Dividend stocks might seem dull to growth-oriented investors, but they can generate stable returns through ugly economic downturns. Therefore, investors should always hold a few blue-chip dividend stocks, reinvest their dividends, and let the magic of compounding handle the rest.
Here are three dividend stocks that investors can comfortably buy and forget: General Mills (GIS -1.39%), Coca-Cola (KO -0.22%), and Cisco (CSCO 0.25%). Let's find out a bit more about them and why dividend lovers should consider them.
1. General Mills
General Mills, the packaged foods giant that sells Cheerios, Yoplait, Häagen-Dazs, and other well-known brands, disappointed income investors when it froze its annual dividend hikes in 2018. It did so to reduce its debt after its $8 billion takeover of premium pet products maker Blue Buffalo.
However, General Mills ended that freeze this September by raising its quarterly dividend 4% to $0.51 per share, which gives it a forward yield of 3.4%. It spent just 38% of its free cash flow (FCF) on its dividend over the past 12 months, which gives it plenty of room for future hikes.
General Mills' organic sales grew 4% in fiscal 2020, which ended on May 31, with a significant acceleration in the fourth quarter as the pandemic forced people to stock up on packaged foods. Its adjusted EPS rose 12% in constant currency terms.
That momentum continued in the first quarter of 2021, as its organic sales rose 10% and its adjusted EPS jumped 27% in constant currency terms. General Mills didn't offer any guidance for the full year, but analysts expect its sales to dip 1% and for its earnings to rise just 1%.
That slowdown isn't surprising, since General Mills will face tough year-over-year comparisons after the pandemic ends. But its underlying business is resilient, and the stock trades at just 16 times forward earnings.
Coca-Cola has raised its dividend for 58 straight years, making it a Dividend King of the S&P 500, meaning it has maintained annual dividend hikes for over half a century. It currently pays a forward yield of 3.1%, and it spent 95% of its FCF on its dividend over the past 12 months.
That cash dividend payout ratio might seem uncomfortably high, but it mainly rose because the pandemic shut down restaurants and other businesses that serve Coca-Cola's beverages earlier this year. Once the pandemic passes, Coca-Cola's payout ratios should cool off as it stabilizes its earnings and FCF growth.
Coca-Cola's organic sales rose 6% last year as its comparable EPS rose 1%. To counter declining soda consumption rates worldwide, the company is selling more non-carbonated drinks, bottled water, energy drinks, coffee, and even alcoholic beverages in certain markets. It's also launching healthier versions of its flagship sodas with less sugar and caffeine.
In the first nine months of 2020, Coca-Cola's organic sales fell 11% and its comparable EPS dipped 4%. Analysts expect its revenue and earnings to decline 11% and 10%, respectively, for the full year. But next year, they expect its revenue and earnings to grow 10% and 12%, respectively, as the headwinds wane.
Based on those forecasts, Coca-Cola's stock trades at 24 times forward earnings. That valuation is a bit high relative to its growth, but investors clearly believe Coca-Cola will recover -- as it did repeatedly throughout its 101-year history as a public company.
3. Cisco Systems
Cisco, the world's largest producer of networking routers and switches, struggled over the past year as its revenue declined year over year for four straight quarters.
Its infrastructure business, which generates over half its revenue, struggled with sluggish network upgrades, competition from rivals like Arista Networks, the loss of Chinese contracts during the ongoing trade war, and pandemic-related disruptions. Its smaller security business continued growing, but couldn't offset its other weaknesses.
Cisco's revenue declined 5% in fiscal 2020, which ended in July, but its adjusted earnings grew 4% as it cut costs and repurchased more shares. Analysts expect its revenue and earnings to both dip by about 1% this year, as macro headwinds continue to batter its infrastructure business, before returning to positive territory next year.
Those growth rates might seem dismal, but Cisco's core business should warm up again after the pandemic passes. Warmer relations between the U.S. and China under the Biden administration could stabilize its Chinese business, and it might pull customers away from Huawei as the Chinese tech giant struggles with trade blacklists and sanctions. A growing need for cloud and data center upgrades should also spark fresh orders for its routers and switches worldwide.
Cisco's stock won't rally anytime soon, but its low forward P/E ratio of 14 and its high forward yield of 3.3% should limit its downside potential. It's raised its dividend every year after its first payment in 2011, and it spent just 40% of its FCF on its dividend over the past 12 months.