After the pandemic-recovery craziness, the stock market’s getting back to basics. As the focus returns to fundamentals, dividend stocks will stage a stunning comeback, dwarfing the returns of long-dominant growth superstars whose downfall is now underway. Put simply, in a world of high inflation and rising interest rates, dividend stocks are the place to be. 

Of the three vehicles that deliver gains to shareholders—capital gains, buybacks, and dividends—dividends are the most powerful contributor over long periods. In a recent study, the Hartford Funds found that from 1973 to 2021, companies that made those quarterly payments furnished annual returns of 9.6% a year, crushing non-payers’ record of 4.79%, and beating the overall market average of 8.2%. Since 1930, dividend stocks have provided an outsize 40% of total shareholder gains. Yet in the past 15 years as P/E multiples exploded, driven primarily by the soaring prices of tech titans that frequently didn’t pay dividends at all, the share of gains attributable to dividends shrank by over half, to around 15%. As a result of that downtrend, investors pretty much forgot that, over history, it’s the dividend payers that performed best.

Today tumultuous climate strongly favors those long-distance champions. To understand why, it’s important to analyze the profile of a typical dividend stalwart. These are mature, generally stable businesses that don’t have a big need for capital to invest. Their top growth stage is behind them. The best use of their earnings is channeling the cash to investors. Of course, they can also return capital via share buybacks. But stock repurchases are seldom consistent. Companies are constantly raising or lowering them, making it hard for investors to gauge how much they’ll bolster returns over extended periods. By contrast, large and especially rising dividends send a message of confidence in the future. Companies live in terror of ever cutting their payouts. And when they raise dividends, they’re signaling that stronger profits lie ahead, suggesting more increases to come.

A trademark of dividend stocks is that they’re cheap compared with the overall market, and never more so than today. They offer high earnings relative to their share prices, the formula that enables them to pay chunky yields. “High earnings and strong dividends go together with low P/Es,” says Chris Brightman, CEO of Research Affiliates, a firm that oversees investment strategies for $168 billion in mutual funds and ETFs. Hence, dividend payers are quintessential value stocks. “Since the Great Financial Crisis, value strategies have lagged growth strategies by a big margin,” observes Brightman. “Value has outperformed in the past year since worries about inflation began, but all the metrics such as P/Es and price-to-book show that the gap between growth and value is at an all-time high. Value has never been this cheap versus growth.” Brightman foresees powerful tailwinds for the dividend payers that are the bulwarks of “value” in the years ahead. “Over five or 10 years, the valuations of value stocks will be ‘mean reverting,’ meaning that they’ll close the gulf with growth, and significantly outperform in the process,” he says.

It’s important to note that if you purchase an S&P 500 ( index fund, you’ll reap a puny dividend yield of under 1.5%. That’s because so much of the U.S. large-cap universe is still dominated by high-priced tech stocks that mainly eschew dividends. In this article, I suggest that the portfolio offering the best future returns comprises dividend stocks that meet four criteria, and I’ve assembled a list of 10 candidates that check those boxes. The first requirement is a dividend yield of at least 4.5%. Many of my choices pay far more, yet are extremely safe. The second feature: a P/E of 15 or lower, far less than the market average of 22. That multiple range puts the stocks in deep value territory. Third, the choices must show a history of consistent earnings. Fourth, my picks are all shares that took a beating in the recent selloff that isn’t justified by their fundamentals. They were good buys before the crash that just got cheaper.

I’ve established guardrails to eliminate junk choices. I’ve avoided companies deploying high leverage, and those that are paying out nearly all their cash flows to support the dividend, leaving little cushion either for further increases or for sustaining their payouts in a downturn. A super-high dividend yield can also indicate that shareholders are pushing down the share price in anticipation of a deep cut. I’ve attempted to avoid candidates where today’s dividend stands in serious jeopardy.

