Every day of every year is a great opportunity to increase your wealth and passive income.

But the start of a new year is a particularly good time to look at investment ideas that could hold the potential to deliver better results than most other investment ideas available.

With this in mind, I’m going to reveal my top 5 stock ideas for 2021!

While these are highly worthwhile investment ideas to consider for this year, every stock I’m going to discuss should be thought of as a very long-term investment.

Even great investments can have down days, months, or years.

2020 was an excellent example of that. The stock market experienced unprecedented volatility throughout the year as a result of the global pandemic, beating up just about every stock you can think of.

But wonderful businesses are resilient. And they tend to do incredibly well for their investors over the long run.

Indeed, all five of these stocks rebounded sharply from their 2020 springtime lows.

However, I still see room for more.

These are five special businesses that have decades-long track records of delivering increasing wealth and passive income for their investors.

2021 could be just the start of a long runway for growing profit, increasing dividends, and happy shareholders for many more decades to come.

The stocks I’m listing for you have already passed three big hurdles.

First, they’re all dividend growth stocks. 

Per Ned Davis Research, dividend growers & initiators vastly outperform the broader market over the long term.

[Data sources: Ned Davis Research and Hartford Funds, 2/20.]

It’s easy to understand why.

Dividends aren’t simply a component of the market’s total return over the long term; dividends are the main component. And reinvesting growing dividends intensifies that effect.

[Data sources: Ned Davis Research and Hartford Funds, 1/19.]

Just in case that chart doesn’t hit home, here’s an apt quote from Hartford Funds on this matter:

“Dividends have played a significant role in the returns investors have received during the past 50 years. Going back to 1970, 78% of the total return of the S&P 500 Index can be attributed to reinvested dividends and the power of compounding…”

Dividend growth stocks take everything great about stocks… and supercharges all of it.

You get to participate in the growing value of successful businesses. That increases the value of your holdings and, by extension, wealth.

But you also receive a portion of growing profit directly.

That occurs through reliable and rising cash dividend payments.

After all, there’s no better proof of growing profit than an ever-larger sum of cash in your pocket.

These growing cash dividend payments can make for an amazing source of totally passive income that grows all by itself.

An investor could even live off of growing dividends, as I do. That’s a dream come true.

Second, they’re all high-quality businesses. 

Every business I’m going to discuss has excellent fundamentals and durable competitive advantages.

It’s one thing to be a dividend growth stock. It’s quite another thing to be a wonderful business.

A growing dividend can (and often does) serve as a great initial litmus test for business quality. That’s because only a strong business that’s producing growing profit can sustain a growing cash dividend for years on end.

However, some businesses have seen their best days come and go. They’re relying on past glory days to amble along into an uncertain future.

Meanwhile, other businesses are still firing on all cylinders.

I’m focusing on the latter here.

The importance of this has never been more clear than right now. 2020 saw an acceleration of trends worldwide. And businesses that aren’t healthy and nimble are getting left behind.

To that point, every business listed below has:

  • brisk top-line and bottom-line growth
  • robust profitability
  • a rock-solid balance sheet
  • impressive dividend growth metrics, and
  • numerous competitive advantages

Furthermore, every company I’m going to discuss has a business model that’s fairly easy to understand.

It’s important to stay within your circle of competence. You want to comprehend how a company will make a lot of money for you throughout the next year – as well as every year thereafter.

Third, they all appear to be attractively valued. 

Every dividend growth stock featured below looks undervalued at the time of this publication.

As I note throughout my Undervalued Dividend Growth Stock of the Week series, a high-quality dividend growth stock that’s undervalued can confer multiple benefits to the long-term investor. Undervaluation presents the opportunity to take advantage of a higher yield, greater long-term total return prospects, and reduced risk.

All of that is relative to what would otherwise be available to the investor if the same stock were fairly valued or overvalued.

Even the best stock in the world can be a poor investment, especially over a shorter period of time (like the year ahead), if an investor pays far too much.

But if one is able to invest in a great business at a great value, they’re setting themselves up for truly outstanding investment performance.

That outstanding investment performance is possible over the short term, but it’s almost certain over the long term.

