Consistently investing in quality stocks is one of the best ways to build wealth for retirement, and one of the simplest ways to make sure you are investing in a company built to last is to look at its ability to pay dividends. These are companies that possess a competitive advantage and generate plenty of profits to reinvest in growth and still reward shareholders.
Moreover, owning top dividend stocks can provide that extra bit of income in a downturn that keeps your portfolio ahead of the market.
If your portfolio needs some extra yield, three Motley Fool contributors selected three top dividend stocks that you can't go wrong with in this environment. Here's why they like Altria Group (MO -0.38%), Kroger (KR -0.79%), and Kraft Heinz (KHC 0.16%).
Keep it simple
Jeremy Bowman (Altria Group): If you're looking for a high-yield consumer-facing dividend stock, it's hard to find a more reliable choice than Altria, the domestic maker of Marlboro cigarettes.
The tobacco stock has long been a top dividend payer, and currently offers an impressive yield of 8.4%. You'll be hard-pressed to find a better yield than that from a safe stock, and for a dividend stock, Altria is about as safe as they come.
The company is a Dividend King, one of a handful of stocks that have raised their dividend every year for at least 50 years. In Altria's case, it's lifted it 57 times in 53 years, most recently raising it by 4.4% last August.
It's true that tobacco is a declining industry, but Altria has successfully managed the decline by continuing to raise prices and controlling costs. In its most recent quarter, the company reported a 5% increase in adjusted earnings per share even as revenue after excise taxes fell 2%.
Altria's pivot to smoke-free products has been slow, but the company's new strategic partnership with JT Group to sell heated tobacco sticks and other products holds promise, and it's getting a $2.7 billion payment from Philip Morris International for giving up exclusive rights to sell Iqos in the U.S.
With a recession potentially around the corner, Altria is just the kind of defensive dividend stock that can keep paying you even through an uncertain economy. Even better, analysts expect the company to grow earnings per share through 2023, enabling it to raise its dividend once again.
One of the fastest-growing dividends plus a high yield
Jennifer Saibil (Kroger): Kroger has long been outshone by its larger competitors, which include the two largest companies in the U.S. by sales, Walmart and Amazon, as well as members-only club Costco Wholesale. However, with its upcoming merger with supermarket chain Albertsons, it will be much more of a force in U.S. grocery shopping. Together, the companies have nearly 5,000 stores, or more than Walmart's 4,700 U.S. stores.
Not only does that position it as a more competitive company, but it illustrates how management at Kroger is shifting its thinking. After taking its time to join the digital shopping revolution, it has launched a full omnichannel program that helped increase sales at the beginning of the pandemic.
While Kroger is not a discount chain like its larger rivals, it has a large assortment of off-price owned brands that attract the discount consumer, keeping it competitive among several demographics. Comparable sales (without fuel) increased an impressive 6.9% year over year in the 2022 third quarter, but the owned brands portfolio increased 10.4%. It has been working with a revamped brand strategy over the last few years focused on digital, fresh, and owned brands, and it's bearing fruit (pun intended).
Kroger's dividend yields 2.4% at this writing, and it has been raised for the past 16 years. But you can really see the value of Kroger's dividend when you compare its growth to dividend superstars like Coca-Cola, PepsiCo, and Walmart. It has grown more than twice as fast as the second-place PepsiCo over the past 10 years.
KR Dividend data by YCharts
Management is focused on cash generation and creating shareholder value, and it's not surprising that Kroger is a Warren Buffett stock in the Berkshire Hathaway portfolio.
With the successful execution of its new strategy and a huge merger in the works, Kroger should be an exciting company in the coming years, and its stock is likely to reward shareholders many times over.
This grocery stock is outperforming the market
John Ballard (Kraft Heinz): While there is still a lot of uncertainty about the economy in 2023, owning shares of Kraft Heinz is a great choice. The owner of Philadelphia cream cheese and other brands is highly profitable and generates consistent revenue that funds a tasty yield of 4.04%. What's more, the stock trades at a low price-to-earnings valuation, setting the stage for another year of outperformance.
Kraft Heinz enters the year with momentum. Although unit volume sales fell 4% year over year in the third quarter, grocery shoppers are clearly willing to pay up for their Kraft Mac & Cheese. Despite lower volume sales, total adjusted net sales grew 11.6% last quarter, driven by higher selling prices. Kraft, Lunchables, Heinz, Primal Kitchen, and Philadelphia are some of the company's strongest performers.
Management's strategy to increase brand investment and efficiencies in the supply chain is driving solid results where it counts. Trailing-12-month free cash flow was $3.5 billion through the third quarter on nearly $26 billion of revenue. Free cash flow would have been higher if not for one-time expenses related to divestitures and spending to rebuild inventory levels.
Kraft Heinz paid out 55% of its free cash flow as dividends over the last year. Its high-volume sales at the grocery store, in addition to a strong foodservice business, is the type of business that can hold up in a weakened economy. This is why the stock outperformed the S&P 500 index over the last three years, returning 30.4% to shareholders compared to 21.3% for the broader market.
The stock's above-average yield and relatively low forward price-to-earnings ratio of 14.4 should lead to solid returns to investors.
