After several lean years, income-focused investors have many more attractive options these days following a series of interest rate hikes by the Federal Reserve. Higher rates have put downward pressure on valuations, pushing up income yields.
Many high-quality dividend stocks currently yield around 3%, nearly double that of the S&P 500. American Tower (AMT), Coca-Cola (KO), and Johnson & Johnson (JNJ) stand out this month for their blend of yield and financial strength.
A towering dividend growth stock
American Tower’s dividend yield is currently over 3%, a historically high rate for the data-infrastructure real estate investment trust (REIT). The company has an exceptional track record of paying dividends. It has increased its payout at a more than 20% compound annual rate since converting to a REIT over a decade ago.
While dividend growth has moderated in recent years, it still expects to increase its payout by about 10% in 2023 compared to last year’s level after growing it by about 12.5% over the past year.
American Tower supports that payout with a strong financial profile. It generates enough cash to cover its dividend ($3 billion in 2023) and growth-related investment spending ($1.5 billion planned for 2023 on new international tower builds and U.S. data center developments).
Meanwhile, the REIT has a solid leverage ratio that it aims to reduce over the next few years, further strengthening its investment-grade balance sheet.
The company’s growth-related investments and organic growth drivers (adding more tenants to its towers and data centers) should boost its income in the coming years. That should enable American Tower to continue pushing its payout higher.
Coca-Cola is a cash-flow machine
Coca-Cola’s dividend is right around the 3% mark. The company has an amazing track record with payouts. It delivered its 61st straight year of dividend increases earlier this year after giving its investors another 4.6% raise. That kept it in the uber-elite group of Dividend Kings, companies with 50 or more consecutive years of increasing payouts.
The company generates prodigious cash flows, giving it the funds to allocate across its four priorities:
- Reinvest in growth: Coca-Cola plans $1.9 billion in capital expenditures (capex) this year.
- Continue to grow the dividend: The company has increased the payout by around 5% annually in recent years.
- Consumer-centric mergers and acquisitions: Coca-Cola will make acquisitions as opportunities arise to grow and build its capabilities.
- Net share repurchases: The company aims to at least repurchase enough stock to offset dilution. In 2023, it issued about $800 million in shares to employees and repurchased $1.4 billion of shares on the open market, putting its net repurchases at about $600 million.
Coca-Cola has ample financial flexibility to deliver on these objectives. It expects to produce about $9.5 billion in free cash flow this year after funding capex, which will easily cover its roughly $6.6 billion dividend outlay.
Meanwhile, the company has a fortresslike balance sheet. Coca-Cola has a leverage ratio of 1.8 times net debt (below its 2.0 to 2.5 target range), A-rated credit, and nearly $12 billion in cash equivalents on its balance sheet.
A very healthy dividend stock
Johnson & Johnson also currently yields around 3% and has an elite record of paying dividends. The company increased its payout by 5.3% this year, matching Coca-Cola with 61 straight years of dividend growth.
The healthcare giant is a financial fortress, which puts its payout on an extremely firm foundation. Johnson & Johnson has an AAA bond rating, matching it with one other company (Microsoft) for the highest in the world.
The company ended the first quarter with $33 billion in cash and marketable securities against $53 billion in debt, giving it a low net debt level. It recently used its balance sheet flexibility to acquire Abiomed for $16.6 billion in cash to bolster its MedTech division.
Johnson & Johnson generates tremendous cash flows to support its dividend and continued growth. The company produced $17 billion in free cash last year after investing $14.6 billion in research and development.
That easily covered its dividend ($11.7 billion) while allowing it to return additional money to shareholders ($2.5 billion in repurchases). The company’s growth-related investments should expand its cash flow so that it can continue its streak of increasing the dividend.
Excellent income stocks to buy this month
American Tower, Coca-Cola, and Johnson & Johnson are standout dividend stocks. They offer yields roughly double that of an S&P 500 index fund and have steadily grown their payouts over the years.
They back those above-average dividends with strong financial profiles, which should enable them to continue expanding their businesses and payouts in the future. The high quality of their above-average dividends makes them great stocks for income-seeking investors to buy this month.
— Michael DiLallo
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Source: The Motley Fool