There’s the built-in performance that a great company usually provides. Revenue and profit prolifically rises over time, with the stock price following along (albeit with some volatility along the way).

However, this dynamic is amplified when there’s a favorable gap between the intrinsic value of a stock and the price you pay for it.

A stock price is prone to rise to meet business performance as a natural course, but it should rise even more to catch up to value.

Plus, there’s the higher yield you get at a lower price, which can significantly increase the amount of dividend income you collect over the course of your investment.

Looking out toward 2021, there’s a lot of uncertainty for investors to consider.

The pandemic recovery. A new US President. Ongoing US-China tension.

There’s also the stock market itself. The S&P 500 is actually up on the year and sporting a P/E ratio (around 38) that is considerably higher than its long-term average.

With all of that in play, it’s vitally important to look for wonderful businesses trading at attractive valuations.

Well, that brings us to my top 5 stock ideas for 2021!

If I had $5,000 to invest in just 5 stocks, these are the first 5 stocks I’d consider right now…

Stock #1: Johnson & Johnson (JNJ)

Johnson & Johnson is a global healthcare conglomerate that produces and markets a wide variety of medical devices, pharmaceuticals, and consumer goods.

Founded in 1886, this is a $402 billion (by market cap) healthcare behemoth that employs more than 132,000 people worldwide.

FY 2019 sales break down across the following three segments: Pharmaceutical, 51%; Medical Devices, 32%; and Consumer, 17%.

This isn’t the kind of stock that will blow you away with growth.

But when I think of blue-chip stocks, this is one of the first stocks that comes to mind.

No matter what part of the company’s fundamentals you look at, you will find a high amount of quality. It’s the kind of stock that can be a cornerstone of a portfolio.

Meanwhile, the business is poised to take advantage of a global demographic megatrend.

It’s quite simple, really.

With the global population expanding, the world is getting bigger. And with people living longer than ever, the world is getting older. Then you have the fact that people are, on average, becoming wealthier.

When you have a larger pool of older people, you naturally have an increase in demand for quality healthcare products and services. And since these people are also getting richer, their access to these same products and services also increases.

That bodes well for Johnson & Johnson and its ability to continue increasing its profit and dividends.

The company has already increased its dividend for an incredible 58 consecutive years. That’s one of the longest such track records in existence.

And with a 10-year dividend growth rate of 6.9% coming on top of a yield of 2.6%, there’s an appealing combination of income and growth here.

Plus, this is a safe dividend. The payout ratio is 63.5%.

In fact, Johnson & Johnson announced a 6%+ dividend increase in April 2020 – when the pandemic was fresh and confusion was abound. That speaks volumes about the reliability of the dividend.

The dividend is further backed by solid business growth and one of the best balance sheets in Corporate America.

Johnson & Johnson’s revenue is up from $61.587 billion in FY 2010 to $82.509 billion in FY 2019.

That’s a compound annual growth rate of 3.24%.

Earnings per share moved up from $4.78 to $8.68 (adjusted) over this period, which is a CAGR of 6.85%.

Again, this stock doesn’t knock your socks off with growth. It’s instead a consistent performer that steadily increases its profit over time. It just grinds higher and higher while you sleep well at night.

Further speaking to the stock’s quality is the balance sheet.

They’re one of only two companies in the world with a AAA credit rating from Standard & Poors.

Then there’s the robust profitability.

Over the last five years, the firm has averaged annual net margin of 16.86% and annual return on equity of 19.53%.

There are also durable competitive advantages in place.

They have unmatched scale, with with ~70% of sales coming from a #1 or #2 global market share position. And their R&D, IP, and brand power further help to protect the business.

There’s also the fact that Johnson & Johnson is working on a COVID-19 vaccine. I wouldn’t buy the stock based on this, but it is something looming in the background that could give the stock a boost in early 2021 (depending on the outcome of the trials).

Now, I don’t think the stock is a steal at current prices. Instead, this is one of the highest-quality businesses in the world that I believe will be an excellent long-term investment in terms of delivering consistently upward profit and dividends.

Furthermore, I don’t think one needs to get an amazing deal on this kind of quality in a very uncertain and volatile environment.