But the purpose of the portfolio isn’t to generate modest income while minimizing risk. I’ve added some daring choices that greatly raise the average yield where my analysis shows the probability that the company harbors the financial strength to keep paying, say, a 8%-plus dividend, and probably raise it. The number of ultralow P/E picks also promises large capital gains in the years ahead as the gap between value and growth narrows, adding a bonus of strong price appreciation to the overall, high-single-digits dividend yield.

The portfolio also offers diversity of industries. It encompasses sectors likely to best weather a slowing economy such as rental real estate, energy infrastructure, and medical real estate. I’ve also included companies that are extremely cheap in industries that are bound to consolidate, including asset management and consumer banking.

Here are the 10 players. Think of them as a professional football team packed with undervalued talent, where the low betting odds don’t reflect their excellent prospects for winning. Call them the Big D All-Stars.

Best stocks to own in 2022: Blackstone (BX)

Dividend yield: 4.7%. P/E: 12.9. Price drop from 52-week high: –37%. Market cap: $113B.

finviz dynamic chart for BX

The private equity giant spreads its $916 billion in assets under management across investments in companies, credit and insurance, and real estate. But it’s the real estate arm that’s showing the most impressive growth, and that promises to keep delivering fast-increasing cash flows in the future. In 2021, Blackstone garnered just over half of the $7.8 billion in earnings available for distribution to shareholders from the fees and performance bonuses on its sundry, high-return property funds.

In times of fast-rising interest rates and fears of a looming recession, you might wonder why it’s wise to wager on a colossus in real estate investment. One reason: Before COVID struck, Blackstone moved heavily into apartment developments in such Sunbelt states as Florida, Texas, Arizona, and the Carolinas to benefit from job and population growth in the region. Of course, the work-from-home economy only accelerated the great migration to those areas. As homes get less affordable, more families and singles will renew their apartment leases, and folks moving to new locales will rent instead of buying. Home buying and apartment renting tend to move in opposite directions. Today, rental real estate accounts for one-fifth of Blackstone’s real estate holdings, up from a tiny portion just a decade ago.

Blackstone wisely exited most of its office holdings in the U.S. before the meltdown driven by the shift to remote work, and long ago dumped suburban office malls. Apartments are one of its four “highest conviction themes” in real estate. The other three are also specialties in which demand should remain strong: space for film studios that produce programs for streaming; laboratories occupied by tenants in life sciences; and warehouses that store products for delivery in the digital economy. In this last category, Blackstone typically owns the best properties closest to big population centers, where it’s difficult to get approvals for new construction.

A real estate downturn will also bring opportunities for bargain buys. Some of the best private equity returns of the past 20 years flowed from funds that started in 2008 and 2009, when prices cratered. Blackstone is holding $139 billion in “dry powder” it can deploy to buy on the cheap. Another plus: Blackstone paid less than 60% of its free cash flow in dividends last year, leaving plenty of margin for more increases.

Enterprise Products Partners (EPD)

Dividend yield: 7.6%. P/E: 12.1. Price drop from 52-week high: –13%. Market cap: $55B.

finviz dynamic chart for EPD

Enterprise Products is what’s called a “master limited partnership.” MLPs are required to channel a large share of their cash flow to investors. They don’t pay tax at the partnership level; instead, the shareholders are responsible for the levies detailed in special K-1 filings. Potential investors should study the tax treatment of MLPs. But in general, shareholders often pay lower taxes on MLP distributions than on regular dividends. 

EPD is a relatively safe bet on the hot energy sector because its fortunes aren’t dependent on the price of oil and gas. It’s a “midstream” player that operates a network of pipelines covering 50,000 miles that transport natural gas, natural gas liquids, crude oil, and petrochemical products from producers to refineries, utilities and plants. It features extremely low leverage, and generates high returns on capital through rough and smooth cycles. It also offers extra diversification through its large petrochemical services franchise. 

