There is a name for stocks that consistently produce rising dividends, Dividend Aristocrats. They are considered the best of the best among income-producing stocks because they have generated dividends that have increased for at least 25 years straight. That status alone indicates consistent earnings and great stability through various market cycles. It is no guarantee, of course, of similar future results. But a good bellwether for how resilient a dividend stock was occurred in 2020, particularly for stocks in the financial sector, which got hammered by the pandemic.
One high-yield Dividend Aristocrat in particular that didn't flinch through the pandemic and increased its dividend for the 34nd straight year was T. Rowe Price (TROW -0.79%). And this year, the asset manager raised its dividend once again, for the 35rd consecutive year. Here's why this is a high-yield dividend stock you can trust.
Image source: Getty Images.
An above-average yield driven by consistent earnings
In February, T. Rowe Price increased its quarterly dividend for the 35th straight year raising it 20% to $1.08 per share. At a stock price of $189 per share, it pays out the dividend at a yield of 2.28%, which is considerably higher than the 1.38% average dividend yield on the S&P 500 index.
There are a lot of reasons why this is a great and trusted stock for not just dividends, but capital appreciation. The asset management firm has had consistent revenue and earnings growth over the years, far outpacing others in the sector. Revenue growth has averaged about 11% per year over the last 10 years through 2020, while earnings per share have grown at almost 14% per year over that same time period.
The company's stock price was up nearly 24% in 2020 and has gained nearly 26% in 2021 year to date. Over the past 10 years, the stock price has returned about 15% annually.
Debt-free and lots of cash
The consistent and strong earnings have provided an excellent foundation on which to deliver dividend increases. In the first quarter of 2021, the momentum continued as net revenue was up 25% year over year to $1.8 billion. Most of the revenue, $1.1 billion, came from management fees on its mutual funds, an increase of 20%. Revenue from its separate accounts, sub advised funds, and investment trusts gained 41% to $637 million. Earnings per share were up 125% year over year to $3.17 per share.
Through its performance, T. Rowe Price has gained a reputation as one of the premier active managers, gaining market share in a decade that was dominated by indexers by having many of its funds outperform their benchmarks. https://www.troweprice.com/content/dam/trowecorp/TROW%20Q1%202021%20Earnings%20Release.pdf
While T. Rowe Price will continue to benefit from its record and reputation as a leading active manager, it branched out into exchange-traded funds, or ETFs, last year, launching four actively managed ETFs. In March 2021, it rolled out its first environmental, social, and governance (ESG) fund, the Global Equity Impact Fund. https://www.troweprice.com/content/dam/trowecorp/IBD%20Trusted%20Financial%20Companies%20C109693_finaleprint.pdf
The company is in a great spot to adapt and thrive in the years ahead because of its near-perfect balance sheet. T. Rowe Price has literally no debt and $2.8 billion in cash on hand, up 33% from the start of the year. It also has high margins, with a 44% operating margin, on which to generate more free cash flow for investments -- and dividends.
This is one of the best dividend stocks ion the market and one that investors should trust to produce steady income.
