Please ensure Javascript is enabled for purposes of website accessibility

1 Top Dividend Stock to Buy Now (It Might Surprise You!)

By Beth McKenna - Mar 29, 2017 at 11:23AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This growth stock's dividend is growing like gangbusters and investors should be able to count on continued robust dividend hikes.

A worthwhile dividend stock that many investors probably don't think of as such is toymaker Hasbro (HAS 3.23%). The company's brands include such perennial favorites as Nerf, Play-Doh, and Monopoly, and it has tight ties to entertainment powerhouse Walt Disney (DIS 3.69%).

Hasbro's dividend yield is currently 2.3%, which is somewhat on the modest side, but its dividend has been growing fast. Investors often miss out on good opportunities by looking only at current yield.

Various denominations of dollar bills in the shape of trees growing increasing taller to illustrate the concept of dividend growth.

Image source: Getty Images.

Outshining many popular dividend stocks

The term "dividend stocks" probably brings to mind the stocks of pharmaceutical companies, such as Pfizer; stocks of oil and gas powerhouses, such as ExxonMobil; stocks of century-plus-old consumer product titans, such as Coca-Cola; stocks of industrial goliaths, such as General Electric; and stocks of old-guard technology giants, like IBM.

As you can see below, not only has Hasbro's 345% total return (stock price appreciation plus dividends) outperformed all these stocks over the last ten years, but Hasbro's dividend has increased the second-highest percentage, trailing only IBM's. And while IBM's dividend has increased the most, its stock's 128% total return has considerably lagged Hasbro's. 

HAS Total Return Price Chart

For context, the S&P 500 returned 103% over the last 10 years. Data by YCharts.

If these same general dynamics continue, an investor's effective yield on his or her Hasbro stock, purchased now, would approach and eventually surpass his of her yield from the stocks of all these other companies purchased now (except IBM), even though they all currently have higher dividend yields than Hasbro. (Their current yields range from IBM and GE's 3.2% to Pfizer's 3.8%.)

A key thing to remember is that your effective yield is based on the price you paid for a stock, not its current price. It's important to consider a company's growth potential and related dividend growth potential even if your primary or sole goal for that stock is to provide you an income stream in the future. Of course, if you need a certain yield now that's higher than the 2.3% that Hasbro stock is yielding, then Hasbro stock isn't a good fit for you. 

Picture shows various Hasbro characters and brands, such as Nerf, Transformers, and Play-Doh.

Image source: Hasbro.

Plenty of room for continued dividend hikes

In February, Hasbro announced a 12% hike in its quarterly dividend, payable on May 15 to shareholders of record on May 1. This follows an 11% raise last year. 

Among the popular dividend stocks previously mentioned, IBM's most recent dividend increase of 7.7%, effective last June, is the highest. The others' most recent raises range from Pfizer's 6.6% down to ExxonMobil's 2.7%.

Moreover, unlike most of the stocks (ExxonMobil, Coke, and GE), Hasbro's cash dividend payout ratio (dividends paid divided by free cash flow) indicates that it has plenty of room to increase its dividend. Hasbro's ratio is 40.1%. While several factors come into play, a cash dividend payout ratio of about 60% to 70% or less suggests that shareholders can probably count on more dividend increases ahead.

HAS Cash Dividend Payout Ratio (TTM) Chart

Data by YCharts.

Hasbro's robust financial performance supports the dividend-hike party continuing. In 2016, revenue rose 12.8% as reported and 14% in constant currency, adjusted earnings per share soared 27.1%, and EPS on the basis of generally accepted accounting principles (GAAP) jumped 21.6%.

Moreover, 2017 looks bright. Hasbro's toy sales should get a nice boost from Disney's recent release of Beauty and the Beast, which is wowing moviegoers. And a strong slate of movies will follow that should drive toy sales: Disney's Guardians of the Galaxy Vol. 2 and Hasbro's Transformers: The Last Knight in the second quarter; Disney's Spider-Man: Homecoming in the third quarter; and Disney's Thor: Ragnarok, My Little Pony: The Movie, and Disney's Star Wars: The Last Jedi in the fourth quarter.

Yes, that's a lot of mentions of Disney. Hasbro's status as a favored Disney partner is a big reason for the company's strong performance, though Hasbro's internal brands, particularly Nerf and Play-Doh, have also been performing well in recent years.

A worthy component of a successful investing playbook

Hasbro's business isn't as immune as some popular dividend stocks to macroeconomic factors, so it's not a good match for all dividend investors. However, the company's robust financial performance and outlook coupled with its low cash dividend payout ratio make it a worthy choice for investors looking for a stock that has the potential to continue to outperform both from stock appreciation and dividend growth standpoints.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Hasbro, Inc. Stock Quote
Hasbro, Inc.
$85.74 (3.23%) $2.68
The Walt Disney Company Stock Quote
The Walt Disney Company
$97.78 (3.69%) $3.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/25/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.