These three stocks have a record of raising dividends.
Dividend-paying stocks always attract investor interest. However, with long-term interest rates heading down, and the Federal Reserve poised to cut short-term rates, getting income from equities seems particularly enticing.
Not all stocks present the same buying opportunity, of course. It’s important to look beyond the dividend yield to ensure the company can continue making payouts. Even better, you should look for those increasing payments.
The three stocks below have all lagged the overall market recently, but they offer a good opportunity to buy now — or add shares if you already own them.
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1. PepsiCo
PepsiCo (PEP -1.14%) has a stable of well-known and popular beverage, snack, and food brands. These include soda, chips, granola bars, and cereal sold under the Pepsi, Aquafina, Doritos, and Quaker banners, to name a few.
However, the stock has lagged the overall market over the past year. Shares have gained 1.5% compared to about 21% for the S&P 500 during this period. That’s likely because PepsiCo’s revenue growth has been sluggish lately. Second-quarter adjusted revenue grew 1.9% after removing foreign currency translations. However, convenience food volume fell 2 percentage points and beverages were flat.
The depressed volume is likely due to consumers stretched by higher prices. But this will undoubtedly prove temporary as inflationary pressures have faded. Nonetheless, despite low revenue growth, PepsiCo’s adjusted operating profit increased 10%. Management expects 4% revenue growth this year, and earnings per share to increase by at least 8%.
Meanwhile, PepsiCo shareholders will enjoy a 3.1% dividend yield versus 1.3% for the S&P 500. And the company has reliably increased payments. The board of directors has raised dividends for 52 straight years, including a 7% increase earlier this year. That makes the stock a Dividend King. PepsiCo, with a 73% payout ratio, can comfortably afford the payments.
2. Target
Target (TGT -0.49%) differentiates itself from retail competitors like Walmart by offering brands sold exclusively at its stores and on its website. These make up about one-third of Target’s sales.
There were some well-publicized inventory missteps in which management had too much stock of higher-priced items. Its subsequent discounting temporarily hurt Target’s gross margin and profitability.
Fast-forward, and these steps appear to have put the company in a strong position to benefit from a stretched consumer. Fiscal second-quarter same-store sales (comps) increased 2%. Stores comps grew 0.7% and digital comps were up 8.7%, helped by its drive-up and same-day delivery services. And its gross margin improved 1.9 percentage points to 28.9%. This covered the period that ended on Aug. 3.
Nonetheless, despite the positive earnings report, the stock price has underperformed the S&P 500 since the start of the year. Target’s shares have increased 6.2% while the S&P 500’s are up 13.4%.
That’s likely due to investor concerns about consumer spending. But this venerable retailer has proved it can pivot to what consumers want, and they will continue flocking to Target. The business also produces plenty of free cash flow (FCF). For the first half of the year, Target’s FCF was $2 billion. That easily covered the $1 billion in dividends.
In July, the company announced an approximately 2% increase in dividend payments, marking 53 consecutive years with a raise. Target has paid dividends since 1967. The stock has a 3% dividend yield.
3. Home Depot
Home Depot (HD -0.10%) generates the largest sales among home improvement retailers. Serving consumers and professionals, its sales totaled nearly $153 billion last fiscal year (ended Jan. 28) compared to $86 billion for rival Lowe’s Companies.
This size conveys certain advantages, such as brand recognition and economies of scale in areas such as purchasing. However, Home Depot’s results depend on the economic cycle to a certain degree since people update their homes when they’re comfortable with their financial situation.
Home Depot’s recent results have been weak as homeowners have struggled with higher interest rates and took a breather from major projects conducted during the early days of the pandemic. Its comps have been falling, including a 3.3% drop in the second quarter.
The weaker sales have been reflected in the stock price, which has increased just 4.4% in the past year. That’s badly lagged the broader S&P 500.
While the timing may be uncertain, people will conduct large projects at some point. They won’t hold back on projects forever, and borrowing costs will likely become more accommodating given that the Federal Reserve seems set to lower interest rates at its meeting later this month.
Patient investors can sit back and collect dividends, however. That’s because Home Depot continues to generate plenty of FCF. During the first half of the year, FCF was $9.3 billion, and it paid out $4.5 billion in dividends. Home Depot has raised dividends annually since 2010, and the stock has a 2.5% dividend yield.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot, Target, and Walmart. The Motley Fool recommends Lowe’s Companies. The Motley Fool has a disclosure policy.
