3 Must-Buy Dividend Stocks if You Only Have $5,000 to Spend

The vast majority of investors don’t have hundreds of thousands to bet on each stock. Instead, they usually have a few thousand or less to spare each month out of their paycheck. This is enough to retire if you patiently plan your investments and also build up a dividend portfolio on the side.

Many choose to invest their savings in speculative assets like cryptos or gamble on sports, thinking that the money that they save is “too little” to meaningfully change their lives. However, that’s unlikely to pan out well in the long run. The amount doesn’t matter if you’re patient.

If you have around $5,000 to spend right now, it’s a much better idea to buy into dividend stocks instead of chasing outsized gains through speculative investments.

If you keep reinvesting those dividends year after year, that investment can balloon significantly. You can set aside just $500 every month, and you’ll find yourself with nearly $300,000 if these stocks generate around 8% in annual total returns in the next 20 years. Here are three dividend stocks that can do it:

Key Points in This Article:

• The first stock is a stable, consistent pick in the healthcare sector, which rarely sees disruption.
• The second is a long-term recovery bet that has historically beaten the S&P 500 for long periods of time.
• The third pick is paying exceptional dividends and could bottom out as well.
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Johnson & Johnson (JNJ)

This company has delivered excellent gains over its history and it still retains a formula that’s likely to work for the next few decades. Johnson & Johnson (NYSE:JNJ) has diversified revenue streams from pharmaceuticals and medical devices. It also has a pipeline of up-and-coming drugs that could add significantly to its existing revenue drivers. JNJ stock is up 8% year-to-date and has outperformed the S&P 500 so far this year.

JNJ stock has been remarkably stable and consistent during volatile times, and that is unlikely to change anytime soon. The only thing it has lacked is growth, but that could come soon. Q1 worldwide sales have increased 4.2% operationally to $21.9 billion. DARZALEX (multiple myeloma) saw over 20% growth.

After years of stagnation, analysts finally see growth in the coming years. EPS is expected to grow 6.35% year-over-year to $10.61 this year and $11.1 next year. Johnson & Johnson also raised its full-year operational sales guidance by $700 million to a midpoint of $92 billion, up 3.8%. It has also increased its dividends for 64 consecutive years and now yields 3.33%.

The consensus price target of $170.88 implies 9.5% upside. That’s likely an underestimate since interest rate cuts are ahead.

PepsiCo (PEP)

PepsiCo (NASDAQ:PEP) has been a disappointing investment over the past year, as the stock is down 17.1%. The decline in the past year has caused the stock’s 5-year performance to be flat, but a reversal may come soon.

PEP stock has been on a stable, long-term trajectory over the past three decades with occasional hiccups during recessions. The stock barely took a dent during 2020 and outperformed the broader market through 2023. However, growth slowed, and weight loss drugs changing consumer habits caused investors to reassess how they’d see PepsiCo’s snacking products.

I see this underperformance as a long-term entry point. PepsiCo’s revenue is still almost $21 billion higher than it was in 2020. The margins are lower, but the bottom line has remained well above $9 billion.

You should also keep in mind that PepsiCo has $48.5 billion in debt, pulling the enterprise value to almost $226 billion. The high interest rate environment doesn’t help either. But once interest rate cuts start, it should help with both growth and debt servicing, and it should also bring down the discount rate.

PEP stock currently comes with a 4.2% dividend yield, and it has increased its dividends for 54 consecutive years.

The consensus price target of $159.75 implies 18.67% upside.

United Parcel Service (UPS)

United Parcel Service (NYSE:UPS) is another great play at current levels. UPS stock is down 54% from its highs back in 2022 and is trading at a discount compared to even pre-COVID prices. The stock comes with a 6.34% dividend yield, and the market seems to be underestimating its long-term potential.

The stock has a great margin of safety and a business that has a great moat. The enterprise value of $108.7 billion is less than it was even in 2020. That’s just 9 times EBITDA. The long-term upside potential seems significant once interest rates are cut and e-commerce takes off more. UPS is already expected to see a significant rebound next year, with EPS expected to grow by 12.2% next year. The 5-year expected EPS growth here is at 7.4%.

The dividend yield here will attract many more investors once the Federal Reserve starts cutting later this year. It’s a good idea to lock in the yield early before others pile in. Dividends have been increased for 16 consecutive years, and the cash flow covers it. The consensus price target of $119.29 implies 15.65% upside potential. There are price targets going up to $147.

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