Here's My Top Dividend Stock to Buy in July

Yet another sharp dividend increase makes an already attractive dividend stock even more compelling.

Daniel Sparks
Daniel Sparks
Jul 2, 2019 at 8:05AM
Consumer Goods

Buried in the news about banks getting approved for dividend increases last week was another notable dividend hike that income investors may have missed. Supermarket grocer Kroger (NYSE:KR) announced a nice double-digit increase to its payout. The dividend increase gives Kroger a dividend that's well ahead of the average dividend yield of stocks in the S&P 500.

Here's a close look at Kroger's most recent dividend increase, the company's prospects for further dividend growth in the coming years, and why income investors may want to buy shares.

A roll of hundred-dollar bills next to a sign that says dividends.

Image source: Getty Images.

Boosting its dividend

Kroger is increasing its dividend by 14%, the company said in a press release last Thursday. This means Kroger's quarterly dividend is increasing from $0.14 to $0.16, or $0.64 annually. The dividend will first be paid out on Sept. 1, 2019, to shareholders of record as of close of business on Aug. 15, 2019.

"Kroger's 14 percent dividend increase underscores our Board of Director's confidence in the momentum we are building in the second year of Restock Kroger and our ability to deliver strong free cash flow," said Kroger CEO Rodney McMullen in the press release.

This higher dividend gives Kroger a meaningful dividend yield of 3%, easily beating the average dividend yield of stocks in the S&P 500 of 1.9%. 

Expect more growth

While a substantial dividend yield is nice for investors looking for income, investors want dividend growth, too. Fortunately, Kroger shines in that regard.

Showing how management prioritizes dividend growth, the company's dividend has increased at an average annual rate of 13% since the dividend was reinstated in 2006. In addition, the company has raised its dividend for 13 years straight.

If this dividend history isn't enough to demonstrate management's prioritization of dividend growth, consider that management explicitly stated in its press release about its dividend increase that it expects its payout to continue increasing over time.

In addition, Kroger's underlying business looks poised to easily support dividend growth. For instance, the company brought in an impressive $954 million in free cash flow (cash from operations less capital expenditures) in trailing 12 months, yet it paid out just $440 million in dividends. This means Kroger has plenty of wiggle room for its dividend, protecting it during a downturn and increasing the odds of substantial dividend increases in the coming years.


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Should income investors buy shares?

Perhaps the biggest downside to Kroger's dividend is the company's slow growth. Sales only increased 2% in Kroger's most recent quarter when adjusted to exclude fuel sales and the impact of selling its convenience store business unit. In addition, the company's non-GAAP (adjusted) earnings per share decreased slightly from $0.73 to $0.72 during the same period.

But investors should note that same-store sales are on the rise, increasing 1.5% in the first quarter of 2019. In addition, digital sales were up 42% year over year, highlighting the momentum of the company's Restock Kroger transformation plan. Further, Kroger expects full-year 2019 same-store sales to rise 2% to 2.5%. Pairing these metrics with the company's meaty dividend, Kroger looks like a solid bet for income investors.