans. Taking into account expected reserve and resource life, the majority of Kinross' core mines are expected to be producing for 15 or more years.
Currently sporting a market-topping 2.3% yield, Kinross Gold can be scooped up for less than seven times Wall Street's consensus earnings forecast for 2022. It has an even lower multiple if taking into account the company's operating cash flow. It's simply too great a deal for income investors to pass up.
A third dividend stock investors can confidently buy to become richer in February, and likely well beyond, is pharmaceutical stock Merck (NYSE:MRK).
The beauty of healthcare stocks like Merck is they're highly defensive. Even though they may decline in sympathy with the broader market during pullbacks, their operating performance remains largely unaffected by economic contractions and stock market moves. Since we don't get to control when we get sick or what ailment(s) we develop, there tends to be steady demand for prescription drugs, medical devices, and healthcare services.
The key driver for Merck's bottom line continues to be cancer immunotherapy Keytruda, which has more approved indications in the U.S. than I can count. During the third quarter, Keytruda brought in $4.53 billion in sales, which equates to more than $18 billion in annual run-rate revenue. Between multiple ongoing clinical trials that could expand its label and strong pricing power, Keytruda could well become the world's top-selling drug in the years to come (not counting COVID-19 vaccines).
Merck also hasn't been afraid to lean on inorganic opportunities to lift its growth rate and diversify its sales channels away from Keytruda. Last year, it spent $11.5 billion to acquire Acceleron Pharma to gain hold of sotatercept. This late-stage clinical therapy has shown promise as an add-on treatment to the current standard of care in patients with pulmonary arterial hypertension. While estimates vary, the expectation is for sotatercept to top $1 billion in peak annual sales, if approved.
However, Merck is about more than just brand-name pharmaceuticals. The company's animal health division is making waves with consistent double-digit growth. In particular, companion animal therapeutics have been especially strong. With more U.S. households than ever owning a pet, Merck's animal health segment can shine.
Investors can gobble up this pharma giant for a reasonably low 11 times Wall Street's forecast earnings in 2022, and they'll be rewarded with a hearty 3.4% dividend yield for their patience.
JPMorgan Chase and Bank of America are advertising partners of The Ascent, a Motley Fool company. Sean Williams owns Bank of America. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.