There's no shortage of reasons investors love dividends. Besides the cash flexibility they provide, these payouts act as cushions during market swoons and amplify returns over long holding periods when you reinvest the income.
A dividend hike is also a useful sign for income investors, since it usually reflects expanding growth opportunities for the business, improving profitability, or both.
With that in mind, let's look at three dividend stocks that raised their payouts in recent weeks: Nike (NKE -0.18%), McCormick (MKC 0.44%), and Costco Wholesale (COST 1.01%). Here's why these stocks look like solid long-term investments today.
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Nike
Nike routinely announces its annual dividend increase in November, and this boost was its 19th consecutive hike. But there were some additional factors that made this year's raise worth following. The sports apparel titan endured collapsing revenue during the COVID-19 closures, meaning its payout boost implies good news about its rebound trajectory in the fiscal second quarter, which runs through November.
That recovery looked solid in the fiscal first quarter as sales dipped slightly and earnings jumped 11%. Investors are expecting more good news on the revenue side when Nike reports second-quarter results on Dec. 18. The company likely bounced back to growth in the core U.S. market, which dipped 1% last quarter after plunging 46% in the prior quarter.
CEO John Donahoe said Nike's 12% dividend increase reflects management's confidence in the company's financial strength and growth potential. That bright outlook has a lot to do with profit margin, which will expand as demand shifts toward direct-to-consumer sales and away from Nike's wholesale business. Higher gross margins translate into more cash available for the business (and for shareholders) over the coming years.
McCormick
McCormick has lifted its dividend each year since 1985, and that streak easily qualifies it as a Dividend Aristocrat. The company just boosted its quarterly payout from $0.62 to $0.68 per share, which translates into $0.34 per share following a 2-for-1 split that was just completed. Yet that impressive record is just one reason to like this spicing and flavorings giant today.
For another, consider that McCormick notched surprisingly strong sales through the pandemic as rising demand for its home-cooking solutions outpaced losses in its restaurant supply segment. The management team had been bullish about the growth potential of its niche before COVID-19, and that optimism has only grown thanks to new habits being formed around dining at home.
A McCormick investment also gives you exposure to a company with a great track record for value-creating acquisitions. The French's and Frank's condiment buyout is one recent example, and the chain's $800 million purchase of the Cholula hot sauce brand might quickly land a spot in that list of tack-on wins. McCormick's ample cash flow supports these aggressive moves without threatening shareholders' hopes for an ever-rising dividend payout.
Costco
Costco isn't your typical dividend stock. The warehouse retailer's executives prefer to supplement a modest payout ratio (the percentage of earnings allocated toward dividends) with lump-sum outlays like the $10 per share bonanza it announced last month.
There's no predicting when such a boost will happen, but it occurs frequently enough to push that payout ratio well above its reported 40% mark. Contrast that record with Home Depot, which aims to pay about 55% of annual earnings as dividends.
COST Payout Ratio data by YCharts.
Costco in 2020 has benefited from some of the same trends that lifted Home Depot's business, including surging consumer spending in discretionary categories at the expense of areas like travel and dining out. But market-thumping growth is normal for this business, which went public in 1985 and became the world's second-biggest retailer just 30 years later.
Costco will announce its fiscal first-quarter results on Dec. 10, while issuing an update on holiday shopping trends. The chain is likely to make bullish comments about the year ahead. And, like the other successful dividend stocks mentioned above, those remarks will be backed up by a steadily growing payout.
The warehouse retailer typically announces increases to the regular dividend in the spring, so investors will have to wait a few more months for details about next year's bump from the current $0.70 per share quarterly payout.
