There are investors who prefer regular income and are on the lookout for quality dividend stocks that provide decent top-line and EPS growth. I have selected companies that pay regular dividends and have a history of consistent dividend growth.
A very high dividend yield is a risk at times because it may be a sign of significant stock price decline, meaning the dividends are in jeopardy. It is always important to be cautious since dividends are not guaranteed and can be changed at any time.
In my opinion, companies that are market leaders with a decent dividend yield and a strong history of dividend payouts should be considered as an investment opportunity.
Johnson & Johnson
Johnson & Johnson is currently trading around $116.9 and has a current dividend yield of 2.8%, which is higher than S&P 500’s 2% yield. The company has a history of strong dividend growth. Since 1990, the dividend has grown at a compound annual growth rate of around 12%. The stock price, however, has not grown the way the dividends have in the past several years. The company has a diversified business structure consisting of pharmaceutical products, consumer health and medical devices.
This diversified structure makes it difficult for any small economic or market downturn to affect it significantly. Although there was a 2.6% increase in the company’s total sales and a 7.6% increase in the adjusted earnings in fiscal 2016, the stock fell 2.2%. This is primarily because the stock missed expectations of 3% to 4% growth marginally. Since it is a huge company with a market cap of $319 billion and had impressive 2.6% sales growth, I believe the market's reaction to the results will be shortlived.
Moreover, the company has been involved in value creation through acquisitions and investments in innovation. In fiscal 2016, the company invested more than $9 billion into innovations, with 243 product approvals and 14 acquisitions and licensing agreements. I believe this will help in the company’s growth estimate of 3% to 4% in fiscal 2017. The company has also delivered strong shareholder returns with a one-year average of 15.3% against the S&P 500’s 12%. Considering the above factors, I believe the stock is worth accumulating for all income investors.
Procter & Gamble
Procter & Gamble is currently trading with a dividend yield of 3%, which is also well above the S&P 500. The company has more than 25 years of dividend increases, with one-year and three-year dividend growth rates of 1.5% and 3.1%.
The impressive dividend payout ratio of 77% and share buyback ratio of 0.9% suggest the company believes in rewarding its shareholders.Â
The company has a well-planned strategy that focuses on portfolio transformation. This will help it focus on its key products and drive revenue in key markets. China is the company’s second-largest growth market. Considering an increase in its adult population along with an increase in per capita income, companies like Procter & Gamble will benefit from the rising demand.
The company also has ample free cash flow, which is used to create shareholder wealth and is also reinvested into further growth. Therefore, Procter & Gamble can be considered a safe investment with a strong dividend payout and yield.
One utility company that I believe should be in the portfolio of every income investor is NextEra Energy. The company generates, transmits and distributes electric energy in the United States and Canada.
NextEra is currently trading with a dividend yield of 2.8% and a payout ratio of 53%. In fiscal 2016, the company paid an annual dividend of $3.48 per share, while competitors Southern Co. (SO, Financial) and Dominion Resources (D, Financial) paid respective dividends of $2.22 and $2.80. The company’s dividend has grown by around 10% in the last five years based on its strong earnings. It expects to increase it further by an average of 10% over the next few years.
NextEra wants to grow its payout ratio to 65% by 2018, increasing it by 12% to 14% per year until 2018.
The company reported strong 2016 EPS growth of 8.4%. This growth was largely driven by contributions from new investments. In addition, the company also expects to increase its adjusted earnings per share at a compound annual growth rate of 6% to 8% through 2020. I believe the company has strong financials and valuable assets to support its growth, which would help it continue rewarding investors through dividend increases.
Dividend stocks are primarily associated with conservative investors. But, if a stock has good growth potential and the ability increase its dividend, then it can be considered a good long-term investment for all.
Johnson & Johnson, Procter & Gamble and NextEra Energy have impressive dividend histories with continuous dividend increases over the years. As a result, all three would make excellent investments.
Disclosure: No positions in the stocks discussed.
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