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The 10 Best Blue Chip Dividend Stocks

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Blue-chip stocks are among the best stocks that dividend investors can buy.

We define blue chip stocks as those with a history of 100+ years of dividend payments to shareholders, along with a 3%+ current dividend yield.

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We have compiled a list of stocks that meet these two requirements. You can see the full list of blue chip stocks here.

In addition, Sure Dividend employs a ranking system, called the 8 Rules of Dividend Investing, to more clearly separate the best-in-class blue chips.

With that in mind, we have created a Top 10 list, for the best blue-chip stocks in the market today.

Several of the stocks on the list are Dividend Aristocrats, a group of 51 stocks in the S&P 500 Index, with 25+ years of consecutive dividend increases. You can see all 51 Dividend Aristocrats here.

Some are members of an even more exclusive group: The Dividend Kings, which have raised dividends for 50+ consecutive years. You can see all 19 Dividend Kings here.

The following Top 10 are ranked, in order from best to worst, according to the 8 Rules Rankings.

Blue-Chip Dividend Stock #1: Exxon Mobil (XOM)

It is no secret that oil and gas majors are struggling in the current environment, due to low commodity prices.

Exxon Mobil’s earnings fell by 51% in 2016, due to a $4 billion loss in its huge exploration and production segment.

Fortunately, Exxon Mobil is an integrated major, which means it also has a large downstream refining business and a chemicals business.

This balance gives Exxon Mobil shelter from the storms.

Refining and chemicals profits are not reliant on high oil and gas prices, and as a result hold up very well in times of low commodity prices.

For example, refining and chemicals profits came in at $4.2 billion and $4.6 billion in 2016, respectively. These two segments helped Exxon Mobil remained profitable last year, in a terrible year for the industry.

This relative stability is why Exxon Mobil earns its place on the Top 10 list. For proof of its consistency, take a look at Exxon Mobil’s industry-leading returns on capital.

Source: 2017 Analyst Meeting, page 4

Exxon Mobil maintains its high returns on capital, by consistently generating positive earnings from its downstream and chemicals businesses.

Another way is through disciplined cost controls. In 2016, Exxon Mobil cut capital expenditures by 38%.

Fortunately, conditions have improved significantly to start 2017.

Earnings more than doubled over the first half of the year, to $7.4 billion. Upstream losses narrowed to $201 million, compared with $1.3 billion in losses during the same six-month period the previous year.

The company benefited from higher oil and gas prices, as well as a 21% reduction in capital expenditures in that time.

Going forward, future growth will be due in large part to where commodity prices head next. But Exxon Mobil continues to invest in new projects, which will also boost growth.

Its impressive project lineup includes the Papua New Guinea liquefied natural gas project, which has capacity of nearly 8 million tons of LNG each year.

Ramping up new project will significantly boost Exxon Mobil’s production, which is expected to rise to as much as 4.4 million barrels per day, by the end of the decade.

In the meantime, investors receive a 3.8% current dividend yield, and more than 30 years of dividend growth each year.

Blue-Chip Dividend Stock #2: Target (TGT)

Target is a discount retail giant. It has more than 1,800 stores across the U.S., and generates nearly $70 billion in annual sales.

Target is also a Dividend Aristocrat. It has increased its dividend for 46 years in a row.

Target’s current dividend yield is 4.4%. The reason for Target’s unusually high dividend yield, is that its stock price has declined by 25% in the past one year.

Target, like most other brick-and-mortar retailers, faces fierce competition from online retailers, led by Amazon.com (AMZN).

The current environment is indeed difficult for Target. Sales declined 6% in 2016. Earnings-per-share declined 20% last year, and were lower in 2016 than five years prior.

Blue Chip Dividend Stocks

Source: 2016 Annual Report

Target has performed poorly over the past five years. The consistent declines over that time, show the impact that e-commerce has had on physical retailers.

Making matters worse, Target expects earnings to decline again in 2017, as the company invests significant resources in its turnaround efforts. These efforts include store renovations, building new small-format stores, and lowering prices to match online competition.

Target expects adjusted earnings-per-share to decline by 20% for the fiscal year, at the midpoint of guidance.

However, there are reasons to be optimistic.

Target’s investments are necessary, to improve its existing stores and better compete on price with Amazon. The initiatives are already gaining traction.

Target’s sales and earnings-per-share came in better than analysts expected last quarter. Adjusted earnings-per-share of $1.21 were $0.30 above forecasts. Quarterly revenue beat expectations by $400 million, thanks to 22% growth in digital sales.

