We appreciate several characteristics when it comes to dividend investing, as it is important to understand that not all dividend paying stocks are created equal. Depending on the individual investor’s goals, life stage, etc., different types of dividend stocks are optimal at different times. However, one thing that never changes is that we want to own high-quality, dividend-paying stocks that have proven themselves over time.
There are different ways to define quality, but longevity is certainly one of them, and there is no equal when it comes to longevity for the Dividend Kings.
Q2 2022 Hedge Fund Letters, Talks & More
The Dividend Kings all have at least 50 consecutive years of dividend increases. In this article, we’ll take a closer look at three dividend kings that not only have high yields, but also very safe dividends.
Abbott Laboratories (ABT)
Our first Dividend King is Abbott Laboratories (NYSE: ABT), which is a global pharmaceutical company. Abbott discovers, develops, manufactures and distributes various health products worldwide. The Company’s pharmaceuticals treat a wide variety of illnesses, including long-term illnesses and viruses. It also has a diagnostic care business, a medical device business and a large nutritional products segment. The company is therefore very diverse when it comes to healthcare and pharmaceutical businesses, which has helped it grow over the decades.
Abbott was founded in 1888, generates approximately $42 billion in annual revenue, and trades with a market capitalization of $189 billion. Abbott’s dividend-raising streak currently stands at 50 years, having become a dividend king at the end of 2021.
Looking ahead, we expect the company to deliver 5% annual earnings per share growth in the coming years, with margin gains representing a significant portion of this projected growth. The company’s revenue growth is expected to be moderate this year and next, given that it made significant gains from COVID diagnostics in 2020 and 2021. We believe Abbott can grow over the long term, but what was a tailwind became a headwind, at least temporarily. The company’s strong position in diagnostics and medical devices should contribute to longer-term growth.
Even though earnings are expected to fall this year, Abbott’s payout ratio is still only 40% of earnings. This means that not only is the dividend very safe, but also a long growth streak. Abbott’s earnings are fairly recession-proof given that it primarily sells non-discretionary products, but even in a severe economic downturn the dividend could continue.
Based on the low payout ratio and 5% earnings growth, we think Abbott could increase its payout by an average of 7% in the coming years, making it an excellent dividend growth stock.
Additionally, stocks are yielding 1.7% today, which is higher than the broader market. It’s also high for Abbott based on the past five years of trading history, so the stock offers value on that metric.
Kimberly-Clark Corporation (KMB)
Our next stock is Kimberly Clark Corp (NYSE:KMB), which is a diversified consumer products company that operates globally. The Company manufactures and sells various personal care and consumer paper products, including diapers, feminine products, facial and toilet paper, paper towels, napkins and related products.
Kimberly-Clark was founded in 1872, generates approximately $20 billion in annual revenue, and trades with a market capitalization of $46 billion. He also recently became a dividend king, sporting a 50-year streak of consecutive dividend increases.
We expect earnings per share growth of 5% over the horizon, driven by a combination of revenue gains and margin improvements. Kimberly-Clark has also seen a surge in demand thanks to COVID, with demand for paper products notably soaring. The company is currently riding through this headwind, but once it normalizes, we expect its strong cost-cutting program and modest revenue growth to deliver mid-single-digit annual growth.
We expect annual dividend growth of 4% for Kimberly-Clark, which is roughly in line with expected earnings growth. The company’s payout ratio is quite high at 80% of earnings, so growth will need to be at or slightly below the earnings growth rate to be sustainable. Kimberly-Clark’s earnings are highly predictable, so we don’t believe payout is in jeopardy, even in a recession.
Finally, the stock’s current yield is 3.4%, more than double that of the S&P 500 today, so Kimberly-Clark is an appropriate income stock.
3M Company (MMM)
Our latest dividend king is 3M Co (NYSE: MMM), a diversified technology and consumer products company that operates globally. It has several lines of business that collectively produce thousands of different products. Examples of products offered by the Company include safety and personal protective equipment, tapes and adhesives, packaging solutions, skin and wound care, dental products, filtration and purification systems. and stationery products.
The company was founded in 1902, produces approximately $36 billion in annual revenue, and trades with a market capitalization of $74 billion. 3M’s dividend streak is one of the best in the world over 64 consecutive years, making it a truly rare company when it comes to dividend longevity.
We expect earnings per share growth of 5% in the coming years for 3M, based on a combination of revenue growth, margin expansion and a small measure of share buybacks. The demand for the company’s product varies by industry, but given that it is extremely diverse, revenues and profits are quite predictable.
The payout ratio is only 54% on this year’s earnings, so the company has plenty of avenues for a drop in earnings before payout is in jeopardy. Given the 64-year streak of consecutive increases, we obviously don’t think a dividend cut is a realistic probability.
We estimate dividend growth of 3% in the coming years, given that recent dividend increases are at the lower end of the spectrum. The company uses cash to deleverage, invest in growth and acquire growth, so we view dividend growth as a lower priority.
However, the current yield is extremely high at 4.6%, so income investors are unlikely to mind modest increases in payout with three times the yield of the S&P 500 coming from 3M.
It is important, especially during turbulent market times, that investors focus on finding the highest quality dividend-paying stocks for their portfolios. We see longevity as a key differentiator, and the Dividend Kings list is a great place to start. Abbott, Kimberly-Clark and 3M all have very safe dividends, high yields and the prospect of many more years of increased dividends to come.
Written by Josh Arnold for Sure Dividend
Companies mentioned in this article
Compare these actions Add these stocks to my watchlist
7 Small Cap Stocks That Present Long-Term Growth Opportunities
Before investing in small cap stocks, you need to be comfortable with the risk they present. By definition, a small cap stock is one with a market capitalization of less than $2 billion. But that leaves them prone to volatility. And when the market experiences a sell-off or a correction, these stocks can suffer big losses.
These concerns are magnified as the Federal Reserve pledges to raise interest rates as part of its effort to implement less accommodative monetary policy. And that means if your investing calendar winds down in the next few years, you might want to look elsewhere.
However, if you have a longer time horizon, quality small cap stocks have historically provided investors with a high growth opportunity. In this special feature, we take a look at seven small cap stocks. Some have an interesting story playing out right now. Others have a narrative that should act as a catalyst for the stock once the economy is back on solid footing.
Here are seven small-cap stocks that we think deserve a closer look.
Check out “7 Small Cap Stocks That Present Long-Term Growth Opportunities.”