Most companies that choose to redistribute a portion of profits to shareholders are mature, relatively slow-growing businesses. But not all dividend stocks are boring.
There are companies with mature business units that are also investing in promising growth opportunities. If they succeed in capturing new markets, then they might be able to grow their dividend payouts for years to come.
Take Scotts Miracle-Gro (SMG 0.58%) and Enterprise Products Partners (EPD 2.02%) as two great examples. The former is a leader in consumer lawn and garden markets, but is also a leading provider of hydroponics and other products to the fledgling cannabis industry. The latter rakes in cash flow as a leading midstream operator, but is taking advantage of American energy exports to expand business in lower-risk petrochemical markets.
Here's why these are two of the top dividend stocks to buy in January.
A dividend with room to Gro
Shares of Scotts Miracle-Gro jumped nearly 73% in 2019, which stacks up favorably next to the nearly 29% leap for the S&P 500. The business achieved levels of revenue, gross profit, and net income in fiscal 2019 (the period ending Sept. 30) that were either all-time records or the highest achieved since at least fiscal 2014.
The consumer segment bounced back from a rough 2018 by growing revenue and segment operating profit 8% and 6%, respectively, in the year-over-year period. Meanwhile, the closely watched Hawthorne segment doubled revenue from the year-ago period and achieved $53 million in operating income, compared to a segment loss of $6 million in 2018.
Investors might be confident that the business can maintain the momentum in the early 2020s. Scotts Miracle-Gro continues to reap the rewards of investments in consumer brand extensions. Products introduced in the last three years comprised 15% of total segment sales in fiscal 2019.
Additionally, the consumer lawn care leader simplified its marketing agreement for Roundup with Bayer, which is a quiet but important development for long-term shareholders to understand.
The Roundup brand of weed killers has always been embroiled in controversy, but the legal tides have been turning against it at an accelerated pace in recent years. That prompted Scotts Miracle-Gro to sell back its brand extension rights to Bayer for a cool $112 million in fiscal 2019.
The pair also made changes to the marketing agreement that should make the brand more profitable for Scotts Miracle-Gro beginning in fiscal 2020, while also reducing the company's exposure to the brand's growing risks.
For instance, Scotts Miracle-Gro could terminate the agreement by the end of fiscal 2022 and receive $175 million (given the sale of brand extension rights, this might be the strategy), or earn even higher payouts should Bayer offload the Roundup brand to contain its own risks.
Investors can also look forward to continued success in the Hawthorne segment. Scotts Miracle-Gro sells the products and infrastructure required to efficiently operate cannabis greenhouses, which allows it to capture the growth opportunity without fretting too much over state-by-state legislation. Revenue won't double again in fiscal 2020, but if segment margin continues to improve from the 8% mark achieved last year, then investors won't have to worry about the business weighing on overall operations.
If Scotts Miracle-Gro continues to execute and pay down debt balances, then investors with a long-term mindset might find the current 2.1% dividend yield pretty attractive.
Primed for continued growth
Units of Enterprise Products Partners gained only 14.5% in 2019, which doesn't look great next to the nearly 29% rise of the S&P 500. But the business should stand out to income investors for several reasons.
First, the business has increased its annual distribution for 20 consecutive years, which currently yields a whopping 6.1%.
Second, Enterprise Products Partners generated 85% of operating income from fee-based revenue in the first nine months of last year. Fee-based contracts are insulated from price volatility in the energy markets and provide much more predictable cash flow.
Third, the company is playing a central role in American energy exports, which are quietly positioning the United States to significantly reduce its goods trade imbalance in the next decade. The business is just getting started on that front.
Enterprise Products Partners exited the third quarter of 2019 with $9.1 billion of major capital projects under construction, although 40% of those investments won't begin operations until 2021 or later. The projects include pipelines, processing units, and storage infrastructure for handling crude oil, natural gas, natural gas liquids (NGLs), and even ethylene for customers or export markets.
Importantly, 70% of the capex required for major projects is dedicated to petrochemicals and NGLs, which offer higher margins and better growth prospects than more traditional crude oil and natural gas infrastructure. Once completed, the projects could generate an additional $1.2 billion to $1.8 billion of operating income per year. That would be equivalent to 16% to 24% growth from operating profits achieved in 2018.
To be blunt, units of the partnership haven't fared well in the last five years, losing 10% of their value in that span.
While it's been a difficult stretch for energy companies in general, Enterprise Products Partners might be guilty by association only. The business converts 19% of revenue into operating income, routinely funds significant portions of growth projects from cash flow, and easily covers distribution payments and increases.
If and when Wall Street grows more optimistic on the energy sector, then this dividend stock is likely to be a prime beneficiary.