The P/E ratio is right about 24.0.

At first glance, that actually looks high. But it’s based on GAAP earnings, which have been skewed of late.

The P/CF ratio is 18.9, which isn’t far off from the stock’s own five-year average.

And the yield is right in line with its five-year average.

I think the stock is priced at its intrinsic value.

However, that doesn’t mean it’s not attractively valued. Valuation is relative. And relative to the market, interest rates, the quality of the business, and the overall environment, this stock is highly attractive.

We can also see that Morningstar rates JNJ as a 3-star stock, with a fair value estimate of $147.00.

CFRA rates JNJ as a 5-star “STRONG BUY”, with a 12-month target price of $164.00.

So we have a pretty tight consensus here on the stock being fairly priced. The good news is, you don’t need a deep discount on this stock.

With a ~3% yield and ~7% growth (in line with its long-term average), you could get a ~10% total return over the next year.

In this kind of environment, I think a set up for that kind of return on this kind of quality is very nice. This is an extremely compelling long-term investment for 2021 – and beyond.

Stock #2: Lockheed Martin Corporation (LMT) 

Lockheed Martin Corporation is the world’s largest defense contractor.

Founded in 1912, Lockheed Martin is now a $106 billion (by market cap) global giant that employs more than 100,000 people.

Fiscal year 2019 revenue is broken out by segment: Aeronautics, 40%; Rotary and Mission Systems, 25%; Space Systems, 18%; Missiles & Fire Control, 17%.

The US Department of Defense accounts for approximately 60% of revenue. International sales account for almost 30% of revenue. The remaining 10% comes from various US government agencies. Commercial sales are insignificant.

The investment thesis here is so straightforward.

Lockheed Martin is the world’s largest defense contractor. And it’s headquartered in the world’s largest consumer (United States) of defense products and services.

It’s a money machine.

What’s also interesting here is the idiosyncratic way in which the business operates. The more uncertain the world becomes, the more demand there is for its products and services. When things become tense, countries bulk up on their defense capabilities.

Building on the quality theme that was started with Johnson & Johnson, Morningstar has this to say about Lockheed Martin: “We view Lockheed Martin as the highest-quality defense prime contractor, given its exposure as the prime contractor on the F-35 program and its missile business.”

This mixture of quality and unique market position augurs well for Lockheed Martin’s future profit and dividend growth.

As it stands, the company has increased its dividend for 18 consecutive years.

The stock yields 3.0%, which is quite the yield when you pair that with the 10-year dividend growth rate of 14.4%.

The company actually handed out a double-digit raise back in September, which should give investors a lot of confidence about the state of the business and dividend.

Even more confidence should come after seeing the payout ratio of just 44.8%.

This dividend isn’t going anywhere but up.

Lockheed Martin grew its revenue from $45.803 billion to $59.812 billion between FY 2010 and FY 2019.

That’s a compound annual growth rate of 3.01%.

They increased earnings per share from $7.81 to $21.95 over this time frame, which is a CAGR of 12.17%.

Impressive growth here.

And I think there’s plenty more where that came from.

Bolstering the company’s already fantastic prospects is the $4.4 billion acquisition of Aerojet Rocketdyne Holdings Inc. (AJRD). Announced in late December, this deal scoops up a supplier and expands Lockheed Martin’s space/rocket capabilities.

This deal is strategic and inexpensive. Investors should like Lockheed Martin even more now than they did before, in my view.

The company’s balance sheet is fairly solid, and this bolt-on acquisition doesn’t change the financial position meaningfully.

While the long-term debt/equity ratio of 3.65 looks high, that’s due to low common equity from buybacks.

The interest coverage ratio of over 12 indicates no issues with its debt costs.

Profitability is good, and there’s been clear margin expansion in recent years.

Over the last five years, the firm has averaged annual net margin of 8.55%. Return on equity is N/A because of low common equity.

What’s amazing about this high-quality stock is how unloved it is right now. The market is almost completely ignoring it, which is exactly the kind of opportunity shrewd long-term investors look for.

This is a technology company disguised as an industrial, yet it’s valued less than slower-growing consumer companies.

