The U.S. stock market has roared back from the lows of the year, but the economy is by no means out of the woods. The novel coronavirus pandemic continues to keep a lid on the potential recovery of the economy, while unemployment remains at an elevated level. In an uncertain environment, risk-averse investors looking for safe income should focus on quality dividend stocks.
Specifically, we recommend investors take a closer look at the dividend kings, a group of just 30 stocks that have each increased their dividends for at least 50 consecutive years. The dividend kings have stood the test of time, with the unique ability to continue raising their dividends each year, even during recessions.
The following three dividend kings have solid dividend yields, growth potential and most importantly, safe dividend payouts backed by strong revenue and earnings:
Dividend Stocks: Altria Group (MO)
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Altria is the top tobacco company in the U.S., with its flagship Marlboro cigarette brand that captures more than 40% retail market share. The company has a diversified business which includes various tobacco products such as cigarettes and cigars, along with smokeless tobacco, wine, and a 10% investment in beer giant Anheuser-Busch InBev (NYSE:BUD).
Altria is a top dividend king for many reasons. Not only has it raised its dividend for more than 50 years in a row, the stock also provides a very high dividend yield of about 8.7%. This makes it the highest-yielding dividend king.
The company should be able to continue increasing its dividend for many years, as it enjoys tremendous competitive advantages. The tobacco industry is not a capital-intensive business, which gives Altria huge free cash flow that is used in large part to pay shareholders a hefty dividend. Altria also enjoys brand loyalty, a natural benefit of selling an addictive product. Finally, tobacco is a very recession-resistant business, as demand holds up even when the economy enters a downturn.
Altria has continued to generate stable profits throughout 2020. In the second quarter, revenue of $5.06 billion fell 2.5% year-over-year. Adjusted earnings-per-share came to $1.09, up 1% year-over-year. Net revenue and adjusted EPS rose 3.9% and 8.5%, respectively, over the first half of 2020. For the full year, Altria expects its 2020 full-year adjusted diluted EPS to be in a range of $4.21 to $4.38, representing a growth rate of 0% to 4% from an adjusted diluted EPS base of $4.21 in 2019.
Management has a target dividend payout ratio of 80% of annual adjusted EPS. Therefore, the current annual dividend payout of $3.44 represents a 2020 dividend payout ratio of approximately 80% using the midpoint of earnings guidance. This shows the current dividend is in-line with management’s target payout ratio.
National Fuel Gas (NFG)
National Fuel Gas is a diversified energy company. It is a high-ranking dividend king because it has a high yield of 4.3%, but it is also unique as it is the only energy stock on the list of dividend kings. This is not entirely surprising, as the energy sector is a notoriously cyclical industry. Oil and gas is a “boom-and-bust” industry, due to its reliance on underlying commodity prices, which can be volatile.
Indeed, oil prices fell from over $100 per barrel to less than $30 from 2014 to 2016. After a modest recovery, oil prices have swung below $40 again on renewed concerns over a global supply glut and weak demand due to the Covid-19 pandemic. This reality makes it even more impressive that National Fuel Gas has increased its dividend for more than five decades.
And yet, National Fuel Gas achieved dividend-king status. This is partly due to the company’s diversification. National Fuel Gas operates five business segments: exploration and production, pipeline and storage, gathering, utility, and energy marketing. It is a diversified business across upstream, midstream, and downstream. The company’s upstream assets located in the Marcellus and Utica shale formations have production capacity of 800 million cubic feet of gas per day. Midstream operations include pipeline infrastructure, while its downstream segment provides utility services.
This mix provides a balance between regulated, stable businesses such as pipelines and utilities with cyclical areas such as exploration and production that rely on commodity prices. Not being fully exposed to the swings of oil and gas prices has served National Fuel Gas well over the years, including 2020.
In the most recently reported quarter, National Fuel Gas’s adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) declined 6% year-over-year. While so many energy stocks are reporting steep losses due to low oil and gas prices, National Fuel Gas generated adjusted operating earnings-per-share of $0.57 for the quarter. The company’s consistent profitability, even during recessions, secures the current dividend payout while leaving flexibility for future dividend increases to continue.
Lowe’s Companies (LOW)
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Lowe’s is the second-largest home improvement retail in the U.S., behind Home Depot (NYSE:HD). Both retailers benefit from structural tailwinds, specifically the strong housing market as well as the fact that they operate in a duopoly. The highly concentrated nature of the home improvement retail industry mean Lowe’s and Home Depot have the entire market to themselves, which provides lots of customers as well as strong margins.
Lowe’s is a growth-oriented dividend king. Many of the dividend stocks on this list operate in highly mature industries that lack growth catalysts. But Lowe’s continues to generate impressive growth, even during the coronavirus pandemic. For example, in the most recent quarter, Lowe’s adjusted earnings per share increased 74% to $3.75.
This huge level of earnings growth was due largely to 34% comparable sales growth (which measures sales growth at stores open at least one year). Comparable sales growth included 135% year-over-year growth for Lowes.com as the company benefits from explosive e-commerce growth.
From 2010 to 2019, Lowe’s grew its earnings-per-share by 18% per year, on average. This growth came as a result of the economic recovery in the aftermath of the Great Recession, and more precisely the strong performance of the U.S. housing market. This has led to high dividend growth as well. The company recently increased its dividend by 9%.
A high level of dividend growth helps make up for a somewhat disappointing current yield of 1.5%. The dividend yield is slightly below the S&P 500 average yield of 1.8%, making Lowe’s relatively unappealing for investors solely focused on high yields. But Lowe’s makes up for this with high dividend growth. For example, a dividend growth rate of 9% per year means an investor will see their dividends double every eight years. Therefore, investors with time in the market could generate higher income over time with Lowe’s than with some high-yielding stocks that cannot grow their dividend payouts.
On the date of publication, Bob Ciura held a long position in MO.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
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