With markets in a turbulent mood as we enter October and the final quarter of 2022, it's as good a time as any to fortify your portfolio with rock-solid dividend stocks. Not only do dividend stocks increase your passive income, they can help to bolster your portfolio. Dividend-paying companies are often more stable, mature businesses and their stocks can hold up during bear markets. The best dividend stocks will also consistently increase their dividends year after year and their shareholders will benefit from share price appreciation over time as well.
My approach to dividend investing is looking for stocks with market-beating yields, a dividend that is growing over time, and a dividend that looks safe based on the dividend payout ratio. With that in mind, let's take a look at three dividend stocks that investors should be buying hand over fist in October.
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1. Franchise Group: Aggressive dividend grower
Let's start with Franchise Group (FRG), which sports a massive 9% dividend yield. While a yield this high can sometimes be a sign that the dividend is unsustainable, closer examination shows that this isn't the case at Franchise Group. The stock's $2.50 per share dividend on an annualized basis is well covered by its $8.68 in earnings per share.
Shares are down 50% year to date based on recession fears, which is part of the reason the yield has reached this level. But Franchise Group also aggressively increased its dividend over the past few years. The company, which came public in 2019 via a business combination of Liberty Tax and Buddy's Home Furnishings, increased its dividend by 250% from $1 per share annually in 2020 to $2.50 per share in 2022.
An additional factor that I like about Franchise Group and its dividend payout is that the company is the owner and operator of franchise businesses including The Vitamin Shoppe, Sylvan Learning, and Pet Supplies Plus. It also owns and operates a group of discount furniture retailers like American Freight and Badcock, as well as Buddy's, a rent-to-own furniture store.
This gives Franchise Group a diverse mix of revenue and earnings sources to fuel its dividend over time, and the discount furniture retailers and rent-to-own business should be well suited to deal with the event of an economic downturn. Franchise Group pays out a safe dividend that beats the market average, and the company is increasing it at an impressive clip, making it a top dividend stock to buy.
2. Alico: Rise and shine with dividends
Let's shift from Franchise Group to another high-yielding dividend stock with a longer track record of dividend payouts -- Alico (ALCO 0.79%). Alico is an orange grower that owns 74,000 acres of land in Florida.
Shares of Alico yield nearly 7%, and like Franchise Group, the company is increasing its dividend at an aggressive pace. Alico increased its dividend by 178% to $2 a share in 2021. Zooming out, the dividend has grown sevenfold since 2018, when Alico was paying $0.24 a share annually. Alico is not a Dividend Aristocrat, but it has paid a dividend every year since 1974 with the exception of one year, which is a pretty solid track record. The company's dividend looks sustainable with a dividend payout ratio of 46%.
Alico's dividend is sizable, safe, and growing. The defensive nature of Alico's business should also help the company to preserve and grow the dividend for years to come -- most people who like to start their day with a glass of orange juice will continue to do so, regardless of economic conditions. Of the company's 74,000 acres, about 49,000 of these are prime citrus-growing land, and the rest is monetized via a variety of other purposes, which diversifies Alico's sources of income.
Furthermore, the company estimates that its total land holdings have an unrealized value of $505 million to $680 million. Taking out the company's net debt of $98 million, this leaves an implied equity value of $407 million (at the low end) to $530 million (at the high end) for Alico's land holdings alone. With a market cap of just over $220 million, this gives investors a compelling margin of safety when buying shares of Alico.
3. Texas Instruments: The bluest of blue chips
After discussing two under-the-radar dividend stocks in Franchise Group and Alico, let's close with a large-cap, blue-chip dividend stock -- Texas Instruments (TXN -1.23%). Shares of the Dallas-based analog semiconductor giant yield 3%, and the Dallas-based semiconductor giant increased its payout for 18 years in a row. Not only has Texas Instruments increased the dividend for 18 years and counting, it has done so at a 25% compound annual growth rate.Texas Instruments' dividend also looks safe with the payout taking up 61% of free cash flow.
Texas Instruments' management team, led by Rich Templeton, has demonstrated a strong drive to create shareholder value over the last two decades. The company is supplementing the dividend by consistently repurchasing shares, and has reduced its share count by 46% since 2004 when Templeton became CEO.The company says that it buys back shares "with the goal of the accretive capture of future free cash flow growth for long-term investors."
Texas Instruments is a market leader in analog semiconductors. These types of chips are needed in all electronic devices, so the company should be able to continue growing its cash flow and dividends for years to come in an increasingly digital world.
While these three companies are very different, what they have in common is their commitment to consistently paying and growing their dividends, the safety of their payouts, and their above-average yields. Using this criteria to add these dividend stocks to your portfolio is a winning strategy in any market environment.