And durable competitive advantages like global scale, massive barriers to entry, long-term contracts, technological know-how, and high switching costs, Lockheed Martin protect the business.

With a P/E ratio of 15.0, I’d argue the stock is downright cheap.

That’s well below the market. It’s also completely disconnected from the stock’s five-year average P/E ratio of 23.7.

You’re only paying 12.5 times cash flow at these prices, which compares very favorably to the stock’s own three-year average P/CF ratio of 20.0.

And the yield is about 30 basis points higher than its recent historical average.

I performed a DDM analysis on the stock using a 10% discount rate and a long-term dividend growth rate of 8%.

That gives me a fair value of $561.60.

Morningstar rates LMT as a 4-star stock, with a fair value estimate of $433.00.

CFRA rates LMT as a 5-star “STRONG BUY”, with a 12-month target price of $504.00.

Averaging these three numbers out gives us a valuation of $499.53.

When you factor in the possible 43% upside and ~3% dividend, investors could be looking at a 46% total return in 2021.

This is one of my very best ideas for dividend growth investors right now.

Stock #3: W.P. Carey Inc. (WPC)

W.P. Carey Inc. is a net lease real estate investment trust.

Founded in 1973, W.P. Carey is a $12 billion real estate giant that operates globally.

The company’s worldwide real estate portfolio of over 1,200 properties are spread out across 25 countries and leased out to over 350 tenants in aggregate.

One might think real estate is a no-go with the pandemic still not behind us as 2021 begins.

However, I’d counter that misconception with two big points.

First, the pandemic won’t be with us forever.

Society has dealt with pandemics before. Vaccines are being dispersed and life will return to normal. You want to pick up deals before the turn happens.

Second, let’s consider that W.P. Carey has been almost completely unaffected by everything going on.

While REITs with heavy exposure to areas like hospitality and leisure have been hurt, W.P. Carey’s largest amount of exposure in their real estate portfolio is to industrial properties.

Their Q3 FY 2020 report showed a 98.9% portfolio occupancy rate and 98% overall rent collection. This is not a distressed operation.

Compare that rent collection to one of the bluest blue-chips of all REITs in Realty Income Corp. (O). Realty Income reported only 93.3% rent for October 2020 – yet that stock sports a higher valuation and offers a lower yield.

Meanwhile, W.P. Carey’s dividend pedigree leaves little to be desired.

They’ve increased their dividend for 23 consecutive years.

They’re only two years away from becoming a Dividend Aristocrat.

Now, the five-year dividend growth rate of 2.7% isn’t massive.

However, this is a stock that yields 6% here.

So that kind of growth, especially in an environment with little inflation, is more than enough to get the job done.

Based on the midpoint of 2020 AFFO/share guidance, the payout ratio is 89.0%.

That’s a touch high, but it’s not totally out of line for a REIT.

I wouldn’t expect any kind of dividend acceleration, but the high yield offsets the lower growth.

Speaking of growth, W.P. Carey has grown its revenue from $214 million in FY 2020 to $1.233 billion in FY 2019.

That’s a compound annual growth rate of 21.48%.

Really incredible.

But a REIT often shows brisk top-line growth at the expense of slower bottom-line growth. That’s because a REIT funds growth by issuing equity and/or debt.

W.P. Carey’s outstanding share count is up more than fourfold over the last decade.

Their adjusted funds from operations per share increased from $3.27 to $5.00 over this 10-year period, which is a CAGR of 4.83%.

That’s a more accurate reflection of their true growth. And I think that’s great for this kind of quality and reliability in real estate. It’s an income vehicle that offers a solid growth kicker.

The balance sheet is strong.

Total liabilities of $7.1 billion stack up well against $14 billion in total assets.

They ended FY 2019 with a ratio of net debt to adjusted EBITDA of 5.4.

Their biggest competitive advantage is scale. But their portfolio makeup is also an advantage, in my view, which is showing up in the results.

Best of all, the stock looks like a good deal right now.

The P/AFFO ratio (using the midpoint of FY 2020 AFFO/share) is 15.0.

This ratio is analogous to a P/E ratio for regular stocks. The stock is commanding an undemanding valuation.

