Having a few trusty dividend stocks that you can approach with a "set it and forget it" mindset takes a lot of the stress out of investing, and such investments can play a key role in your efforts to craft a portfolio that delivers market-beating returns.
For this dive into promising income-generating stocks, I'll be looking at three companies that have recently been making headlines for their strong performances. Two are technology giants that are benefiting from the growth of recurring revenue streams -- Cisco Systems (CSCO 1.64%) and Microsoft (MSFT 1.50%) -- and the other is an apparel stalwart on the rebound as one of its key lines is heating up -- Hanesbrands (HBI 5.20%).
The rapid growth of the Azure cloud services platform over the last five years has helped Microsoft deliver impressive earnings growth and notch one of the best performances of a Dow tech stock in recent years. The company's transition to a focus on cloud, subscription-based software delivery, and artificial intelligence have powered that strong performance, and it looks poised to keep reaping the rewards of that successful transformation.
Microsoft stock yields roughly 1.7% at current prices, a less than earth-shattering yield, thanks to payout hikes that haven't quite kept pace with the past few years-worth of big share price gains. Still, the company has a strong balance sheet, and appears to be on track to keep growing its free cash flow at a healthy clip. To cover its distributions for the next year will take just 45% of its trailing free cash flow. It has raised its payout annually for 15 years straight, and its low payout ratios and business momentum suggest that shareholders can look forward to substantial dividend growth.
The company has also been on a big stock repurchasing push, reducing its shares outstanding by 7% over the last five years and nearly 14% over the last decade. While buying back stock isn't always the best use of a company's capital, it has a positive impact on earnings per share. Buybacks also tend to make dividend growth easier to deliver over the long-term, so there are a range of points that bolster the case for Microsoft as a dividend growth stock.
Check out the latest earnings call transcripts for Cisco, Microsoft, and Hanesbrands.
Cisco is reaping the benefits of increased financial flexibility. It repatriated $67 billion in cash it had been holding overseas after the 2017 tax overhaul presented an opportunity to do so at a lower tax rate. The company is in the midst of a massive capital allocation push, doling out big bucks to purchase and integrate new companies that will help modernize the business and expand its competencies, buying back shares, and hiking the dividend.
The size of the company's recent 6% dividend hike was a deceleration from 2018's 16% payout increase, but the stock already offers a solid yield of roughly 2.8%. It's also worth noting that Cisco has increased its payout by an impressive 84% over the last five years.
There's evidence of real progress from its push into software, and with growth in its recurring revenue streams supplementing its core routing and switching hardware businesses, there are reasons to like the company's cash flow outlook, and to feel confident about its ability to continue delivering substantial payout growth. Besides dividend increases and share buybacks, shareholders can probably look forward to more big acquisitions in the near future. The company has made billion dollar deals to acquire businesses including Duo Security and BroadSoft within the last year, and it will likely continue to look for targets that it could use to improve its positions in cybersecurity and software as a service.
Cisco appears to be effectively leveraging its big cash pile and dominance in networking hardware to shore up its position in an information-technology sector that's undergoing some significant changes. With the company's push into cloud and security services proceeding commendably, Cisco stock has the profile of a dependable income generator.
Hanesbrands stock has rallied roughly 40% from the $11 per-share bottom that it hit late in 2019, but its yield still comes in at roughly 3.1%, and shares still have upside, trading at roughly 11 times this year's expected earnings.
The company's Champion brand has been posting impressive growth -- driven in part by an overall increase in the market for athleisure and active wear. In addition -- and this is almost strange to say, because Champion has been a quieter name in the sports apparel space compared to higher-priced players like Nike or Adidas -- the brand is hot.
Hanesbrands direct-to-consumer sales grew 20% year over year last quarter to account for roughly a quarter of business for the period. That's an encouraging development as it reflects interest in the company's products, as well as some increasing defensive fortitude against risk factors like Target and other large-channel retailers opting to move away from Hanesbrands products in favor of foregrounding their own house brands.
One big story from the recent quarter was that Champion sales in direct-to-consumer channels climbed by 50%. That was more than enough to offset a 4% decline in the brand's mass channel imprint as Target de-emphasized the C9 Champion activewear line, and it powered overall Champion brand sales to 33% year-over-year growth on a currency adjusted basis.
Hanesbrands' dividend has been flat since 2017, but it has been paying down debt after a big acquisitions push, and is approaching its target debt-to-EBITDA levels. With the cost of covering its current dividend coming in at less than 40% of trailing free cash flow, and the company on track to near its debt target in 2020, it could return to delivering substantial payout growth.