When it comes to picking stocks, sometimes it's better not to outthink yourself. The names you tend to see all the time on supermarket shelves and highway signs are there because they are established businesses with a massive presence and strong brands.
Turns out, those characteristics can also help reveal solid dividend stocks.
The world's largest brewing company
Keith Noonan (AB InBev): When it comes to brand and distribution strength in alcoholic beverages, no company can match AB InBev, and these advantages suggest that the beer giant has the potential to deliver a rare combination of impressive growth and income generation over the long term.
Last year saw the company complete its acquisition of SAB Miller, bringing brands including Miller, Blue Moon, and Foster's under a corporate umbrella that already included Budweiser, Stella Artois, and Busch. All told, the company now has over 500 alcoholic beverage brands, with 18 of these brands each generating over $1 billion in annual retail sales.
The merger also looks to create ongoing infrastructure synergies, with AB InBev reporting $252 million in merger-related cost savings in its last quarter and anticipating that the integration of the businesses will result in an additional $1.75 billion in expense savings over the next three to four years. SAB Miller's position in growth-rich markets including Africa and South America should also work to offset AB Inbev's soft performance in the North American market in the short term while paving the way for long-term growth.
Looking at the returned income component, AB Inbev's dividend yields roughly 3.6% -- a level that should look plenty tasty to income investors. The company has only distributed a dividend for seven years, but it's been aggressive in raising its payout over the stretch and plans to continue boosting its dividend. While management has stated that payout growth will be more modest in the short term as AB Inbev pays down debts, the stock already packs a potent yield and its potential for capital appreciation further sweetens the pot.
Cleaning up with dividends and growth
Rich Duprey (Clorox): Even a dummy should be able to see that a company that's raised its dividend every year for the past 40 years has a good chance of cleaning up tomorrow too. Bleach maker Clorox has done just that, most recently hiking its dividend another 5% to $0.84, which should push its yield to over 2.5% at current prices.
Although best known for its namesake bleach, Clorox actually owns a portfolio of leading brands in a number of consumer goods categories, including Brita water filters, Pine-Sol and Tilex cleaners, Kingsford charcoal, and Burt's Bees lip balm. More than 80% of Clorox's sales are generated from brands that hold the No. 1 or No. 2 market share positions in their respective markets.
In its recent earnings report, sales rose more than 5% to $1.48 billion, in line with analyst consensus views, on a 7% increase in volumes, while earnings of $1.31 per share beat out expectations by a penny. As a result, it raised the low end of its full year profit forecast to a range of $5.25 to $5.35 per share from previous guidance of $5.23 to $5.28 per share.
Now it's true that Clorox is priced like the dividend aristocrat it is. Although its stock trades at around the same multiple as the broad market index, it also goes for three times sales and nearly 100 times the free cash flow it generates. That does make such a mature, stable performer like Clorox seem expensive.
Yet the company has easily outpaced the S&P 500 over the past decade and its 167% total return over that time frame gives investors seeking both income and price appreciation a solid foundation. Certainly Clorox will experience periods of softness, particularly as a strong U.S. dollar pressures exchange rates, but because its products span so many parts of our daily lives, Clorox should be a steady, smart performer for your portfolio.
Milk & sugar?
Dylan Lewis (Starbucks): You pass one on your way to work, and your way to the gym... and on your way home even if you take the backroads shortcut nobody else knows about. Starbucks is everywhere, and the company's strategy of absolute ubiquity has turned the coffee brand into a cash cow business and regular part of most people's mornings.
In its most recent earnings report, the company showed all the markings of a strong business, beating top- and bottom-line estimates with growth of 6% and 13%, respectively. And yet the market said "meh" because of 3% same-store-sales growth and the fact that management revised earnings guidance down for the full-year. That change in the forecast was due to the company's plans to invest in itself, continuing to make upgrades in its digital offering and more niche concept locations -- both long-term plays that investors should be happy about.
The coffee maker has other levers to pull: comps in China were up 7% last quarter, and the company estimates they open a new store in the country every 15 hours, a clip management intends to maintain for the forseeable future.
Income investors might scoff at Starbucks' 1.6% yield, but the company has aggressively grown its dividend since initiating it in 2010. With the company currently paying out less than half of earnings via dividends, there's still plenty of room for that to grow.
Often dividend payers are staid, older businesses, but Starbucks offers investors the potential for dividend growth and meaningful share price appreciation. Not a bad bundle to take with you on your way to work.