Motley Fool - Sat Jan 20, 7:00AM CST
Dividend income can play an important role in an investor's long-term returns, but not all dividend stocks are worth buying.
Some high-yield stocks can be deceptive. For example, a company experiencing financial difficulty might be at risk of reducing its dividend payment. In this scenario, it's common for investors to discount the share price, and therefore demand a higher yield on shares to account for the risk of a dividend cut.
The most rewarding dividend stocks can sustain, and ideally increase, their dividends. Kraft Heinz(NASDAQ: KHC), Home Depot(NYSE: HD), and Realty Income(NYSE: O) are financially strong companies that can accomplish those goals.
What's more, last year's market sell-off leaves these top stocks trading well off their previous highs, pushing their dividend yields well above the S&P 500 average of 1.65%. Let's see why the following Motley Fool contributors believe these stocks are timely buys.
Kraft Heinz: 4.25% dividend yield
John Ballard (Kraft Heinz): Consumer staples have been a mixed bag for investors over the last few years. On one hand, these companies are struggling to grow sales volumes and relying mostly on price increases to grow their top lines. However, it's in challenging times like these when you can score a top dividend stock like Kraft Heinz at a high yield.
There's a lot to like about the Kraft Mac & Cheese owner. Sales only increased 1% year over year in the third quarter, but non-GAAP (adjusted) earnings per share grew 14%. Management is reinvesting the extra profits into the areas that it expects to drive more growth over the long term, such as better marketing and technology.
The investment in technology is already producing results. The company introduced new Heinz Remix machines last year that allow consumers to customize their own sauce flavors. These machines should be a solid growth driver for the company's foodservice business, which saw adjusted sales increase 9% year over year in the third quarter.
Another reason to like the stock is the company's international growth potential. Kraft Heinz saw adjusted sales in emerging markets increase by 10% year over year in the third quarter. As management continues investing in distribution and infrastructure in these markets, more growth is expected.
The stock is well off its previous highs and looks cheap, trading at a modest 12.6 times 2024 earnings estimates. The company paid out 65% of last year's earnings in dividends, bringing the dividend yield to an above-average 4.25%.
Home Depot: 2.33% dividend yield
Jennifer Saibil (Home Depot): 2023 was not the year for home improvement companies. All home-related industries were feeling the impact of increased interest rates, which translated into high mortgage rates and a housing slowdown. On top of that, customers are generally staying away from expensive products and remodeling when every penny counts.
Despite its celebrated retail model, home improvement giant Home Depot didn't escape this depressing trend. Sales and comparable sales were down 3% from last year in the 2023 fiscal third quarter (ended Oct. 29). Even worse, earnings per share (EPS) dropped from $4.24 to $3.81.
The good news is that these are short-term trends. And the company is using this time to improve its platform and become more efficient.
It's highly focused on its digital platform and connecting the physical and digital shopping experiences, and digital orders increased 5% over last year in the quarter.
One of its initiatives is to get more orders fulfilled through stores. This saves time in getting orders to customers, since the company doesn't have to send them from regional warehouses. It also saves money for the company, which doesn't have to keep up as many costly distribution centers. Half of orders were fulfilled by stores in the third quarter. These actions position Home Depot for a strong rebound when conditions become more favorable.
Home Depot stock has crept up 8% over the past year, but it's still 14% off of its highs from two years ago. At its current price, Home Depot's dividend yields 2.33%.
Home Depot is the largest home improvement chain in the world, with more than 2,300 stores and strong digital channels. Contrary to what you might expect, it still sees plenty of growth opportunities, and it opened seven new stores in the third quarter alone. It's likely to bounce back big, and that could happen quickly if the interest rate environment changes. Now is a great time to buy shares.
Realty Income: 5.28% dividend yield
Jeremy Bowman (Realty Income): Real Estate Income Trusts (REITs) are always a popular source of dividend income, and I can think of few that are more worth owning than Realty Income.
Realty Income specializes in single-tenant occupancy locations and operates through triple net leases, meaning that tenants bear the costs of insurance, maintenance, and property taxes. That helps streamline the company's business and reduce risk. Additionally, it favors renting to recession-proof retailers like Dollar General, 7-Eleven, and Walgreens, as well as related businesses, which also helps it generate stable cash flows.
Those companies tend to be stable and reliable business partners and are able to withstand economic shocks since they sell mostly consumer staples, or products that customers buy in any environment.
Realty Income has a long history of outperforming the S&P 500 on a total return basis, and the stock is nearly unbeatable as a dividend payer. Realty is one of the few stocks that pays a monthly dividend. It has a track record of paying 640 monthly dividends, and 104 consecutive quarterly dividend increases.
The company's business model makes it about as close to a sure thing as you can find for steady dividend growth on the stock market as it's able to pass along rent increases to its tenants, and its current dividend yield of 5.28% should please most investors. The stock should also benefit from falling interest rates, as investors are likely to move back into REITs for dividend income.
Now also looks like a good time to buy the stock as it's still trading 29% off its all-time high before the pandemic. Finally, the company's pending acquisition of Spirit Realty Capital should also provide further fodder for growth.
Should you invest $1,000 in Kraft Heinz right now?
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Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has no position in any of the stocks mentioned. John Ballard has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Home Depot and Realty Income. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.
I'm an experienced investor and financial enthusiast with a deep understanding of dividend investing and stock analysis. Over the years, I've honed my expertise through extensive research, practical application, and continuous learning in the field of finance and investment.
Now, let's break down the concepts used in the article from Motley Fool:
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Dividend Stocks: These are stocks issued by companies that pay out regular dividends to their shareholders from their earnings. Dividend income can be an essential component of an investor's total return.
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High-Yield Stocks: These are stocks with above-average dividend yields compared to the broader market indices, such as the S&P 500. While high yields can be attractive, investors should be cautious as they may indicate underlying risks, such as financial instability or unsustainable dividend payouts.
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Financial Strength: Refers to a company's ability to maintain profitability and financial health over the long term. Financially strong companies are more likely to sustain and potentially increase their dividend payments.
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Market Sell-Off: A period of widespread selling in the financial markets, often resulting in declining stock prices. Market sell-offs can create buying opportunities for investors to acquire stocks at lower prices, potentially leading to higher dividend yields.
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Consumer Staples: Companies that produce essential goods and services that consumers purchase regularly, regardless of economic conditions. These companies often exhibit stable demand for their products, making them resilient during economic downturns.
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Earnings Per Share (EPS): A company's profit divided by its outstanding shares of common stock. EPS is a key financial metric used by investors to assess a company's profitability and performance.
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Digital Platform: Refers to an online infrastructure or software ecosystem that facilitates digital interactions and transactions. Companies often invest in digital platforms to enhance customer experience, improve efficiency, and drive growth.
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Real Estate Investment Trusts (REITs): Companies that own, operate, or finance income-generating real estate across a range of property sectors. REITs typically pay out a high percentage of their income as dividends to shareholders and offer tax advantages.
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Triple Net Leases: Lease agreements where tenants are responsible for paying property taxes, insurance, and maintenance costs, in addition to rent. This arrangement reduces the landlord's expenses and risk exposure.
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Total Return: The overall return on investment, including both capital appreciation (or depreciation) and dividend income. Total return is a comprehensive measure of investment performance.
By understanding these concepts, investors can make informed decisions about dividend stocks and build a diversified portfolio aligned with their financial goals and risk tolerance.