On July 13th, Target raised guidance for the second quarter. It is a good sign that Target expects comparable sales to increase this quarter.

With a price-to-earnings ratio of 12 and a 4.4% dividend yield, Target is a top blue chip for value and dividends.

Blue-Chip Dividend Stock #3: Macy’s (M)

Macy’s is struggling even more than Target. While online retailers like Amazon have had a significant effect on discount retailers, the impact on department stores has been even more severe.

Macy’s stock has lost one-third of its value since the beginning of 2017, because its earnings-per-share declined 38% for 2016.

Things haven’t gotten much better to start 2017. First-quarter sales fell 7.5% from the same quarter last year. Earnings-per-share declined 40% in the first quarter.

But, like Target, Macy’s looks like a bargain.

Last year’s results were not nearly as bad as they seem. Macy’s incurred significant non-recurring charges, such as impairments and restructuring expenses. Excluding them, Macy’s had adjusted earnings-per-share of $3.11 for 2016.

Based on this, Macy’s stock trades for a price-to-earnings ratio of just 7.8, which is very low. Such a low price-to-earnings ratio signals that investors expect profits to drastically decline moving forward.

But investors may be focusing too much on the first quarter, which is typically inconsequential for a department store.

The third quarter and fourth quarter are far more important, because of back-to-school and holiday shopping, respectively.

Macy’s management expects adjusted diluted earnings per share of $2.90-$3.15 this year, meaning 2017 will be another highly profitable year for the company.

It is not out of the question that Macy’s could return to earnings growth in 2018. The company is closing stores, but it is also opening new stores for the concepts that are working.

For example, last quarter Macy’s opened 10 new Bluemercury beauty specialty stores, along with 11 new Macy’s Backstage stores. It also opened one new Bloomingdale’s store in Kuwait. These investments will pave the way for growth in beauty and off-price channels, which are attractive growth categories.

Macy’s has a market capitalization of just $7.3 billion, which seems far too low, given that the company could have more than $20 billion in real estate value on the balance sheet.

That’s the value activist investor Starboard Value estimated for Macy’s real estate, after it purchased almost 1% of Macy’s outstanding shares. Starboard eventually sold its stake, having grown frustrated that Macy’s did not move more aggressively to monetize its real estate.

But even if Starboard’s estimates are too high, Macy’s could still have more in real estate value than the current enterprise value of the company.

If that is the case, the retail business is essentially being valued as though it is worthless.

Those willing to be patient with Macy’s receive a 6.5% dividend yield. Dividends are never guaranteed, and investors need to closely monitor Macy’s performance in the crucial final two quarters of the year.

That said, if the turnaround holds, Macy’s could be a big winner.

Blue-Chip Dividend Stock #4: Buckeye Partners (BPL)

Buckeye Partners is an MLP. Investors could hardly be blamed for being skeptical of MLPs, given what has transpired over the past year.

Exploration and production MLPs that spent heavily on buying up acreage over the past several years, were saddled with very high levels of debt. When oil and gas prices fell, it caused many of these MLPs to cut their dividends. Some even want bankrupt.

At the same time, other MLPs—including Buckeye—were hardly impacted.

Buckeye Partners has not only maintained its hefty 7.9% dividend yield through the current downturn, but it has raised its dividend for over 10 years in a row.

Buckeye’s remarkable stability is because it is a midstream MLP. It operates oil and gas transportation and storage assets, such as pipelines and terminals.

The MLPs that got hit the hardest were upstream operators, which are far more reliant on commodity prices.

Buckeye generates cash flow based on fees, which are determined by the volumes being stored and transported through its system. Commodity prices play only a minor role.

BPL System

Source: 2017 Annual Meeting, page 9

Buckeye has three major operating segments:

  • Domestic Pipelines & Terminals (53% of EBITDA)
  • Global Marine Terminals (41% of EBITDA)
  • Merchant Services (6% of EBITDA)

Its network includes more than 6,000 miles of pipelines, and 115 terminals. In trailing 12-month period through March 31st, 98% of Buckeye’s adjusted EBITDA was fee-based.

2016 was another strong year for Buckeye. EBITDA rose above $1 billion for the first time in Buckeye’s 130-year history.

Buckeye’s high dividend is supported by plenty of cash flow. In the past four quarters, it maintained a dividend coverage ratio of 1.08.

Cash flow is poised to grow from project completions, such as the 400,000 barrel-per-day Permian-to-Corpus-Christi pipeline.

This should allow Buckeye to continue growing cash flow to support higher dividends each year. As a result, Buckeye is a rare find, because of its extremely high dividend yield, plus dividend growth potential.

