Don't look now, but we're less than five weeks away from turning the calendar over to a new year. While 2016 has been filled with plenty of volatility, which included the worst start to a new year ever, as well as the rapid Brexit-associated plunge in June, investors are currently on track to have a generally good year. Through the week of Thanksgiving, the broad-based S&P 500 was up by more than 8% year to date. For context, the stock market has historically returned about 7% annually, including dividend reinvestment.
With 2016 coming to a close, it's time to look to 2017 for potential bargains. While it's impossible to know with any certainty what 2017 will bring for U.S. stocks, focusing on high-quality dividend stocks has often been a recipe for success over the long term. Top dividend stocks can sometimes be described as "boring," but they also have proven business models that seem to make money no matter how well or poorly the U.S. economy is performing, and regardless of who's in the Oval Office.
Here are three top dividend stocks you should give strong consideration to buying in 2017.
Bank of America
Bank of America (NYSE: BAC) has had another outstanding year, although the first quarter was nearly derailed by Federal Reserve commentary that it was putting its plan to raise interest rates on hold. Its closing price of $20.86 on Friday essentially represents an eight-year high.
What makes Bank of America such an intriguing stock to own in 2017, and why I'm so excited as a shareholder of five years, is the potential for rising interest rates. Both jobs and economic data have been stronger than expected in recent months, opening the door for the Fed to raise interest rates in December and perhaps a couple of times next year. In August, Bank of America announced in its second-quarter filing that a 100-basis-point move higher in both short- and long-term interest rates would result in $7.5 billion in additional net interest income a year.
This is worth pointing out because President-elect Donald Trump has suggested deregulating the banking industry and promoting certain initiatives in the U.S. that could lead to faster growth rates. In other words, Bank of America could benefit from rising interest rates and falling expenses tied to deregulation. While precise by no means, Bank of America could see an extra $0.65-$0.80 in annual EPS if short- and long-term rates rise by 100 basis points and its regulatory costs are minimized.
Even after its recent run higher, Bank of America is valued at just 1.2 times its tangible book value. Most of its peers are still valued at loftier premiums, implying that if Bank of America can put its recession-based legal woes in the rearview mirror for good, it may be able to close this gap. Additionally, without tight regulations, Bank of America may be able to more than double its payout from $0.30 annually, a 1.5% yield.
There are still plenty of bargains to be had in the biotech and pharmaceutical industry following their 2016 swoon, and Amgen (NASDAQ: AMGN), which is down 10% year to date, is a strong candidate for income investors to consider in the upcoming year.
Had Hillary Clinton won, drugmakers such as Amgen would have had a bull's-eye on their backs. Clinton offered a number of proposals throughout her campaign designed to scale back the pricing power of drug developers, which would have meant a reduction in the juicy margins that large-scale drugmakers benefit from -- especially those that operate in specialty indications, such as oncology. However, with Trump winning the election, the perception is that we're less likely to see prescription-drug reform tackled anytime soon. That's one positive catalyst for Amgen.
More importantly, Amgen is slated to release critical data from its long-term cardiovascular study of injectable LDL-cholesterol-lowering drug Repatha sometime during the first quarter of 2017. Repatha generated reductions in LDL-C, the bad kind of cholesterol, of around 60% in clinical studies, but its wholesale cost of $14,100 has scared insurers and some patients away. If Amgen's long-term CV studies demonstrate superiority over current standards of care, this pricing premium becomes more appealing. Repatha could be a $2 billion-per-year drug, but a lot is riding on its cardiovascular study.
Amgen also has a pretty rich pipeline. It's introduced about a half-dozen products in the past two years, and its relatively new cardiovascular pipeline, along with an established cancer-drug portfolio, offer numerous pathways to growth in practically any economic environment.
Having increased its dividend by around 30% annually since it was introduced in 2011 -- its current yield is 2.8% -- Amgen and its adjusted operating margin of 52.9% could be too tantalizing for dividend investors to pass up.
America's largest private employer, Wal-Mart (NYSE: WMT) is another intriguing name to for dividend investors to consider after its recent underperformance. It's no secret that consumer buying habits are fickle, and that Wal-Mart is facing competition from e-commerce sites. However, it's made some changes and could be poised to grow its dividend under President Trump in 2017.
One of the intriguing aspects of Trump's plan to grow the U.S. economy are the possible cuts to individual and corporate tax rates. As the largest private employer, Wal-Mart would obviously benefit from seeing its peak marginal corporate tax rate fall from 35% to 15%. But cost-conscious consumers who are getting more cash in their pockets each paycheck could be a real boost to our consumption-driven economy, which is where Wal-Mart, a true one-stop shop, could really benefit.
Beyond this hypothetical, Wal-Mart's strategic growth plan seems quite achievable and customer-focused. Aside from leveraging its supply chain to reduce costs, Wal-Mart is increasing its efforts to improve its e-commerce website and in-store digital marketing to enhance the shopping experience of its customers. Wal-Mart is also working to supply more nutritious food options, including organic foods, in an effort to reach a broader audience and keep consumers with changing food habits happy. We've even seen Wal-Mart lift the minimum wage of its employees twice recently in an effort to lower turnover and improve employee morale. Lowering turnover is critical to building up the skills of existing workers, which should translate into an improved shopping experience for the customer.
Given that Wal-Mart is healthfully profitable in seemingly any economic environment, its 2.9% yield could be an attractive target for income seekers in 2017.
10 stocks we like better than Bank of America
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