The P/CF ratio of 15.5 is just under the stock’s own three-year average.

And the yield is in line with its five-year average.

While the stock doesn’t look overly cheap, it was nearly $90 earlier in 2020 (before the pandemic hit). So the stock has been impacted considerably, yet the business has not. This disconnect is where the opportunity lies, in my opinion.

My DDM analysis, using an 8% discount rate and a long-term dividend growth rate of 2.5%, shows the stock is worth $77.90.

Neither Morningstar nor CFRA produce full reports for the stock.

With the upside between the current price and what I think the stock is worth, along with the big yield and underlying business growth, investors could be looking at a total return of 19% over the course of 2021.

Much of that would come via that sizable dividend, which is perfect for income-oriented investors.

This is a REIT that has held up remarkably well in the face of huge challenges. The stock hasn’t been rewarded fully yet, but that could change soon. And investors might want to pick up the stock before that change happens.

Stock #4: Pinnacle West Capital Corporation (PNW) 

Pinnacle West Capital Corporation is a utility holding company that principally serves as the parent of Arizona Public Service, Arizona’s largest and longest-serving electric utility.

With corporate roots dating back to over 125 years ago, Pinnacle West is now an ~$8 billion (by market cap) company that serves 1.2 million customers.

Utilities are often a favorite for dividend growth investors.

That’s because these stocks usually have higher yields, backed by a service that people quite literally cannot live without (electricity, in this case). Utilities have been almost totally unscathed by the pandemic.

That predictable cash flow is perfect for income-oriented investors who like to sleep well at night.

And since utilities pass on a lot of their costs, any possibility of tax hikes in the United States would impact utilities much less than other businesses. This is a nice hedge against any adverse tax announcements from the incoming Biden administration.

While I actually like a lot of utility stocks right now, and while I could have listed any number of them in lieu of this one, there are two reasons I chose Pinnacle West Capital.

First, the yield.

A lot of other utility stocks I like right now are offering sub-4% yields. This stock is over that mark.

Second, the service territory.

Pinnacle West Capital is benefiting from its geographic location. The Phoenix metro area, which is a major service territory for Pinnacle West Capital’s subsidiary APS, is one of the fastest-growing areas in all of the United States right now.

This geographic advantage is a long-range tailwind that should continue to blow the utility’s way for years to come, which bodes well for rising profit and rising dividends.

They’ve increased their dividend for nine consecutive years.

The five-year dividend growth rate of 5.4% is paired with a yield of 4.3%.

It’s worth noting that the company increased its dividend by over 6% in late October.

I think that’s an awfully nice combination of yield and growth.

And the dividend has a well-covered payout ratio of 59.2%.

This is a reliable dividend that investors can count on.

It’s further backed up by solid underlying business growth.

The company grew its revenue from $3.264 billion in FY 2010 to $3.471 billion in FY 2019.

That’s a compound annual growth rate of 0.69%.

Meantime, earnings per share increased from $3.27 to $4.77 over this 10-year period, which is a CAGR of 4.28%.

The dividend is growing slightly faster than earnings, so I’d expect that to be reconciled at some point. However, the strong growth that Arizona is seeing will help to correct this disparity.

Their balance sheet is another area of strength.

The long-term debt/equity ratio is 0.89, while the interest coverage ratio is a bit under 4.

Profitability is strong. And margins are impressive.

Over the last five years, the firm has averaged annual net margin of 13.64% and annual return on equity of 9.85%.

The big competitive advantage that a utility like Pinnacle West Capital has is its geographic monopoly.

There’s typically only one electric provider in any one service area. And a unique regulatory structure practically guarantees profit.

The stock offers a lot to like.

And the valuation only serves to reinforce that.

The stock is trading hands for a P/E ratio of just under 14.0 right now.

That’s well below where the broader market is at.

It’s also way off of the stock’s own five-year average P/E ratio of 19.3.

And the stock’s yield is almost 100 basis points higher than the stock’s own five-year average yield.

I recently valued the stock using a DDM analysis. I factored in a 9% discount rate and a long-term dividend growth rate of 5%.

That gives me a fair value of $87.15.

