Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.
This week I want to take a look at a company close to my heart that's only recently begun paying a dividend: Starbucks (Nasdaq: SBUX ) .
First off, let me put my biases out in the open. My name is Sean, and I'm a Starbucks addict. I have around 50 Starbucks gift cards currently on my dresser, I write at Starbucks practically every day, and I have more Starbucks memorabilia and trinkets than one man should have. In addition, I live just outside of Seattle, so Starbucks is infused in my blood.
With that off my chest, let's get into why Starbucks remains a great buy here because of its sector dominance, innovation, great leadership, and now its dividend.
When you think of the coffee sector, Starbucks is probably the first company that comes to mind. With approximately 17,000 locations throughout the world and expansion into China on its plate, Starbucks looks poised to grow for years to come. A lot of that has to do with its incredible pricing power. As a perceived leader in bringing easily accessible premium coffee choices to consumers, Starbucks is readily able to pass along food inflation costs to consumers without scaring them to its peers Dunkin' Brands (Nasdaq: DNKN ) or McDonald's (NYSE: MCD ) , who offer cheaper coffee options, and occasionally shorter lines.
What really makes Starbucks stand out from the crowd is its ability to innovate. I could spend a couple of articles listing off what I feel are important moves the coffee chain has made over the years, but I'll attempt to narrow it down to two key points.
Perhaps nothing is more important than Starbucks' move toward healthier food options. Like McDonald's with its introduction of salads and snack wraps, and Panera Bread (Nasdaq: PNRA ) , which relies on healthier food options and exclusive coffee products to drive sales, Starbucks' push toward natural, organic, and usually local food growers has been a significant boost to its business.
Starbucks has also mastered walking the thin line of growing independently while partnered with some of its rivals. Both Starbucks and Dunkin' Brands have K-Cup distribution partnerships with Keurig single-brew system maker Green Mountain Coffee Roasters (Nasdaq: GMCR ) . Yet Starbucks is also developing its own single-brew machine, the Verismo, which is slated to hit shelves sometimes in the coming weeks at a very competitive price point to the Keurig.
It has a great leader
I've said this before and I'll say it again: You cannot discount the effect that good leadership has on a company. Howard Schultz is a fantastic CEO and his leadership represents the primary reason that Starbucks reversed its stagnant sales growth in the late 2000s and is why he was chosen as a top CEO by me last year.
Schultz is the mastermind behind Starbucks' move into China, the introduction of its single-brew machine, the Verismo, its partnership with Green Mountain, its recently announced partnership with Square to bring mobile payments into 7,000 of its stores, and the introduction of more nutritious foods and beverages to its menu. Simply put, Starbucks' success rests squarely on Schultz's shoulders.
Now on to that dividend...
But, as we do every week, let's examine the real reason that Starbucks should have long-term investors excited: its dividend income potential.
As I mentioned previously, Starbucks only began paying a quarterly dividend in the second quarter of 2010. However, since the introduction of that dividend, its quarterly payout has already risen by a cool 70% to $0.17 from $0.10. Have a look at this rapid ascent for yourself:
The current yield of 1.4% may not seem like a head-turner, but keep in mind that Starbucks' current payout ratio of 36% is still low enough that it could enact both regular and sizable annual increases in its quarterly stipend.
Putting my biases regarding Starbucks aside, it'd be hard to argue against a company that is hitting on all cylinders. Its food and beverage mix is producing reasonably strong same-store sales growth, and it's utilizing new products and payment technologies to improve its customers' experience within its stores. As Starbucks moves deeper into China and its peers struggle to penetrate an already saturated U.S. market, it's quite likely that Starbucks' dominance will only be enhanced moving forward, as will its dividend.
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