Stocks that generate solid dividends play a key role in a portfolio, but dividend income has become even more important to investors in this period of market volatility and uncertainty. That's because a good dividend stock can generate income to offset some of the losses in your portfolio. Or the dividend can be reinvested in the stock -- which, in times like this, could be at a discounted price.
The other attractive quality about a good dividend stock is that it is typically a long-established, stable, often blue-chip company that might be boring when the market is hot but looks good in times like these. Franklin Resources (BEN -0.85%) is a stock that checks all of the boxes as a good dividend stock. And this is a particularly good time to buy.
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Franklin Resources is dividend royalty
Franklin Resources is an asset manager that runs Franklin Templeton Investments along with several other boutique money management firms. As of Feb. 28, it had about $1.5 trillion in assets under management, including about $612 billion in fixed income, $510 billion in equities, $155 billion in alternatives, $149 billion in multi-asset investments, and $61 billion in cash management. Franklin is seventh largest in the U.S. in managed assets and is one of the largest fixed income managers.
As a dividend investor, there is one thing you need to know upfront about Franklin Resources -- it is a Dividend Aristocrat. It has increased its dividend for 40 straight years, one of the longest streaks of any stock in the U.S. That speaks to its stability and longevity. Only 35 other companies have a longer streak of raising their dividend.
It just paid out a $0.29 quarterly dividend in February, the equivalent of 1.16 a year. The quarterly increase is up 4% from the first quarter of 2021 and up about 45% over the past five years. The dividend works out to a yield of about 4.25%, which is significantly higher than the average on the S&P 500 or among financial-services firms. The payout ratio, which is the percentage of earnings that go to the dividend, is just 27.6%.
Why this is a great time to buy
There are a few good reasons why this is a great time to invest in this dividend stock. The first is that the yield is as high as it has been pretty much ever, other than when it spiked higher than 6% at the start of the pandemic in 2020 when the share price plummeted.
While Franklinʻs stock price is down 18% this year, it was up 38.9% in 2021 and is coming off a fourth quarter where revenue was up 11% to $2.2 billion from a year earlier and operating income was up 36% to $557 million.
Franklin also boosted its operating margin to 25.6%, and still has more than $4 billion in cash despite making several key acquisitions in the past year or so. The big one was the purchase of former rival Legg Mason in 2020. But it just closed on the acquisition of custom indexer OʻShaugnessy Asset Management in January and is getting set to close on the purchase of private equity manager Lexington Partners, potentially at the end of this month.
These moves not only brought scale to Franklin, with respect to Legg Mason, but also allow it to expand into new and growing areas. Franklin also brought in one of the best, and largest, fixed-income managers in the world with the acquisition of Legg Mason. The balance and diversity in Franklinʻs portfolio of assets should help Franklin navigate a choppy year on the markets.
Another great reason why this is a good time to buy Franklin is its valuation. It has a price-to-earnings (P/E) ratio of around 7, which is down from 9 at the end of the year and 15 at the end of 2020. In fact, the P/E ratio is at one of its lowest points in the past 20 years. On top of that, its five-year P/E growth ratio is under 1, signifying it is undervalued.
For a company with sound financials, a great dividend, and steady revenue growth potential, the low valuation makes it worth a look.