Blue-Chip Dividend Stock #5: Emerson Electric (EMR)

Emerson earns a place on this list because it is one of the 19 Dividend Kings. It has increased its dividend for 60 years in a row.

This is not an easy time to be a global industrial giant like Emerson. First, the decline in commodity prices has caused customers from the oil and gas industry to cut back on orders.

Second, as a global company, Emerson has been hurt by the strong U.S. dollar, as well as the economic slowdown in emerging markets.

And yet, Emerson continues to increase its dividend each year. One reason it can do this, is because of a laser-like focus on cost controls.

EMR Costs

Source: Investor Conference, page 14

Emerson has taken hundreds of millions out of its cost structure over the past few years, which has kept profitability intact.

Another factor that has kept Emerson’s dividend and cash flow afloat, is a major restructuring. Emerson divested its network power, and motors and electric power businesses, for more than $5 billion.

It used the proceeds to invest in its core competencies. Emerson’s focus is on its two core operating segments:

  • Automation Solutions (62% of revenue)
  • Commercial & Residential Solutions (38% of revenue)

In particular, the Commercial & Residential Solutions segment continues to perform well, as its end markets have remained healthy.

EMR Commercial

Source: 2017 Investor Conference, page 28

This has helped Emerson perform relatively well, considering the headwinds it is dealing with. Adjusted earnings-per-share declined just 6% in 2016.

Conditions have picked up a bit to start 2017. Last quarter, sales were flat, while adjusted earnings-per-share increased 2% from the same quarter last year.

With a modest price-to-earnings ratio of 20, Emerson appears to be undervalued, given its high-quality business model. And, the stock has a solid 3.3% dividend yield, with dividend growth each year.

Blue-Chip Dividend Stock #6: International Business Machines (IBM)

IBM is an attractive blue chip, because the stock offers a 4% dividend yield, a cheap valuation, and growth potential.

Like Target and Macy’s, IBM is in the middle of a difficult turnaround.

Many years ago, IBM was an industry leader in technology hardware.

Over time, IBM’s hardware businesses, such as semiconductor manufacturing, became commoditized. Profitability shrank, which compelled IBM to change course.

However, it is not easy to turn around a ship as large as IBM, which has a market capitalization of $135 billion.

Investors need to be patient with IBM, which is difficult in light of the fact that the company’s revenue has declined for 21 quarters in a row.

But while its legacy hardware businesses continue to perform poorly, its ‘strategic imperatives’, an all-encompassing term for IBM’s growth initiatives, continue to grow.

IBM Imperatives

Source: 2016 Annual Report, page 21

At the current rate, IBM’s strategic imperatives could exceed 50% of total revenue by next year.

IBM’s revenue growth has not materialized as quickly as investors would like. But rather than focusing purely on revenue growth, IBM is setting its sights on profitable growth.

Like many other tech firms, IBM is investing heavily in the cloud, data, and security, but also wants to keep the bottom line intact.

Without profitable growth, IBM would not be able to generate the free cash flow that fuels its cash returns.

IBM generated $11.6 billion of free cash flow in 2016, which allowed it to spend $5.7 billion on acquisitions, pay $5.3 billion of dividends, and repurchase $3.5 billion of stock.

It also allows IBM to invest in innovation. IBM has one of the largest patent portfolios in the entire tech industry.

IBM Patents

Source: 2016 Annual Report, page 21

IBM was issued more than 8,000 patents in 2016, the first time a company has ever reached that level in a single year. It has led the U.S. in annual patents awarded, for over 20 years.

In the meantime, IBM remains a strong dividend growth stock. It has increased its dividend for 22 years in a row, and is a Dividend Achiever, a group of stocks with 10+ consecutive years of dividend growth. You can see all 265 Dividend Achievers here.

IBM trades for a price-to-earnings ratio of 10.7, based on 2016 operating earnings-per-share. The company expects earnings-per-share to increase in 2017, and as a result the stock appears to be significantly undervalued.

Blue-Chip Dividend Stock #7: Royal Dutch Shell (RDS.A) (RDS.B)

Royal Dutch Shell is an integrated oil and gas major, alongside Exxon Mobil. The key difference, is that Shell is based in Europe, and it has a much higher dividend yield.

European oil and gas stocks tend to have higher dividend yields than the U.S. majors. For example, Shell’s dividend yield weighs in at 6.7%.

Even with low oil and gas prices, Shell has maintained its hefty dividend payout.

One reason for this is that the company has divested non-critical assets, to raise. Shell’s 2016-2018 divestment program is expected to raise $30 billion.

