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4 Top Dividend Payers of the S&P 500

By Josh Kohn-Lindquist – Jan 13, 2022 at 6:15AM

Key Points

  • Each stock currently pays a dividend between 1.1% and 4.2%.
  • The highest payout ratio of the group is only 45%.
  • Their five-year dividend growth rates are between 6% and 18% annualized.

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These stocks could one day be paying dividends of 7% or higher.

While for some stocks in the S&P 500, it's their large dividend yields that make them attractive picks, I like to focus on companies with payout ratios below 50%. This shows a balance between fueling future business growth and returning cash to shareholders. Ultimately, these dividend growth stocks steadily outperform the market, despite paying smaller dividends initially.

Let's look at four stocks that fit this bill and offer some of the highest dividend potential in the S&P 500.

Person looking at a cell phone at a sushi restaurant.

Image source: Getty Images

1. AbbVie

While Humira's 2023 loss of exclusivity (LOE) still looms over AbbVie (ABBV -0.47%), its stock has delivered total shareholder returns of nearly 400% since its spinoff from Abbott Laboratory on Jan. 1, 2013. An LOE event occurs when the patent on a drug ends, exposing the drug to competition fromgeneric and biosimilar versions.

Accounting for more than one-third of AbbVie's $14.4 billion in revenue during the third quarter of 2021, Humira's loss will weigh on overall sales and the company's valuation somewhat deflated in anticipation of this downside. However, trading at only nine times forward earnings, AbbVie's diverse operations should prove that it is more than a one-trick pony.

For example, AbbVie's two other immunology drugs, Rinvoq and Skyrizi, are expected to combine for $15 billion in sales by 2025, helping offset Humira's decline. Furthermore, the company has several additional prospects across its other three business segments, which are hematologic oncology, neuroscience, and Allergan aesthetics. 

With the largest dividend yield of this group at 4.2% and the highest dividend growth rate of 18% annualized over the last five years, AbbVie would be a great core holding for dividend growth investors over the long term. Trading at just 11 times its trailing-12-month free cash flow (FCF), the company may be a sneaky value play to start 2022.

2. Target

Despite its status as a Dividend King, Target (TGT -1.21%) could quietly be a surprise growth pick in 2022, thanks to its promising omnichannel development. Led by its burgeoning digital sales, up 29% year over year for the third quarter, Target saw comparable sales rise 13% for the quarter and growth in all five of its main product lines.

This digital sales growth is exciting to investors once you consider that it was on top of 155% growth in Q3 2021 -- meaning that the company blew past unbelievably tough pandemic-aided comparisons. This highlights that Target's omnichannel strategy is core to the company's future and not just a one-off occurrence thanks to a more locked-down economy. 

Furthermore, with a Net Promoter Score (NPS) of 51, the company essentially has four promoters of its product for every detractor -- making it the No. 8 brand on Comparably's top 100 global brands. Rated on a scale of -100 to 100, Target's NPS of 51 shows it is a beloved brand in an often commoditized industry, especially considering rival Walmart has a score of only 14. 

With a dividend yield of 1.5% and a 53-year streak of consecutive annual dividend increases, Target offers investors the rare blend of Dividend King safety and growth potential.

3. FedEx

Sporting a newly raised dividend in 2021, international shipping juggernaut FedEx (FDX 1.31%) restarted its dividend growth story after pausing it for two years. Better yet, management aims to grow earnings per share (EPS) by 10% to 15% over the long term, thanks to the emergence of e-commerce.

With its core FedEx Ground operations now commanding a 33% share of the overall ground market, the company looks beautifully positioned to drive efficiency throughout its international operations -- especially as its 2016 acquisition of TNT Express becomes fully integrated. As of its most recent quarter, FedEx grew its sales 14% year over year while EPS stayed the same, leaving the company to trade at 12 times its forward earnings. 

Ultimately, the company's massive network (which connects 99% of the world's gross domestic products), its 33% ground market share, and e-commerce tailwinds give FedEx investors a lot to be excited about over the long term. Pair these facts with its reasonable valuation and a dividend yield of 1.1%, and it's clear to see that the shipping behemoth makes for an extraordinary holding.

4. Kroger

Finally, Kroger (KR 0.12%) and its quietly accelerating digital grocery operations have grown by 103% over the last two years. While Kroger's Q3 2021 digital sales did decline 5%, management still expects digital sales to double by 2023.

These digital sales are hugely important to investors as they help the company grow its treasure trove of customer data on over 60 million households. With this valuable customer data, Kroger can continue personalizing its Boost loyalty program for each member, adding valuable cost savings and unique recommendations.

While trailing-12-month revenue has only increased by 4% year over year, the company generated just shy of $3 billion in FCF during this time. Compared to Kroger's market capitalization of $33 billion, this FCF has the company in great shape to continue chipping away at its $21 billion in debt and raising its dividend along the way. 

Having lowered its share count by 21% over the last five years and maintaining a promising dividend yield of 1.8%, Kroger stock could anchor any portfolio looking for dividend growth and stability.

Four dynamic dividend prospects

Metric AbbVie Target FedEx Kroger
Dividend yield 4.2% 1.5% 1.1% 1.8%
Payout ratio 45% 27% 14% 24%
Dividend yield potential 10% 7% 7% 8%
5-year dividend growth CAGR 18% 6% 15% 12%
Years of consecutive dividend growth 8 53 1 15

Data source: Seeking Alpha. Dividend yield potential = yield/payout ratio. CAGR = compound annual growth rate. 

AbbVie may have the largest dividend yield, but all four stocks have similar dividend yield potential, which is dividend yield divided by payout ratio. This shows us what a company's dividend yield would be if it paid out 100% of its net income.

Thanks to this potential for payout growth and their history of dividend increases, I believe these stocks are great selections for almost any investor looking to see some green in their portfolio.

Josh Kohn-Lindquist has no position in any of the stocks mentioned. The Motley Fool owns and recommends FedEx. The Motley Fool has a disclosure policy.

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