As the old adage goes, there’s more than one way to skin a cat. Although most investors might assume the most likely path to riches lies with growth stocks, there’s much to be said about the slow-but-compounded upside of collecting regular dividend payments, even if you’re not reinvesting those dividends in the same stock that’s dishing them out.
Here’s a closer look at three dividend stocks that, with enough time, could make you wealthier than you might ever believe they could.
It’s a tough time to be excited about owning bank stocks. Interest rates are assuredly set to rise, which works against the current prices of any and all dividend-paying stocks. And, higher interest rates make borrowing money for any reason a less compelling idea. Banks that lend to businesses are seemingly threatened here, with or without the prospect of a recession.
But there’s a little detail about banks that’s often overlooked. That is, the higher interest rates go, the more profitable lending becomes.
Enter Citigroup ( C -1.91% ), which, thanks to its 30% stock price pullback from last June’s highs, is now yielding 3.6% on its dividend payout. Assuming the world eases out of its current economic turbulence and avoids slipping into a recession, this sale on the stock shouldn’t last long. Indeed, with rates poised to rise on the order of at least a couple of percentage points by the end of 2024, it’s arguable Citigroup will be better off two years down the road than anybody anticipates now.
In the meantime, the bank continues to offer a variety of reliable revenue-bearing services that are not only perpetually marketable but are also less subject to rising interest rates. Investment banking, wealth management, and other institutional offerings are also in its wheelhouse. These other business lines are a key part of the reason Citi has been able to grow its dividend payment by nearly 60% over the course of the past five years and kept making its quarterly dividend payment even when interest rates started to tumble in 2019.
Income investors looking for outsize returns may also want to consider stepping into a stake in Medifast ( MED -4.32% ). While the company is typically viewed more for its potential as a growth engine and less as an income investment, the stock’s steady sell-off since the middle of last year has pumped up its dividend yield to 3%.
You may be more familiar with Medifast than you realize. This is the organization behind the diet and weight-loss coaching service known as Optavia, which as of the end of last year — with the help of nearly 60,000 personal coaches — has helped more than 2 million customers better manage their weight. Medifast leveraged this base of customers and coaches into sales of more than $1.5 billion last year, improving 2020’s tally by 63%, and converting $164 million of that business into net income. That bottom line was 59% better than the previous year’s. As was noted, these are the sorts of results that inspire growth-seeking investors.
Don’t look for these sorts of growth rates again anytime soon, if ever. Most of that red-hot expansion appears to stem from the unique circumstances of the pandemic. Analysts are calling for more tempered growth of 15% this year and nearly 14% next year, which explains why the stock’s performed so poorly since last May.
The stock’s recent slide, however, is also arguably an overreaction to the revenue slowdown. Now that the company’s got the scale it needs, this year’s per-share earnings are projected to grow from last year’s $13.89 to $15.44 this year to $18.62 next year. That’s growth worth plugging into, particularly in light of the fact that the stock’s now trading at less than 10 times 2023’s expected profits. The above-average dividend with a yield of 3.16% is just a nice bonus.
Finally, add Prudential Financial ( PRU -0.69% ) to your list of dividend stocks to buy if you’re looking to grow your portfolio into a small (or even large) fortune.
Much like Citigroup, Prudential is misunderstood in one key way. That misunderstanding is the assumption that the insurance industry’s bottom lines are completely unpredictable because its payouts are unpredictable, since they may not be fully covered by customers’ premiums. That’s far from being the case. Insurance companies employ teams of mathematicians to determine likely future payout costs, and costs that go above and beyond expectations in any given year are typically offset by the following year’s premium increases. In that all insurers are working with the same basic data, the cost of coverage is about the same from one provider to the next. Of course, insurance protection isn’t exactly optional for most businesses or individuals.
That’s the short way of saying Prudential Financial’s top and bottom lines are rarely major surprises, even if they don’t grow in a perfectly straight line.
This long-term reliability hasn’t prevented Prudential shares from sliding more than 15% in a little less than a month. It’s now priced at less than 10 times this year’s expected per-share earnings of $11.89, and it’s not likely this lull will be any longer-lived than the past couple have been. Stepping in now means you’re getting into a position while the dividend yield is a healthy 4.5%.
That underlying payout, by the way, has been raised for 14 consecutive years now. The company may be aiming for Dividend Aristocrat status, which requires an increased dividend payment annually for at least 25 consecutive years.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.