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3 Dividend Stocks for 2021

It pays to be choosy when it comes to dividend paying stocks.

Dave Sekera: Investors focused on income have been having an increasingly harder time finding new opportunities this year. The stock market has been making new highs as earnings growth has been robust, but dividend growth has not been able to keep up with prices. And as such, dividend yields have been falling. 

In the fixed-income market, interest rates on U.S. Treasury bonds bottomed out earlier this year, and they have rebounded a bit, but at 1.5%, the yield on a 10-year Treasury bond has still only returned to its pre-pandemic historical lows. In the corporate bond market, credit spread on corporate bonds does provide some extra yield for investors. But the spreads are at their tightest levels since before the 2008 global financial crisis.

Currently, the yield on the Morningstar Corporate Bond Index is only 2%. And the yield on our High Yield Index is only 4%. 

So, with fixed-income investments offering such low returns, many investors have turned to dividend-paying stocks. We do think this is a worthwhile strategy, but we also believe it pays to be choosy in the stock market. Among dividend stocks, we focus on those that not only have a solid dividend yield but also promising growth prospects that will support future dividend growth. We also look for companies with long-term sustainable competitive advantages, also known as an economic moat, and those that are trading at a discount to our fair value. So I'm going to review a few today that meet that criteria.

First up is Compass Minerals, ticker CMP. Compass is a 4-star-rated stock, and it currently pays a dividend yield of just under 5%. It's trading at a 25% discount to our fair value, and we rate the company with a wide economic moat. The consensus forward P/E ratio is 25 times, but we expect strong earnings growth over the next few years. So, Compass' main business line is mining and selling salt, of which the majority is sold for highway deicing. Our wide economic moat rating is based on the company's position as one of the lowest-cost producers in the industry. Salt prices had declined this past winter, as its customers were still sitting on huge piles of salt inventory from 2019, when there was a much milder winter and lower than average snowfall. Last winter, snowfall was average. And as such, we expect that inventories were worked down to more-normalized levels. And that's going to allow Compass to be able to raise prices this next winter. In addition, one of its competitors has closed a mine, which should also reduce industry supply. Lastly, the firm has been in the process of selling noncore assets and using those proceeds to repay debt, thus shoring up its balance sheet and putting the company in a better position to weather any future storms.

Next on the list is Gilead, ticker GILD. Gilead is a 4-star-rated stock, and it currently pays a dividend yield of 4.2%. It's trading at a 16% discount to our fair value, and we rate the company with a wide economic moat. The consensus forward P/E ratio is 9.4 times. Gilead develops and markets therapies to treat life-threatening infectious diseases, with the core of its portfolio focused on HIV and Hepatitis B and C. These markets are mature and likely won't deliver growth, but they do produce strong margins and cash flow for the firm. Our wide economic moat rating is based in part on its patent protection on these existing treatments. Gilead has made several acquisitions to broaden its focus to include pulmonary and cardiovascular diseases and cancer. Success in these areas certainly isn't a given. But we do think that the firm has shown it can translate its extensive understanding of the drug discovery and development process into new therapeutic areas.

Lastly, for today, is Edison International, ticker EIX. Edison is a 4-star-rated stock that currently pays a 4.6% dividend yield. It's trading at 18% discount to our fair value, but we rate the company with a narrow economic moat. The consensus forward P/E ratio is 12.6 times. Edison is a regulated utility located in Southern California. And we certainly acknowledge that California will always present political, regulatory, and operating challenges for utilities. In fact, our fair value estimate also includes a $9.5 per share deduction to account for management's estimate of future claims that Edison will have to pay out to victims of the 2017 and 2018 wildfires. However, the state's aggressive clean energy goals will also produce more growth opportunities than you'd see at most utilities. For example, we think state policies, including California's target to be 100% carbon free by 2045, will force regulators to support Edison's investment plan and earnings growth. The combination of Edison's plans for $5 billion in annual capital investment, along with good regulatory support, will allow the company to be able to generate 6% annual earnings growth. Growth opportunities at Southern California Edison address a wide range of areas including grid safety, renewable energy, electric vehicles, distributed generation, and energy storage. Wildfire safety investments alone could reach $4 billion over the next four years. Edison will also benefit over time from the adoption of electric vehicles. Not only will Edison supply the electricity to recharge those batteries, but it also has one of the largest electronic-vehicle charging stations in the United States.