This is Part 1 of a two-part series on “Naughty and Nice” dividend stocks.
Perhaps I’m some sort of anti-social deviant, but I’ve never been a big fan of socially-responsible investing. It has always seemed crazy to me to ignore profitable investment opportunities because a company’s product happens to be politically incorrect at that particular moment.
And yes, notions of what constitutes “socially responsible” do happen to shift over time. Not too long ago tobacco was considered a harmless vice and arms manufacturers were considered patriotic.
Likewise, all-American companies like McDonalds ($MCD) and Coca-Cola ($KO) are considered respectable investments today, but what about tomorrow? After all, like tobacco companies, both sell products that are bad for your health. And like cigarettes, many cities are starting to tax and regulate sugary soft drinks for public health reasons.
Nevertheless, I suppose there is nothing wrong with owning companies that make you feel good about yourself, so long as you maintain your objectivity. I’ll give you five of my favorite “warm and fuzzy” stocks today. To make this list, the company has be engaged in socially responsible businesses and must pay a respectable dividend.
Let’s start with Swiss food and confectionary giant Nestlé ($NSRGY). Nestlé is one of the largest food and health products companies in the world, making everything from instant coffee to baby food. (The ice cream and chocolate businesses might make Nestlé a little naughty, but we’ll wink and look the other way this time.)
Nestlé has recently made a smashing success of its Nespresso pods, endorsed by actor George Clooney—himself no stranger to feel-good charitable causes—and the company takes pride in its social responsibility. Nestlé’s former CEO Peter Brabeck-Letmathe summed up the company’s position: “As stewards of large amounts of shareholders’ capital, it is my firm belief that, in order for a business to create value for its shareholders over the long term, it must also bring value to society.”
Nestlé has backed up its words with actions over the years. Nescafé, one of the company’s most iconic products, came out of an effort in the 1930s to help Brazilian coffee farmers deal with a serious oversupply coffee beans. Nestlé has done well by doing good.
The U.S.-traded Nestlé ADRs pay a dividend of 3.4%, which is quite a haul in today’s low-yield world.
Next on the list is electric utility PG&E Corp. ($PCG). One might not normally think of a producer of electricity as being particularly socially responsible, but PG&E generates more than half of its power from non-greenhouse-gas-emitting sources. 24% comes from nuclear, 16% comes from hydroelectric, and another 16% comes from other renewables like wind and solar.
The company even generates a modest amount of power from bovine emissions. Yes, you read that correctly. They harness the methane put off by cow manure.
Even the company’s more mainstream sources are moderately green. Natural gas, which accounts for 20% of PG&E’s output, is certainly cleaner than coal or petroleum.
True enough, California’s strict green energy standards have a way of creating energy shortages in the state and driving up costs. There is something to be said for the “more is better” approach of my native Texas.
Nevertheless, PG&E has an energy portfolio that even a tie-dyed hippy from Sausalito could approve of.
PG&E pays a healthy 4.00% in dividends, so investors can enjoy a nice income stream while saving the environment.
The next company on the list—Japanese auto giant Toyota Motor Company ($TM)—might be a little bit of a stretch as a “dividend” stock. At current prices, it only yields 1.6%. Still, in a low-yield environment, that’s not half bad and it’s better than the current yield on the 10-year Treasury.
Toyota makes this list because it is the maker of the Prius, the car that made it “cool” to own a hybrid. For any readers that haven’t had the experience of driving one, the Prius is an impressive piece of engineering, to the point of sounding like something from a science fiction movie. Even the brakes are a high-tech wonder; every time you put your foot on the brake pedal, the kinetic energy that would normally be lost to heat gets recaptured and converted into new power for the car.
Just a few years ago, I might have thought this was something from a Star Trek episode, but Toyota has made this technology available to the masses.
Global auto stocks are cheap and out of favor right now, and Toyota is no exception. At current prices it trades for just 9 times expected earnings, 0.49 times sales, and 0.96 times book value.
Next on the list is operating system and office productivity behemoth Microsoft ($MSFT). I include Microsoft not so much for the company’s social responsibility as for the actions of its iconic founder, Bill Gates. As the founder and co-chair of the Bill and Melinda Gates Foundation, Bill Gates is, in effect, the largest philanthropist in the world and one of the biggest supporters of HIV/AIDS research.
One may question some of Gates’ business practices while building Microsoft into its dominant global position, but no one can question that he has decided to make good use of his vast wealth. He’s also acted as an inspiration to other high-profile billionaires, such as Berkshire Hathaway’s ($BRK-A, $BRK-B) Warren Buffett. (Berkshire Hathaway would have made this list, by the way, as I consider the company a model corporate citizen. Alas, Mr. Buffett does not pay a dividend.)
Microsoft pays a respectable dividend at 2.6%, but Microsoft is also one of the fastest dividend growers of any large cap stock anywhere in the world. Microsoft grew its dividend by 25% last year and by 23% the year before. It may not keep up this torrid pace forever, but it is safe to say you won’t find this kind of dividend growth just anywhere.
And finally, I’ll add American consumer products giant Procter & Gamble ($PG).
Procter & Gamble makes everything. Diapers, laundry detergent, shampoo, razor blades…you name it, they make it.
The company has made basic necessities affordable for hundreds of millions of people around the world and has improved world sanitation and health. Its Children’s Safe Drinking Water Program has made previously unsafe water drinkable in more than 65 countries and saved tens of thousands of lives. Likewise, through its Live, Learn and Thrive cause, the company claims to have improved the lives of over 300 million children throughout the world with health and educational programs.
This charitable work is good for business as it builds goodwill and brand loyalty in the emerging markets that are the company’s future.
Procter & Gamble yields a safe 3.4% in dividends, which makes it one of the highest-yielding stocks for a company its size.
So, there you have it. I’ve given you five socially responsible stock picks that you can feel good about owning while also getting paid a nice stream of growing dividends. Watch out for Part II, where I’ll offer five delightfully naughty ways to enjoy the same.
Disclosures: Sizemore Capital is long MSFT, NSRGY and PG
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