But the biggest reason for Shell’s stability, is because the company has aggressively cut costs over the past several years.

RDS Costs

Source: Q2 Earnings Presentation, page 8

It has also reduced capital spending, to boost cash flow. From 2014-2016, Shell cut capital expenditures by $20 billion.

At the same time, Shell has a large slate of new projects ready to come on-line. By 2018, its project lineup is expected to add $10 billion of operating cash flow per year. These projects will collectively boost production by more than 1 million barrels per day.

As a result, the company expects annual free cash flow to grow each year through 2020, even at prevailing commodity prices.

Shell’s discipline and effective cost controls helped it perform well last year. Shell’s earnings declined just 8% in 2016, to $3.5 billion. A big reason for this is that Shell’s downstream segment earned a $7.2 billion profit for the year, which more than helped offset weakness in the exploration and production business.

2017 is off to a good start as well. Second-quarter earnings came to $1.55 billion, which amounted to $0.38 per share.

Earnings-per-share, as adjusted for non-recurring costs, were $0.88 for the quarter. This handily beat analyst expectations, which called for $0.75.

Revenue of $72.13 billion also came in well ahead of estimates, which called for $67.78 billion.

Net profit of $3.6 billion more than tripled from the same quarter last year, when Shell had core profit of $1 billion.

Shell has an attractive dividend yield, and a low valuation as well. Analysts expect the company to earn $4.00 per share in 2017. This means shares are valued for a forward price-to-earnings ratio of approximately 14.

With a modest valuation and high dividend yield, Shell ranks highly among the oil and gas blue chips.

Blue-Chip Dividend Stock #8: Procter & Gamble (PG)

P&G is an obvious choice for a Top 10 list of dividend-paying blue chips. It is the dominant U.S. consumer products company, with sales in excess of $65 billion last year.

The company owns a number of highly popular brands, including Tide, Gillette, Crest, Pampers, and many more.

Thanks to its first-class product portfolio, P&G enjoys a durable business model. Profits hold up each and every year, even when the economy goes into recession.

This amazing stability has allowed P&G to pay dividend to shareholders, for the past 127 years. It has increased its dividend for 61 years in a row.

P&G’s dividend growth rate has slowed in recent years, as the company is in the process of reinventing itself.

At its peak, P&G operated 170 brands, across 16 different product categories. But P&G became a lumbering giant, with more brands than it could effectively manage for growth.

Several of its brands were either in decline, or were falling behind the competition. In response, P&G slimmed itself down, selling off brands like Duracell, that were not part of its future plans.

P&G got rid of more than 100 brands. Now that the transformation is complete, it has just 65 brands.

PG Portfolio

Source: 2017 Deutsche Bank Global Consumer Conference, page 5

While the divestments put a dent in P&G’s revenue, it also significantly expands margins. And, with the proceeds from its various asset sales, P&G can reinvest in innovation, in the categories it still dominates.

The turnaround is gaining traction. Sales fell 5% in 2015, and another 8% in 2016. However, operating cash flow increased 5% in 2015, and 6% in 2016. Earnings from continuing operations rose 21% last fiscal year, to $10 billion.

Cost cuts are one of the major reasons why P&G’s earnings have increased much faster, than its sales have declined.

For example, from fiscal 2012-2016, P&G removed more than $10 billion from its cost structure. This caused operating margin to expand by 270 basis points in that time.

Going forward, P&G expects to generate another $10 billion in cost savings, from fiscal 2017-2021.

The stock could be undervalued, considering earnings-per-share growth could continue over the next several years.

P&G shares trade for a price-to-earnings ratio of approximately 23.8, based on 2016 earnings from continuing operations. Meanwhile, the S&P 500 Index has a higher price-to-earnings ratio, of 25.

P&G also has a 3% dividend yield, which exceeds the S&P 500 average dividend yield by about 50%.

With an above-average dividend yield and below-average valuation, P&G looks good for value and income.

Blue-Chip Dividend Stock #9: General Mills (GIS)

Coming in at No. 2 is General Mills. It earns a high place on the list for many reasons. First, it has paid a dividend for 117 years. And, it routinely increases its dividend.

General Mills’ current annualized dividend rate of $1.92 per share, represents an 8% increase from the total dividend paid in fiscal 2016.

Second, General Mills has a 3.6% dividend yield, which is very attractive in a climate of low interest rates.

Third, General Mills operates in food, which is arguably the most stable industry in the entire economy. It also has a top position in the food industry.

General Mills is synonymous with blue chip. It generates over $15 billion in sales, and has a number of industry-leading brands across its portfolio.

