Investors often buy growth stocks because of the capital appreciation they provide, but adding a dividend payout to the mix can juice a portfolio's returns.
Finding the right combination of a solid business offering a very attractive revenue stream isn't always easy, but Best Buy (BBY 1.09%), Hanesbrands (HBI -8.03%), and Leggett & Platt (LEG -1.32%) are a winning trio of stocks investors should consider for their portfolios.
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An electrifyingly good dividend payer
Eric Volkman (Best Buy): Best Buy isn't renowned as a dividend stock, and that's a bit unfair. The electronics retailer has been doling out a regular quarterly payout longer than many rivals have been in existence, having initiated it at the beginning of 2004 and dispensing it without fail every quarter since (yes, even through the financial crisis of the late 2000s, and inside the coronavirus pandemic).
The company is the best-in-class tech retailer because it is sturdy and adaptable. It's one of our era's big turnaround business stories, with many investors and pundits souring on the company in the early 2010s. Those were dark days for Best Buy, with its prior CEO resigning in the wake of an internal personal misconduct investigation, market share erosion by aggressive eRetailers like Amazon, and drooping sales.
When new leader Hubert Joly assumed the CEO role in 2012, the situation started to change fast.
In order to counteract the practice of "showrooming" that was eating the business of brick-and-mortar retailers, Joly introduced a price-matching guarantee that remains to this day. This naturally threatened margins, which the new CEO balanced with significant cost cuts. Following a nearly $1.4 billion net loss, according to generally accepted accounting principles (GAAP), in 2012 and a much narrower deficit of $249 million the following year, Best Buy has booked an annual bottom-line profit ever since.
These days, buoyed by smart management moves, the company is a monster of growth and profitability. For example, earlier this year it announced its own twist on trendy retailer membership plans with Best Buy Beta. This not only confers the standard free expedited delivery common throughout the industry, but also includes meaty perks like automatic two-year warranty protection on selected items, and a widened, 60-day return window for its goods.
While recent results are a bit distorted by the weak 2020 all retailers experienced due to the pandemic, Best Buy did smashingly well in its latest reported quarter. Its sales in the first quarter of fiscal 2022 rose to nearly $12 billion, which was not only 37% higher compared to the coronavirus-dampened Q1 2021, it also topped the company's pre-outbreak Q1 2020 by a still impressive 27%. Those 2010s bottom-line losses are becoming a hazy memory, with the quarter's net income rising more than three-fold to $595 million.
Best Buy surely has more growth in it, given the continuous upgrade cycle of its hotter product categories (smartphones, video game consoles, TVs, etc.) and the fact that it is the go-to electronics retailer for millions of consumers. As the company grows, that dividend is set to rise commensurately -- in fact, the company's free cash flow in fiscal 2021 was over $4.2 billion, far more than enough to cover the $568 million it spent on dividend payouts.
Image source: Hanesbrands.
This underdog could be a champion
Keith Noonan (Hanesbrands): The negative impacts the pandemic has had on the retail space are pretty well documented at this point. Hanesbrands was able to adjust better than many other players in the industry thanks to a quickly orchestrated pivot to producing face masks and protective wear, but this was only a temporary move, and the company has been left to deal with many other lingering challenges facing its industry. Even with the headwinds at hand, Hanesbrands has managed to put up pretty impressive performance, and it looks like the market may be underestimating the company's growth potential.
The clothing company managed to grow its sales 13% year over year in the second quarter, and sales for the period were also up 15% compared to 2019's quarter. The real stand out was the company's Champion brand clothing, which saw global sales climb 120% compared to the prior-year period and 21% compared to Q2 in 2019. With the popularity of the Champion brand helping the company accelerate its push into direct-to-consumer distribution through both brick-and-mortar and online retail channels, Hanesbrands has a hot sales growth engine that can also help steer the business toward better margins.
Even better, the stock looks cheaply valued trading at roughly 11 times this year's expected earnings and sporting a dividend yielding 3.1%. Investors who are prioritizing dependable payout growth in the near term will probably be disappointed to hear that the company's payout has been flat since 2017, but management remains committed to regular dividend payments as a core component of stock ownership, and there is a feasible path to significant payout growth in the not-too-distant future. Hanesbrands will make its 34th consecutive quarterly dividend payment at the end of this month, and management has indicated that it plans to get back to delivering dividend growth as earnings rise.
Hanesbrands may look relatively boring compared to Nike and other category leaders, but the often overlooked stock boasts an attractive returned income component and avenues to crushing the market's expectations.
Image source: Getty Images.
Giving investors a leg to stand on
Rich Duprey (Leggett & Platt): Consumers often buy products based on the brand of the company selling it, whether it's a smartphone, an electric car, or even a piece of furniture. Most of the time they don't think about the components that go into the product and where they come from.
Those types of businesses that support the brands are hidden from view, yet can make for rewarding long-term investments because they are so critical to the success of the brand name business to begin with. That's the case with Leggett & Platt, a manufacturer of engineered components and products that can be found in most homes, offices, and automobiles.
There's a good bet if you're a person that sleeps in a bed, you're likely using its products. That's because Leggett & Platt is the leading manufacturer of innerspring coils for mattresses and sofas, but also proprietary specialty foam for the bedding and furniture markets.
Its components can also be found in the auto and aerospace industries, furniture manufacturers, and flooring and textile businesses.
Founded in 1889, Leggett & Platt has a long history of returning value to shareholders through a dividend that currently yields 3.4% annually. Since it has raised the payout every single year since 1971, it is a member of a group of companies called Dividend Kings, or stocks that increase their dividends every year for 50 years or more.
Leggett & Platt says maintaining its place on this list of rarified stocks is essential, and it has one of the best records of dividend growth for any stock on the S&P 500.
So Leggett & Platt isn't what you would consider your typical retail stock, but because its components form the backbone of many of the essential products you can buy at stores and online, investors can be comfortable assuming this stock's juicy dividend will reward them for years to come.