EPD runs facilities that extract liquid ethane and propane from natural gas, and ships them to customers that use those materials to make the ethylene that’s a feedstock for everything from antifreeze to plastics to solvents. It also exports propane on behalf of customers. At other plants, EPD manufactures propylene, also a staple in plastics, on a fixed-fee basis for petrochemical giants. Those services provide excellent growth prospects. “Over the past 10 years, ethylene demand has grown at 1.2 times GDP, and propylene has increased at 1.5 times,” Co-CEO Randy Fowler told Fortune.

Fowler notes that since 2004, EPD’s annual unleveraged returns on total capital have ranged between 10.5% and 13%, meaning that the gains didn’t fall below double digits even in the Great Financial Crisis, the OPEC price war and the pandemic that slammed the oil industry in 2015 and 2016. He adds that its profit stream is extremely consistent, chiefly because up to 90% of its revenues are fee-based, mainly on long-term contracts. About one-fifth of the fees flow from the petrochemical side.

The fruits of that consistency: 24 straight years of increasing dividends. Fowler points out that the current big payouts absorb only around 50% to 60% of EPD’s free cash flow. The remainder, some $4 billion over the past four quarters, equivalent to 7% of EPD’s market cap, gets reinvested in growing the business. That’s something you seldom see: a value stock paying a fat dividend that has plenty of cash left over to capitalize on opportunities for growth––and delivers on them.

Icahn Enterprises (IEP)

Dividend yield: 15.9%. P/E: N.A.; price-to-FCF: 6.2. Price drop from 52-week high: –15%. Market cap: $15.5B.

finviz dynamic chart for IEP

When an enterprise is paying an almost 16% dividend, it’s usually a good idea to stay away. In most cases, the payout’s only that big because investors are severely discounting the shares on fears that falling cash flows can’t sustain the dividend, and that a big cut is coming. But in the rare case of Icahn Enterprises, founder and chairman Carl Icahn has made his signature business a model of consistency. The legendary activist has delivered rising quarterly dividends since 2012. (Read my recent profile in Fortune about Icahn’s latest target here.) Over that decade, shares have gained only around 35%, about matching inflation. So IEP is mostly about payouts, not capital gains. Still, if its cash flows and share price simply track the CPI in future years, you’ll pocket a sumptuous 16% in “real” returns, more than double the S&P record over the past decade.

Of course, a bet on IEP is a wager that at 86, Icahn—still at the top of his game—has more good years ahead. It’s encouraging that his probable successor, son Brett, is now working alongside his dad as an activist on such deals as the recent attack on Southwest Gas, and spinoff of Bausch Health’s eye-care business. IEP is an industrial conglomerate that also contains a second franchise, Carl Icahn’s opportunistic hedge fund. The core businesses include controlling interests in independent crude oil refiner CVR, also a big producer of fertilizer, and Viskase, a maker of plastic casings for meat products; plus full ownership of Vivus in specialty pharma, AAMCO in auto parts, and WestPoint in textiles.

In the hedge fund, Carl Icahn parks his investments in publicly traded companies, where he’s typically pushed for turnarounds, management changes, and restructurings as one of America’s most active activists. In the past, IEP has scored big on such revivals as Motorola and Navistar. Among the current holdings are stakes in Bausch Health, Newell, FirstEnergy, and Cheniere. To be sure, a model that combines steady cash flow from stalwart industrial holdings with windfalls from activist attacks is an unusual one. But Icahn’s shown the template works. This is our boldest pick. But the results are so consistent, and the dividends so big, that IEP merits a place on the Big D All-Stars roster.

