Concerns about overvalued stocks and volatility in the market abound. One cure for those worries is investing in Dividend Kings, a select group of stocks that have raised their dividends for 50 years or more. These companies have the ability to grow dividends and earnings in the long run despite wars, recessions, and other massive market hits. They are practically the definition of "safe" stocks.
Three that I particularly like are Johnson & Johnson (JNJ -0.69%), Emerson Electric (EMR -0.14%), and Black Hills Corporation (BKH 0.31%). You're probably familiar with Johnson & Johnson, one of the world's largest Dividend Kings. Emerson Electric and Black Hills Corporation are not exactly household names, but like Johnson & Johnson, they offer dividend yields of 2% or higher, above that of the typical S&P 500 stock, with safe payout ratios.
The share prices for Johnson & Johnson and Emerson Electric are up more than 9% and 15% respectively over the past year, while Black Hills is down more than 28% over the same period. But those data points have little to do with why these stocks are good buys. These are long-term picks that can provide you with consistent income.
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1. Johnson & Johnson is too big and too diversified to fail
Johnson & Johnson has been around for more than 130 years and has raised its dividend for 59 consecutive years, including a bump of 6.3% last spring to $1.01 per quarterly share. The increase gave it a yield of 2.41% and a trailing 12 months (TTM) cash dividend payout ratio of 56.39%. It has more than 130,000 employees and operates more than 250 subsidiaries across 60 countries.
Over the past 10 years, its dividend has climbed 77.19% and revenues have risen 32.92%. COVID-19 affected the company's medical devices and consumer health segments in 2020, with fewer medical procedures being performed. Revenue was down in the medical devices -- a reported 11.6% compared to 2019 -- while consumer health saw revenue remain flat, with a 1.1% increase compared to 2019.
The company's other segments, however, held steady, helping to earn the company $82.6 billion in sales, up 0.6% year over year. Pharmacy was the best performing segment, with a reported annual revenue of $45.5 billion, up 8% compared to 2019. The segment's stars were Stelara, an immunosuppressant used to treat plaque psoriasis, Crohn's Disease, and ulcerative colitis that reported annual revenue of $5.2 billion, up 20.6% over 2019 and the company's growing stable of oncology drugs, which improved sales by 27.4% as a group.
I expect a big rebound this year from J&J's medical devices and consumer health segments as the pandemic eases, and combined with the continued growth of its pharmacy segment, Johnson & Johnson will have little trouble covering its dividend payouts.
JNJ Dividend data by YCharts
2. Emerson Electric has a hand in nearly everything
Emerson Electric, like Johnson & Johnson, has been in business for more than 130 years. The Ferguson, Missouri-based company, which makes process controls systems, valves, and analytical instruments, raised its quarterly dividend 2% to $0.55 per share this year. It was the 65th consecutive year it employed a dividend increase. At its current share price, that works out to a yield of 2.36%, with a conservative cash dividend payout ratio (TTM) of 41.32.
Emerson Electric has two segments, automation solutions and commercial and residential solutions. Automation solutions is geared toward helping manufacturers be efficient and safe through integrated solutions, including process control systems, valves, and analytical instruments. Commercial and residential solutions include everything from home and commercial refrigeration, HVAC systems, thermostats, and food waste disposals, to vaccine temperature monitoring.
Last year, Emerson said nearly a quarter of its revenues came from automation process sales to oil and gas companies, which were hurt by the low price of crude oil. In the first quarter of this year, net sales in the segment were down a reported 6% year over year, but that was balanced by a 13% rise in net sales in commercial and residential solutions.
The company reported first quarter overall net sales of $4.2 billion, flat year over year, but earnings per share (EPS) was a reported $0.74, up 40% year over year. Operating cash flow was $808 million, up 90% over the same period in 2019. Even in trying times, the company has done a great job of protecting and increasing profit margins. Its EBITDA margin of 21.64% is superior to its sector median of 12.96%.
3. Black Hills Corporation is small but a stalwart
Black Hills Corporation is a relatively small electric and natural gas utility with a market cap of $3.88 billion. Founded in 1883, the South Dakota-based company services 1.28 million customers across eight states in the Midwest and Mountain West.
The company raised its dividend 5.6% to $0.565 per share last year, the 50th consecutive year it has increased dividends and the 78th year overall that it has offered a dividend. The yield on the dividend is a hefty 3.6%.
It's the only company of the three whose stock fell last year, but that's not a concern, as it had a solid year financially. Black Hills said it closed the year with $1.7 billion in revenue, compared to $1.2 billion in 2019. Net income for 2020 was a reported $227.6 million compared to $199.3 million the prior year. Adjusted EPS was $3.73, up 5.7% from the prior year. This is despite spending $755 million on utility infrastructure upgrades. The company said the improved earnings were due to higher rates, customer growth, and tax credits.
JNJ PE Ratio data by YCharts
Should you pick all three?
Johnson & Johnson is the biggest slam dunk choice of these three dividend stocks. It has the money to spend on research and development, but also has enough money to just purchase a profitable company and turn it into another subsidiary. Its scope makes it like a one-stock index fund, because if one segment is doing poorly, chances are that will be made up by gains in its other segments.
Black Hills may be the steal of the bunch. Because of its stock drop, it has the lowest price to earnings ration (P/E) at 16.90, which is low compared to the average for an electric utility of 20.24. Its forward P/E is 15.85, well below the industry average of 18.25. It also has the highest dividend yield of the three at 3.57%.
Emerson Electric is another good buy, with a P/E of 24.76 and a forward P/E of 22.77, both below averages for the engineering/construction sector. With rising oil prices, I see it likely to have a better 2021 than 2020.
