What do wearables, car parts, and fertilizer have in common? According to our Motley Fool investors, dividend-paying stocks serving those three markets offer compelling reasons why investors should be buying shares. Their top under-the-radar dividend stock picks are Garmin (GRMN 1.42%), Genuine Parts (GPC 0.95%), and The Scotts Miracle-Gro Company (SMG -0.51%).
Guide me to a 4% yield
Demitri Kalogeropoulos (Garmin): Garmin is one of just a few dividend stocks in the S&P 500 that currently pay a yield above 4%. Yet the shares are trailing the market this year as many investors steer clear of the GPS device specialist.
Sure, the product category it was once best known for, automotive GPS navigators, is shrinking now that the functionality comes embedded for free in most smartphones. But Garmin's portfolio can take the hit. After all, the company overcame a 17% decline in its automotive segment last year with help from soaring growth in the wearable fitness category. All told, it posted a 7% sales increase in 2016 as gross profitability expanded by more than a full percentage point to 55.6% of sales.
CEO Cliff Pemble and his team are forecasting slower, but positive, overall growth in 2017 as the wearables market matures. But Garmin's product pipeline is stacked with new releases, especially on the higher end of the category, that should keep profitability well above 50% of sales.
Caution signs include the fact that its $2.04-per-share dividend amounts to a hefty 75% of the earnings that the company expects to generate in 2017. Income investors can't count on steady annual raises, either, given that Garmin left its dividend unchanged in two of the last four fiscal years. That said, the stock's cheap P/E valuation and unusually high yield do offer investors an attractive mix of capital appreciation potential and income.
From car parts to big dividends
Dan Caplinger (Genuine Parts): For every well-known company in the stock market, there are many that mostly escape investor attention. Some of those often overlooked companies have put in amazing performance over the long run, and Genuine Parts has turned its basic business of providing automotive parts and components into a huge long-term dividend success story.
Genuine Parts is the company behind the NAPA Auto Parts brand, and the company's auto parts distribution business has been doing well in recent years. A booming auto industry has helped, but over the past 12 months, it has also raised some concerns about the sustainability of record auto sales and the possible fallout on Genuine Parts. That's one reason why the stock price has retreated.
For long-term dividend investors, Genuine Parts has already proven that it knows how to get through tough business cycles. For more than 60 years, the auto parts specialist has given its shareholders annual increases to the dividend payments they receive. The most recent came earlier this year, and even though the boost added just 3% to its quarterly payout, Genuine Parts now boasts an impressive dividend yield of 3.25%.
A company that can weather cyclical declines and still pay its investors more money over time stands out in today's market. You might never have thought of Genuine Parts, but it deserves some attention from you now.
Planting seeds for growth
Todd Campbell (The Scotts Miracle-Gro Company): If you enjoy lawn care and gardening, you're probably familiar with Scotts Miracle-Gro's products, including grass seed, fertilizers, Ortho bug killer, and Roundup weed killer.
What you might not know, however, is that Scotts Miracle-Gro pays a 2% dividend yield, and it sells hydroponics products that are increasingly in demand as states legalize marijuana.
The company doesn't say how much money it's making per quarter from hydroponics products, but it's been steadily acquiring smaller companies to build up its footprint in this industry, and in the fiscal second quarter, hydroponics sales grew 22% year over year. In June, the company said that hydroponics revenue growth has resulted in a 17% year-over-year increase in sales in its Hawthorne Gardening business.
Currently, investors may be undervaluing this back-door marijuana stock because this spring and summer, companywide revenue is tracking below last year. In fiscal Q2, total sales dipped 4% to $1.2 billion. While decelerating sales growth isn't a good thing, it could be temporary. According to Scotts Miracle-Gro, a big reason why sales are lower this year is an unseasonably warm spring last year that boosted sales.
Despite the tough year-over-year comparison, Scotts Miracle-Gro's expectations for the full year are far from a disaster. The company still estimates fiscal year sales will inch up 3% to 4% and EPS will clock in at $4.10 to $4.30. The company's ongoing profitability should provide management with plenty of financial firepower to keep acquiring smaller competitors, buying back shares, and paying dividends.
Assuming homeowners continue gardening and voters continue passing pro-pot legislation, I believe Scotts Miracle-Grow can deliver stable, dividend-supporting revenue growth for years to come, and that makes it an unconventional dividend stock that's worth considering.