Arbor Realty Trust (ABR)

Dividend yield: 11%. P/E: 6.5. Price drop from 52-week high: –34%. Market cap: $2.2B. 

finviz dynamic chart for ABR

Arbor Realty is the smallest member of the All-Stars measured in market cap. Its edge is a combination of a double-digit yield with extremely stable and growing earnings that provide the financial strength to keep the payouts rising. Arbor is what’s called a “mortgage REIT.” It engages in two separate lines of business. First, it provides short-term financing for apartment, single-family rental housing, and commercial projects that garner high interest rates. The concentration in residential rentals is especially promising. As interest rates rise to make buying houses less and less affordable, more and more folks and families will rent houses and apartments instead. The counterforce from a slowdown in sales is a rise in demand for the kind of rentals that Arbor finances. Geographically, it’s in the right places, the booming Sunbelt states such as Georgia, Florida, North Carolina, and Texas.

The second franchise: originating long-term loans for multifamily and senior housing that are sold to, and securitized by, GSEs Fannie Mae, Freddie Mac, and Ginnie Mae. Arbor reaps fees for packaging those credits, and also keeps the lucrative servicing rights on the loans, yielding a steady, annuity-like stream of income. Arbor has raised its dividend by 31% since early 2019, yet it’s paying out just 71% of its earnings, one of the lowest ratios among REITs. That leaves plenty of room for future increases.

Janus Henderson (JHG)

Dividend yield: 6.75%. P/E: 7.3. Price drop from 52-week high: –53%. Market cap: $3.9B.

finviz dynamic chart for JHG

Janus Henderson is one of two asset managers (along with Invesco) that Nelson Peltz’s Trian hedge fund is attempting to revive. The British group is the product of the 2017 merger of two midsize players, Janus Capital and Henderson Group. But the union failed to pay off. Since the merger, Janus Henderson’s assets under management have risen only modestly from $350 billion to $419 billion. In Q1, Janus suffered $6 billion in net outflows.

As a 19% stakeholder, Peltz is pushing for change: Late last year, a new CEO, Ali Dibadj, former CFO of AllianceBernstein, took charge, and in February, Peltz and partner Ed Garden joined the board. Peltz and Garden also believe that the asset management space is all about scale, and that great economies can be achieved via mergers in the space. Hence, Janus could benefit either from uniting with a like-sized rival, or selling to one of the industry’s giants. Peltz has a strong record as a matchmaker in the field. As a big investor in Legg Mason, he orchestrated its sale to Franklin Templeton in late 2000, reaping a $70 million gain in nine months.

The attraction: Though Janus’s profits haven’t grown since the merger, they’re at least stable—and extremely large relative to both the dividend and beaten-down valuation. In the past four quarters, it’s posted net profits of $530 million. That’s twice the $259 million it paid to shareholders. Any improvement in operations that substantially raises assets under management or lowers costs could ignite a big rise in both dividends and the stock price. And like many midsize money managers, Janus is an appealing takeover candidate.

Invesco (IVZ)

Dividend yield: 4.6%. P/E: 5.6. Price drop from 52-week high: -42%. Market cap: $7.2B.

finviz dynamic chart for IVZ

Trian holds a 12.25% stake in its second asset management holding, Invesco. The Atlanta titan is far bigger than Janus Henderson, harboring AUM of $1.6 trillion, the seventh largest portfolio of any asset manager in America. It’s famous as the home of the flagship Invesco QQQ, the ETF that tracks the Nasdaq’s 100 largest nonfinancial stocks and boasts $153 billion in investor capital. Invesco’s long been purchasing managers in a wide variety of specialties around the globe. In 2019, it bagged Oppenheimer Funds for $5.7 billion. In general, it’s overestimated the synergies from those acquisitions, and registered relatively low gains on its investments, making it increasingly dependent on asset price gains to swell its asset base.

But Invesco’s now benefiting from the breadth of its offerings, especially its strength in such alternative investments as private credit and real estate. In Q1, it registered net inflows of $17.2 billion, suggesting a turnaround is underway. But as with Janus Henderson, Invesco is so appealing because despite its high yield, it’s spending only around $550 million a year on payouts to common shareholders, less than half of its earnings of $1.3 billion over the past four quarters. It recently increased its dividend by 10%. Even if Invesco grows slowly, it has plenty of cushion to keep raising the payouts. It also repurchased $200 million in shares, equivalent to almost 3% of its current market cap, in Q1. A major revival that boosts earnings would provide a kicker in capital gains. And at these super-low prices, don’t rule out a sale at a fat premium.

