Many investors flock to bonds for portfolio diversification in volatile markets and for the fixed income they provide. But during this recession, bond yields have dropped, as interest rates have plummeted to the 0% range, where they are expected to stay for a while. At the same time, higher-yielding corporate and municipal bonds are fraught with greater risks of default due to the economy. As a result, many investors are turning to dividend-yielding stocks for income.
Of course, not all companies pay dividends, and among those that do, some are facing hardships and thus slashing or suspending their dividends. However, there are many stocks that are paying out more income to investors than bonds right now. Some of the best are considered Dividend Aristocrats, which are stocks that have had dividend increases for 25 years or more in a row.
If you are looking for a good dividend stock, look no further than this Dividend Aristocrat: T. Rowe Price Group (TROW -0.07%).
Annual dividend increases for 33 years ... and counting
T. Rowe Price is a Baltimore-based asset management firm known for its lineup of mutual funds. But its own stock is also a great investment. The fact that it has increased its dividend for 33 years in a row speaks to its consistent earnings power, through all the ups and the downs of the economy, including the tech bust and the Great Recession. And here we are in another recession, and T. Rowe just keeps rolling along, outperforming the sector.
T. Rowe's stock price is basically flat in 2020. But over the past five years, it has doubled, when you count dividends, compared to the S&P 500's return of 65% in that same time frame. This year, while most financial firms are struggling, T. Rowe saw revenue increase 1.4% to $1.4 billion in the second quarter year over year, while net income rose 8.3% to $539 million and earnings per share jumped 12.8% to $2.29 per share. In a testament to its consistency, over the past 10 years, T. Rowe Price has had only three quarters of year-over-year revenue declines, and one of those dips was just 0.8%.
T. Rowe's diversity of assets is one reason for its consistency. Its assets are about half mutual funds (54%), one quarter separate accounts or sub-advised assets (26%), and about one-fifth (18%) in retirement-date funds and other like investments. In addition, the company provides 401(k) recordkeeping and administration services for clients. In the second quarter, that diversification helped. Separate account and sub-advised revenue was up 15% year over year, while mutual fund revenues were down 4%. Plus, T. Rowe is considered one of the top active managers and has a good performance track record, with 70% of its funds outperforming the Lipper average over the past 10 years.
The other reason why T. Rowe has such a great and sustainable dividend is its balance sheet, which is impeccable. As of the end of the second quarter, the company is debt-free, with about $5.7 billion in liquid assets, including $2 billion in cash equivalents. This has allowed it to sustain its dividend while continuing to make strategic investments, like the recent $225 million technology upgrade and the launch of its first-ever exchange-traded funds (ETFs) in August -- the Blue Chip Growth, Dividend Growth, Equity Income, and Growth Stock ETFs.
A solid dividend payout
In August, T. Rowe declared a $0.90-per-share quarterly dividend, which has grown 57% over the past three years. The stock has a solid yield of 2.8%, about four times the current 10-year Treasury rate. The payout ratio, which is the percentage of earnings that goes to dividends, is 44% based on the trailing 12 months and 38% based on next year's projected earnings -- that's pretty good, as the lower the number, the most sustainable the dividend.
Nothing is a sure thing, but it is a pretty safe guess that this Dividend Aristocrat will increase its dividend next year, as it has done for 33 years, based on its track record and anticipated growth potential. Bottom line: T. Rowe Price is a great alternative to bonds.