GIS Portfolio

Source: Investor Day Presentation, page 9

General Mills is yet another company working through a turnaround. Some of its core product categories, such as cereal and yogurt, are slowing.

As a result, General Mills’ currency-adjusted sales declined 2% in fiscal 2016. The decline accelerated to 5% over the first three quarters of the current fiscal year.

Going forward, General Mills has three main growth objectives:

  • Stabilize and grow cereal business
  • Innovate new yogurt products
  • Invest in differential growth opportunities

Consumer trends are changing, particularly among Millenials. Cereal and yogurt are currently out of favor.

General Mills believes it can achieve low-single digit growth in cereal, because it has the No. 2 global market share in the category. It owns 3 out of the top 5 most popular cereal brands.

In yogurt, General Mills is innovating to develop new products that can compete with Greek yogurt brands like Chobani, which have taken share.

Lastly, the company believes its differential brands, including Haagen-Dazs, have growth potential. Snacks are a growth category within the broader food industry.

General Mills expects adjusted earnings-per-share to increase 5%-7% for the full fiscal year. This is a good sign that the company’s turnaround strategy is working.

The stock has a price-to-earnings ratio of 18.4, based on adjusted earnings-per-share over the past four reported quarters.

This is a 25% discount to the S&P 500 Index average. Considering General Mills’ scale, brand strength, and dividend history, the stock seems to be considerably undervalued.

Blue-Chip Dividend Stock #10: Sunoco LP (SUN)

Taking the top spot is Sunoco, another MLP. It has earned the top spot because of its extremely high yield—and equally as important—its sustainable payout.

Sunoco has an annualized dividend of $3.30 per unit. The current dividend yield is 10.3%.

Sunoco distributes motor fuel to approximately 6,800 convenience stores, independent dealers, commercial customers, and distributors. It also operates more than 1,300 convenience stores and retail fuel sites, for the time being.

Sunoco LP is managed by Energy Transfer Equity (NYSE: ETE), which owns Sunoco LP’s General Partner, all of its incentive distribution rights, and a 2% interest in Sunoco LP. Energy Transfer Partners (NYSE: ETP) owns a 46% interest in Sunoco LP.

2016 was a good year for Sunoco. Gross profit increased 12% for the year, to $2.2 billion.

SUN Financials

Source: May 2017 Investor Presentation, page 9

Distributable cash flow, which fuels Sunoco’s dividend, soared 43% for the year.

The major strategic initiative for Sunoco this year is the divestment of its convenience store business. The company has announced an agreement, to sell 1,110 of its convenience stores to 7-Eleven.

Sunoco will receive $3.3 billion for the stores, which it will use to pay down debt. This is a good move for Sunoco, since too much debt is a major risk factor for MLPs.

At the end of the 2017 first quarter, Sunoco held $4.34 billion of total debt. The proceeds from the convenience store sale will take a sizable chunk out of Sunoco’s debt.

And, Sunoco has a smooth maturity schedule. More than half of its total debt is fixed-rate, which will help lessen the impact of rising interest rates. In addition, Sunoco has no current maturities through 2018.

The transaction also includes a 15-year, take-or-pay fuel supply agreement with 7-Eleven, starting at 2.2 million gallons each year. The deal gives Sunoco $3.3 billion of cash to help improve the balance sheet, along with a predictable long-term income stream.

The steps Sunoco has taken are positive for its debt profile, which will be a positive for the dividend as well.

An improving coverage ratio would be very beneficial for Sunoco. As of March 31st, Sunoco’s trailing 12-month dividend coverage ratio was 88%.

A coverage ratio below 100% indicates the company is distributing more cash than it is bringing in. Fortunately, this stands to improve in 2018, once the 7-Eleven transaction is completed.

And, higher oil prices would be a boost. Sunoco’s first-quarter revenue increased 37% year over year, thanks to rising prices at the pump.

If oil prices continue to rise to end 2017, Sunoco should have little trouble maintaining its hefty 10% dividend.

Final Thoughts

The term ‘blue chip’ is loosely defined. At Sure Dividend, we believe it means a company that has paid a dividend for more than a century, with a current dividend yield above 3%.

If you noticed a pattern of turnaround companies, this was no accident. Most companies, even blue chips, hit a speed bump every so often. It is in times of uncertainty that the market presents its biggest bargains.

The 10 stocks on this list represent high-quality companies, with modest valuations, and long track records of dividends. The list could be a good starting point, for investors interested in high-yield blue chips.

Article by Sure Dividend


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