3 Magnificent Dividend Stocks I “Never” Sell.

You can never say never when it comes to investing. But when I look at my portfolio, I see Procter & Gamble (PG -0.26%), Hormel Foods (HRL 0.89%)and Hershey (HSY -0.08%) and I think of them as “never sell” stocks. That’s true, even though two of them are currently facing notable adversity (which could make them attractive purchases for anyone who doesn’t own them).

Here’s why I’m sticking with this trio of dividend-paying consumer staple stocks that I “never” sell.

Procter & Gamble demonstrates the method

I wouldn’t blame anyone for buying Procter & Gamble, usually called P&G by investors, today. While the 2.3% dividend yield is only middle of the road historically speaking, it suggests a fair valuation for one of the most iconic consumer staples companies on the planet. But not so long ago, P&G was dealing with a bloated and stagnant business, weighed down by brands that weren’t really contributing to the top or bottom line. At the time, P&G was deeply unloved and the yield was closer to 4%.

That’s when I bought Procter & Gamble, given its status as the Dividend King (with over 50 years of annual dividend increases). P&G was in a nasty proxy fight with dissident shareholder Nelson Peltz, which it won (but still decided to give Peltz a board seat). The plan at the time was to slim down to focus only on its most important brands, with Peltz pushing for a greater link between performance and pay. This all seemed reasonable to me, so I jumped.

The plan worked and P&G turned its fortunes around. I did pretty well with that investment, essentially buying a great company when it was out of favor due to solvable short-term issues. Like all life, companies work through a sine curve that changes between good times and bad times. So if you’re patient, you can sometimes find winners among unloved stocks.

The key for me is to focus on long-term dividend payers that have historically high, or at least attractive, dividend yields. This is my indication of a high quality stock trading on the discount shelf. This is where Hormel Foods and Hershey come into play.

Hormel and Hershey are out of favor now

Hormel and Hershey are facing some headwinds right now. The issues are unique to each (as well as the issue P&G dealt with), but they don’t appear to be permanent problems. Hormel, for example, has been unable to push price increases as well as its peers in the face of increased inflation. It also bought nuts from Planters as the nut segment of the snack business slowed, was hobbled by bird flu and faces a slow rebound from the pandemic in China. Individually, each of these problems would be a nuisance, but collectively they have caused investors to panic.

Meanwhile, Hershey has some operational shifts underway thanks to an updated distribution system. This resulted in customers being supplied before the switch (just in case the new system failed) which caused a bit of revenue turbulence. That should pass in time. It has also had to deal with the declining demand for popcorn, which it is dealing with adequately enough by adjusting product sizes and prices.

Most importantly, Hershey is burdened by the skyrocketing price of cocoa, a key ingredient in making its famous chocolate products. This particular issue is of real concern to investors as it seems likely that there has been a gradual change in cocoa prices given the murky supply dynamics. Investors have shunned the stock for fear that Hershey won’t be able to recoup its rising costs.

These negative aspects, however, must be seen in a wider context. Like P&G, Hormel is a dividend king. And while Hershey’s dividend streak only stretches back to 15 years or so, the dividend has trended much higher over its history, with some periods where it has remained flat. Simply put, both are reliable dividend stocks and have been for a very long time. This is only possible if a company is well run and knows how to deal with the inevitable periods of adversity that come from time to time. I am confident that both food manufacturers will figure out how to survive while continuing to pay their dividends.

HSY Dividends per Share (Quarterly) data by YCharts

However, despite being large companies, a worried Wall Street has left stocks with historically attractive yields. Like P&G a few years ago, Hormel and Hershey seem to be on the shelf. Hormel’s 3.5% yield is near the highest levels in recent history (that’s the deep discount basket). Hershey’s 2.7% yield is on the high side, but not extreme. It is only attractively cheap, noting that it is very rarely on sale.

HSY Dividend Yield Data by YCharts

I entered both stocks. I’m high on Hershey, a fairly new investment for me, and light on Hormel, a stock I’ve held for several years. I won’t sell either unless something very operationally negative happens to either of them. That seems highly unlikely. What I think is more likely is that these big food manufacturers are obfuscating their problems while they pay me well to wait for better times. Which is exactly what happened with P&G.

Time arbitrage is your secret weapon

If I ran a mutual fund or a hedge fund, I would have to justify to my investors every share I own. It would be kind of hard to justify Hershey or Hormel right now, given their generally negative opinion on Wall Street. Even if I liked the stock, I might sell it so I don’t have to deal with the questions. There are downsides to being a small, individual investor, but this dynamic is not one of them. In fact, the ability to buy and hold for the long term, which I call time arbitrage (I didn’t invent the term, I borrowed it somewhere along the line), is what allows me to find gems that Wall Street overlooks. It’s that simple, but because of the short-term focus on Wall Street, it’s actually a contrarian approach.

The key is to focus on good companies (which I use dividend history to identify) and only buy them when they are out of favor (with historically attractive yields) for temporary or at least fixable reasons. And then wait, unless there is a significant negative operational change at the company. This is why I stick with P&G, Hormel and Hershey. The last two, as I mentioned, still look pretty attractive today, if you’re interested.