Morningstar rates PNW as a 4-star stock, with a fair value estimate of $90.00.

And CFRA rates PNW as a 3-star “HOLD”, with a 12-month target price of $94.00.

The average of those three numbers is $90.38.

If we account for the valuation upside, the yield, and the underlying growth, that adds up to a potential 25% total return for 2021.

In the land of high-quality utility stocks, Pinnacle West Capital stands out as one of the best long-term investment opportunities for dividend growth investors.

Stock #5: Aflac Inc. (AFL)

Aflac Inc. is an insurance company that primarily sells supplemental insurance products to clients in the United States and Japan.

Founded in 1955, Aflac has grown into a very successful niche insurance business that employs almost 12,000 people.

If you’ve been noticing a theme where I’m providing stock names that have held up well throughout the pandemic and lockdowns, you’re paying attention.

Actually, the theme is a bit more complex than that.

These stock picks have an interesting dichotomy.

The businesses have held up well. But the stocks have been hit.

And this disconnect is where our opportunity sits.

Aflac is a continuation of that theme.

The stock is down almost 19% YTD.

That’s stock performance.

Now, let’s contrast that with business performance.

The company reported Q3 FY 2020 results on October 27, showing $5.7 billion in revenue. That’s above the $5.5 billion in revenue they produced in Q3 FY 2019.

Meantime, diluted GAAP EPS increased 231% YOY. There are some currency, tax, and investment fluctuations that can cause volatile GAAP earnings for Aflac, but the company is growing at a good clip.

Aflac’s business is doing well, yet the stock is not. And that’s a big part of why I’m here presenting this idea to you.

I can tell you something else that’s doing well.

Aflac’s dividend.

The company increased its dividend by almost 18% in mid-November.

That’s one of the largest dividend increases I’ve seen in 2020, and it marks 39 consecutive years of dividend raises for Aflac.

The ten-year dividend growth rate is 6.8%, which is paired with a 3.1% yield.

Investors should sleep well at night knowing this is one of the safest dividends out there, with a very low payout ratio of 20.7%.

These are some of the most impressive dividend metrics I’m aware of. It’s a dividend growth star.

And that track record has been built on the back of a fine business.

Aflac has grown its revenue from $20.732 billion in FY 2010 to $22.223 billion in FY 2019.

That’s a compound annual growth rate of 0.77%.

They’ve done a lot with that revenue, however, increasing EPS from $2.46 to $4.43 over the last decade, which is a CAGR of 6.75%.

A 21% reduction in the outstanding share count definitely helped to propel some excess bottom-line growth.

Their balance sheet is outstanding.

The long-term debt/equity ratio is 0.22, and the interest coverage ratio is over 20.

Profitability is robust.

Over the last five years, they’ve averaged annual net margin of 15.18% and annual return on equity of 14.34%.

Their scale and sales force gives them unique competitive advantages within their niche.

You’d think this stock would be expensive, but it’s not.

It’s trading hands for a P/E ratio of below 7.

On the face of it, that’s ludicrously low.

As noted earlier, GAAP EPS can be volatile, but every basic valuation metric indicates an extreme amount of cheapness.

The P/CF ratio is only 5.4. Even for a stock that’s been unappreciated for years – the three-year average P/CF ratio is 5.9 – this is abnormal.

And the current yield is more than 70 basis points higher than its own five-year average.

I think the stock’s intrinsic value is closer to $57/share.

That’s after using a DDM analysis with a 10% discount rate and a long-term dividend growth rate of 7.5%.

Morningstar doesn’t have a rating for this stock.

CFRA rates it as a 3-star “HOLD”, with a 12-month target price of $38.00.

I obviously disagree with CFRA on this one, but averaging the high and low out gives us $47.50 – which is still 10% higher than the current price of the stock.

Based on that kind of upside, along with the growth rate I factored in above and the ~3% yield, investors could be looking at a 20.5% total return on this stock over the course of 2021.

This is priced like a no-growth, high-risk stock, but none of that shows up in the actual business results.

Because of the wide disconnect between business and stock performance, Aflac is one of my top ideas for 2021 and many years to come.

-Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.