AT&T. ExxonMobil. Philip Morris. These are the types of names that are likely to come up when top dividend stocks are being discussed. This class of dividend stock is famous for good reason, typically offering characteristics like high yields and long histories of payout growth, but there's no shortage of other companies that pass cash along to shareholders -- and some have virtues that are being broadly overlooked. Some of these lesser-known dividend plays will even wind up delivering better performance than their more famous counterparts.
With that in mind, we asked three Motley Fool investors to profile an income-generating stock that's currently flying under the radar but has some truly amazing qualities. Read on to see why they think Nielsen Holdings (NLSN), Vail Resorts (MTN 0.82%), and The Walt Disney Company (DIS -1.38%) are top dividend stocks that aren't getting their due.
Survey says this stock's dividend is safe
Rich Smith (Nielsen Holdings): I'd bet dollars to donuts you've heard of Nielsen Holdings, -- it's the company that tells you how many people watch which television shows -- right? It's the company whose data basically determines whether your favorite show on TV will get renewed or canceled next season. But while I'm pretty sure you know who Nielsen is, I'd also bet you don't know that Nielsen Holdings is an absolutely amazing dividend stock.
With a dividend yield of 4.2% Nielsen Holdings pays dividends more than twice as generous as the average stock on the S&P 500. Currently, its net income is low enough to make that dividend payment look overgenerous, as it consumes more than 100% of the company's GAAP earnings. And yet, according to data compiled by S&P Global Market Intelligence, Nielsen actually generated positive free cash flow of more than $1.2 billion last year -- roughly three times its $429 million in reported GAAP earnings, and more than enough to cover the company's $474 million in annual dividend obligations.
Long story short, despite what the company's payout ratio might imply, Nielsen is generating plenty of cash to ensure the longevity of its dividend. Nielsen also has a plan in place to cut costs, grow profit margins, and ensure "double-digit GAAP earnings per share" growth over the next two to three years. If it succeeds in doing that, Nielsen's stock performance could be just as amazing as its dividend yield.
A big dividend bump
Tim Green (Vail Resorts): Winter sports are big business, and Vail Resorts is one of the best ways to invest in the continued popularity of skiing and snowboarding. The company operates five of the top six most visited mountain resorts in North America, including Vail, Breckenridge, Park City, and Whistler Blackcomb. And it's not too shabby as a dividend stock either.
Vail Resorts boosted its dividend by 40% when it reported its second-quarter results in March. Its new quarterly dividend is $1.47 per share, good for a forward dividend yield of 2.6%. That big increase was partly the result of the tax bill passed last year; going forward the dividend will likely grow along with earnings. Vail expects to produce earnings as high as $9.40 per share in fiscal 2018, putting the payout above 60% under that optimistic scenario.
Investing in Vail Resorts comes with some risks. The stock is expensive, trading for 24 times the high end of the company's guidance range. And the company is highly dependent on the weather cooperating, requiring enough snowfall to drive visits to its resorts. The Epic Pass, which provides unlimited visits to some resorts and other perks, helps mitigate this issue to a degree by locking in revenue early in the year.
If you're willing to pay a premium for a high-quality dividend stock, Vail Resorts should be on your list.
Hiding in plain sight
Keith Noonan (Disney): With one of the most recognizable brands in the world, most investors will be familiar with Disney. However, it's also true that the stock's appeal as an income-generating investment doesn't get nearly as much credit as it deserves. A 1.6% dividend yield that comes in below the S&P 500 average of roughly 1.8% and well below the 10-year treasury bond yield of 2.9% helps explain why Disney's dividend is often overlooked, but that's only part of the picture.
The House of Mouse has nearly doubled its payout over the last five years, is in position to continue delivering healthy dividend growth, and its stock trades at prices that make it attractive to stake a long term position and set the dividends to reinvest as Disney continues to deliver payout growth. The cost of distributing its current payout comes in at just 27% of trailing free cash flow, and an unrivaled stable of entertainment properties and strong synergy across its businesses suggest the company will continue to expand and grow its payout even amid some current challenges.
With strong growth for the company's theme parks segment and its film unit looking more dominant than ever, the company should be able to offset pressures presented by cord-cutting and declining ratings at its media networks segment. The acquisition of Twenty-First Century Fox's non-news entertainment assets will also add to the strength of Disney's library and give it new sports and content assets to aid its ventures in the streaming space.
Shares trade at roughly 14 times this year's expected earnings, and, with underappreciated growth prospects and a returned income component that's likely to attract a lot more attention in the coming years, I think Disney stands out as a top dividend stock to own for the long term.