No dividend stock is perfect. Income investors often must choose between a strong sales growth record and a higher payout yield, for example. There's never a guarantee that a dividend will keep rising far into the future, either.
Heading into 2021, Procter & Gamble (PG 0.86%) offers a great balance between these competing investment factors. The growth and profitability trends of the consumer-staples giant are impressive, even as management is preparing to ramp up direct cash returns. Let's take a closer look at why P&G looks like a strong dividend buy for the year ahead.
Image source: Getty Images.
1. Unique operating strengths
P&G's business benefited from surging pandemic-related demand for many of its essential products including fabric care, healthcare, and home cleaning. Look a bit closer at this expansion trend and you'll see clear evidence of above-average gains, though.
The company was outgrowing the competition before COVID-19 struck, after all, with sales comfortably outpacing Kimberly Clark's (KMB -0.28%) in 2019. That global market-share gap has only widened recently. Organic sales in the last quarter shot higher by 9% thanks to robust gains in both volume and selling prices. Kimberly Clark, in contrast, grew sales 3%.
P&G holds the lead when it comes to profitability, too, even through Kimberly Clark is trying to catch up with its recent focus on cutting costs. The industry leader is finding room to slash expenses, too, which helped push operating margin up by 3 percentage points last quarter.
PG Operating Margin (TTM) data by YCharts.
The growth and profit trends show that P&G is in a uniquely strong position in an industry that's likely to stay central to consumers' lives in 2021 and beyond.
2. Soaring cash returns
P&G converts nearly all its operating cash flow into earnings, and that stellar efficiency pays off for shareholders. It funded billions of dollars in dividend payments and stock buybacks during the volatile 2020 selling year, with bigger results ahead. The company is targeting $16 billion of cash returns in fiscal 2021, up from $15.2 billion last year.
That level of return is only possible over the long term because P&G has the resources -- and the desire -- to continuously boost dividends without sacrificing growth initiatives.
3. A better dividend
You could achieve a full percentage point of higher yield today if you purchased Kimberly Clark instead. But P&G's 2.3% yield heading into 2021 still offers a nice cushion for a potentially rocky investing climate ahead. While Kimberly Clark is likely to announce its 49th consecutive year of dividend increases in early 2021, P&G hit that milestone many years ago. In fact, the Dividend King is preparing for its 65th annual raise.
The owner of global powerhouse brands like Tide and Pampers is expecting sales gains to slow a bit from the pandemic-fueled spike that started last spring. But its (recently boosted) outlook still calls for revenue to rise by a market-beating 4% to 5% through the fiscal year that ends in June.
The potential for more COVID-19 disruptions or economic slumps should keep investors feeling cautious about P&G notching a third-straight year of surprisingly strong growth. But one big reason to love dividend stocks -- especially in the consumer-staples niche -- is that these giants offer income protection that can stabilize a portfolio during wild investing environments. P&G's leadership status in that segment makes it an attractive addition to most income-focused portfolios.
