While many investors stick to well-known blue-chip companies -- often overpaying for the name -- when looking for a good dividend stock, putting a little extra work to uncover lesser-known dividend stocks can really pay off. And that doesn't mean you have to hunt where other investors are afraid to go; we aren't talking high-risk investments, either.
For instance, TerraForm Power Inc. (TERP) is easy to miss because it operates in what's still something of a niche: owning renewable energy projects and selling the electricity to utilities and industrial users. Then you have Stanley Black & Decker, Inc. (SWK -1.41%), the company behind a handful of relatively well-known tool brands but not one that's widely known among investors. It can get even more obscure, like Petmed Express Inc. (PETS -1.82%), the online pet pharmacy that's certainly not a household name for most people and certainly not investors.
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But three Motley Fool contributors say they're exactly the kind of stocks dividend investors should look for. Whether you're looking for high yield (TerraForm Power), attractive dividend growth (Stanley Black & Decker), or a mix of both (Petmed Express), there's something for every kind of dividend investor to like. Keep reading to learn more about these three appealing -- if obscure -- dividend stocks.
A timely buy for big income growth
Jason Hall (TerraForm Power): Since peaking a few days after Brookfield Asset Management took a controlling stake last October, renewable energy producer TerraForm Power's stock price is down over 23% at recent prices. But with a new go-forward strategy under Brookfield that's starting to pay off, the big drop in its stock price has created an excellent opportunity to buy.
To start, TerraForm's portfolio of renewable energy assets continue to perform well, generating solid returns. Furthermore, the company is on track to drive down its expenses around $25 million this year, which would boost distributable cash flows by 8% without having to add a single watt-hour of power production.
But its management team is exploring growth, as renewables become a cheaper, bigger piece of the global mix. It recently acquired European renewable power producer Saeta for approx. $1.2 billion, adding over 1 gigawatts of wind and solar production solid under contracts with an average of 15 years remaining.
Here's the kicker: Terraform is on track to pay a 7.1% dividend yield at recent prices, and it plans to continue growing the payout 5%-8% annually over the next five years. With an excellent management team now in place since Brookfield took over as sponsor, I think TerraForm Power should easily meet those targets.
Excellent management, great assets, and a solid plan for growth. That's an excellent combination that investors can buy for a very reasonable price today.
Powering shareholder value
Daniel Miller (Stanley Black & Decker): Although Stanley Black & Decker, Inc. is a common household name and well-known for its power tools and other products, it's commonly overlooked as a dividend stock. And while its 1.8% dividend yield won't jump off the screen and grab your attention, its long dividend history is impressive. Stanley Black & Decker has paid a dividend for 141 consecutive years and has increased it annually for the past 51 years, which reflects the company's ability to generate consistent and strong cash flow.
It's been a bumpy 2018 for the company, which has shed almost 20% of its value year to date. It reduced earnings guidance in April from a one-time tax charge, and rising material costs have weighed on quarterly results. But those are short-term issues and the second quarter was impressive despite headwinds. Through organic growth as well as acquisitions, the company is working toward growing its top line to $22 billion by 2022, up from $12.7 billion in 2017, a strategy management called 22/22 Vision.
Stanley Black & Decker is poised to expand globally through emerging markets, it expects to generate revenue synergies with the integration of Irwin and Lenox, and its e-commerce strategy has upside in the years ahead -- all of which will fuel top- and bottom-line growth. The good news is that its dividend should continue to grow right alongside its top and bottom lines: Management is committed to returning roughly 50% of its free cash flow to shareholders via dividends.
An unknown dividend growth stock
George Budwell (PetMed Express, Inc.): Online pet medication retailer PetMed Express probably isn't on the radar of most income investors. It's fairly unheard of for a small-cap company like PetMed to even pay a dividend after all. However, I think this rapidly growing pet care company is definitely worth checking out by dividend investors for a couple of reasons.
First off, PetMed sports a respectable yield of 2.87% following its recent dividend hike last month. In fact, PetMed's current yield is now on par with some of the best dividend-paying healthcare stocks out there. And if that weren't enough, the company also appears set to continuing growing its dividend at a healthy pace for the foreseeable future.
Turning to the specifics, PetMed has raised its dividend by 11% per year, on average, for the past five consecutive years, and this favorable trend is showing no signs of changing course anytime soon. PetMed presently sports a 12-month trailing payout ratio of only 45.2% and is forecast to grow its top line by a noteworthy 8.3% next year. In short, the company should have plenty of room and financial firepower to expand its payout going forward.
Next up, PetMed's shares are incredibly cheap right now. Thanks to a double-digit downturn this year, its stock is trading at a rock-bottom price-to-sales ratio of 2.74. While it's not entirely clear why PetMed's shares tanked this year (a razor-thin miss on Q2 earnings doesn't fully explain this drop, if you ask me), the fact of the matter is that you won't find many companies growing their top line by high single digits that also offer an above-average yield at this bargain-basement valuation. As a result, I think dividend investors would be wise to grab some shares while this top pet care company is on sale.