Dow Inc. (DOW)

Dividend yield: 5.5%. P/E: 5.7. Price drop from 52-week high: –29%. Market cap: $37.3B.

finviz dynamic chart for DOW

Dow is the largest of the three companies spun from the old DowDuPont in early 2019. It makes such basic products as packaging, plastics, industrial coatings, and architectural paints. Dow is already delivering earnings and sales above pre-pandemic levels, and CEO Jim Fitterling pledges the trend will persist. Fitterling predicts that Dow’s end markets will grow at 3.3% and 5.5% from 2022 to 2025, on a average a point faster than the pre-COVID record.

Yet Dow’s share price is languishing below late-2019 levels, resulting in a tiny multiple of less than six. In the past four quarters, it’s generated sumptuous net income of $6.9 billion, and paid out just less than one-third of that figure to provide what’s now a yield of 5.5%. Hence, Dow has plenty of latitude for returning capital to shareholders. It recently announced a plan to repurchase $3 billion in stock, and did $600 million in buybacks under the program in Q1. The $2.4 billion in dry powder represents over 6% of its current valuation.

Analyst Hassan Ahmed of Alembic Global Advisors praises Dow for excellent cost management. “They benchmark SG&A [selling, general, and administrative expenses] to their peers to ensure they’re among the most efficient in every category,” he says. “They’re all about paying a chunky dividend and tightly running operations, not about empire building or pursuing expansion plans.” The stock, he adds, is screaming buy. “They’ve suffered from the overall skittish market,” he says. “But the 5.5% dividend is guaranteed. Their earnings are so strong that it won’t be cut even in the event of a recession. It’s trading at multiples far below where a name like this should be trading.” Few choices offer a better opportunity for a blend of rising dividends, big buybacks, and large capital gains as Dow’s multiple rises to match the P/Es of industrial giants with similar earnings and growth.

Huntington Bancshares (HBAN)

Dividend yield: 5.0%. P/E: 17.7; price-to-FCF: 6.7. Price drop from 52-week high: –29%. Market cap: $18.1B.

finviz dynamic chart for HBAN

Huntington is a midsize bank that for dividend seekers enjoys an advantage over the Goliaths: Its 5% dividend yield far exceeds those of JPMorgan (3.5%), BofA (2.7%), and Wells Fargo (2.5%). Huntington has long been a powerhouse in Michigan, Ohio, and Western Pennsylvania, offering three main lines: consumer banking, auto lending, and middle market credit. Last June, it expanded into Minneapolis, Denver, and Chicago via the $6 billion acquisition of TCF Financial, growing its network to 1,000 branches across 11 states. TCF also added two strong new franchises in inventory and equipment finance. Huntington is on track to secure a promised $1 billion in cost savings from the deal.

 “Huntington pioneered a low-fee, customer-friendly model for retail banking,” says Terry McEvoy, an analyst at Stephens. “They have excellent customer retention.” Rising rates should swell the bank’s net interest income—but its revenue growth and cash flows are already robust. Over the past four quarters, it’s churned $2.7 billion in free cash flow, almost three times the dollars flowing to dividends. Huntington has almost doubled its dividend since late 2017, and raised the payout 3% in Q4 of last year. Huntington fared well in the recent Fed stress tests, suggesting it can not only maintain that big dividend, but probably grow it.

Unilever (UL)

Dividend yield: 4.3%. P/E: 19.7; price-to-FCF: 11.7. Price drop from 52-week high: -23%. Market cap: $119B.

finviz dynamic chart for UL

As you can see, Unilever offers a slightly lower dividend, and higher P/E, than our other candidates. That P/E of almost 20 is deceiving, however, since Unilever generates free cash far in excess of its GAAP profits. Unilever owns an array of household name brands, among them Hellmann’s mayonnaise, Ben & Jerry’s ice cream, and Dove soap. But its sales have been flat at around $52 billion since 2018. Its latest growth initiative, a campaign to buy GlaxoSmithKline’s consumer health business, failed when GSK rejected its final bid in January.

The upbeat news: Peltz’s Trian has taken a 1.1% stake, and Peltz is joining the board in July. CEO Alan Jope welcomed his arrival, and is apparently open to Peltz’s ideas for spurring growth. Peltz displayed his mastery of reviving consumer brands at Snapple, Heinz, and Mondelez, and helped spur a major comeback at P&G after narrowly winning a director’s chair in 2017. At Unilever, Peltz is likely to steal from his P&G playbook by pushing for a shift to high-growth new brands, and advocating a far slimmer bureaucracy where business heads have direct control over their P&Ls. This is a turnaround play: It will take a revival in growth to spur dividend increases and raise the stock price. But Peltz will champion the template that can make it happen. To be sure, Unilever is a conservative choice. But if the P/E stays where it is now and profits grow at just 3%, you’ll still get a steady almost 7%-plus return. And a real comeback could push the formula into double digits.

Medical Properties Trust (MPW)

Dividend yield: 7.5%. P/E: 8.4. Price drop from 52-week high: –42%. Market cap: $9.5B.

finviz dynamic chart for MPW

Based in Birmingham, Ala., MPW is one of only two publicly traded REITs—the other is Ventas—that invests exclusively in hospitals and care centers. In fact, its 440 facilities offering 46,000 beds make it one of the world’s largest owners of acute care facilities. The business is highly specialized: MPW buys existing hospitals both new and old, then leases them back to their operators on long-term net leases that average 18 years. Its tenants include such major chains as Steward, LifePoint, and Scope. Amazingly, MPW’s also big overseas. Around 40% of its portfolio resides in Europe and Australia, with the biggest concentration in the U.K. MPW recently spent $178 million to purchase three hospitals from the third largest operator in Finland.

The beauty of the model is that the leases contain escalators that lift rents faster than costs, bringing “operating leverage” that expands margins. MPW faces little competition from other REITs or private equity. The hospital industry is heavily protected, helping ensure the financial stability that enables the operators to keep paying those rising rents. Certificate of need laws in many states make it extremely difficult for new hospitals to launch or existing ones to build new beds, so that an industry-weakening surge in supply is virtually impossible.

From 2018 to 2021, revenues doubled from $785 million to $1.54 billion, and profits kept pace. Best of all, MPW is delivering that big yield while paying out just 60% of its earnings. So as an investor, you’ll get the benefit both of the big dividend, and the excess cash that generates profit growth and hence capital gains—and could fund more dividends and buybacks as well.

The dividend portfolio for 2022

Let’s say you buy all 10 of these big dividend value stocks in equal dollar amounts. Here’s what the portfolio, or what we can call Big D All-Stars Inc., would look like. The average dividend yield is 7.3%, five times the S&P 500 average. The P/E is 10.7. (That’s excluding Icahn Enterprises, which is posting GAAP losses but has an extremely low valuation compared with its big free cash flow.) That multiple makes Big D All-Stars over 50% cheaper than U.S. big caps, which command a multiple of around 22.

The great thing about this portfolio is that it isn’t terribly risky. You get the 7%-plus yield, and you’re holding pummeled-down shares selling at multiples so low that the danger of further big declines isn’t nearly as great as for the still pricey tech stars. As the market shifts to value plays, you’re also likely to get a bonus in the form of capital gains. Investors will shift from granting gigantic valuations to enterprises whose big earnings years lie far in the future, to those generating, and distributing, loads of cash right now for each dollar you pay. Follow the Big D All-Stars, and you’ll be in the right place to cash in.

Photo by Pepi Stojanovski on Unsplash

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