While growth stocks may get a lot of attention in the stock market, good old-fashioned dividend stocks often play more pivotal roles in many investors' portfolios. When a stock provides a steady stream of income, that can make it easier for investors to ignore the daily noise of the stock market and focus on the long term.
Whether you're buying your first dividend stocks or adding new ones to your portfolio, here are three smart dividend stocks to consider.
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1. Procter & Gamble
The products and services that people use are generally divided into two categories: consumer staples and consumer discretionary. Consumer staples are essentially needs, while consumer discretionary purchases lean more toward products and services people want but don't necessarily need. Procter & Gamble's (PG 0.44%) catalog of products largely falls within the former category.
When money is tight, it's much easier for consumers to scale back on things like traveling, eating out, and entertainment than it is to cut down on things like diapers, soap, and cleaning supplies. P&G owns many leading household brands, including Tide, Pampers, Old Spice, Tampax, Dawn, and Crest.
P&G's revenue stagnated in the early 2010s as the company expanded its product lines too much and lost some focus. It started shutting down or selling off several brands beginning in 2017 and its focus helped revenue again climb, getting it essentially to the same levels it was a decade ago. The company predicts organic sales (which exclude the impact of things like changing foreign currency exchange rates) will grow by 4% to 5% in its fiscal 2023 as the company is being weighed down a bit by macroeconomic concerns. Investors were hoping for more and P&G's stock is down almost 9% so far in 2023, underperforming the broader consumer staples industry.
Data by YCharts.
While short-term investors focus on the stock's recent lackluster performance, long-term investors should pay more attention to P&G's trifecta of positive attributes:
- It has products that sell regardless of economic conditions.
- It has a cash-filled balance sheet.
- It has a shareholder-friendly dividend.
P&G is a Dividend King, having increased its payout annually for 66 consecutive years. It's payout ratio is a very manageable 62% right now and only a couple of percentage points higher than the 59% average of the past two decades. With a quarterly payout of $0.91 per share (yielding 2.6%), it's good for investors looking for a bit more stability. It's a good defensive stock to have in your portfolio.
2. Lowe's
Lowe's (LOW 0.90%) has a long history of steady revenue growth, but the COVID-19 pandemic gave an extra boost to its top line. Its revenue went from $72.1 billion in 2019 to $89.5 billion in 2020 to $96.2 billion in 2021. However, that outsized growth is starting to lose steam, with the company bringing in $97 billion in 2022 and offering soft guidance for 2023.
Data by YCharts.
Long-term investors shouldn't be deterred by the short-term slowed growth that Lowe's is likely to report as it comes up against tough prior-year comparables. The company is well-equipped to maintain sales -- which are still impressively higher than just a few years ago -- while also returning value to shareholders.
Lowe's has been shareholder-friendly recently, although it's worth mentioning it took on lots of debt while interest rates were low to fund things like share buybacks. Its long-term debt has more than doubled in the past five years. The company's debt load isn't ideal (especially if it finds it needs to refinance it in the current high-interest-rate environment), but its balance sheet is solid, and management hasn't shown any signs that it doesn't know how to execute long-term.
Its $6.78 billion in free cash flow in its 2022 fiscal year was more than enough to cover the $2.37 billion it paid out in dividends. Its payout ratio is a low 37% and it should hit 49 straight years of annual dividend growth in mid-2023, leaving it one year short of Dividend King status. Lowe's yield is hovering in the 2% range, but there's a good chance that it will increase if stagnant sales in the near future drive more investors away. It should be a smart long-term value play.
3. Coca-Cola
Few brands have a product as iconic as Coca-Cola's (KO -0.35%) flagship soda. And from that original beverage Coca-Cola has grown its portfolio of products to include top brands in water, juices, coffee, tea, alcohol, and various sodas. Coca-Cola's portfolio is undoubtedly impressive, but its distribution reach may be even more impressive. Getting products to over 200 countries and territories profitably is no small feat (it's accomplished through franchising its bottling operations around the world).
Coca-Cola's competitive advantages are its reach and market share (it commands 46% of the U.S. carbonated soft drink market), and those have allowed the company to build one of the more solid balance sheets you'll see. It has more than $9.5 billion in cash and cash equivalents, giving it plenty of cushion in down periods, as well as ample money to fuel its research and development.
The $0.46 per share dividend (yielding 2.2%) is largely what attracts investors to Coca-Cola. Coca-Cola has increased its payout annually for 61 consecutive years, aiming for a 5% increase each year. Its dividend hikes have lagged behind the inflation rate from the past couple of years, but the increases generally outpace inflation. The payout ratio of around 80% seems somewhat high (but still manageable), and it has maintained that average rate for more than two decades.
Given Coca-Cola's resources and market share, you can be all but certain that its dividend is safe and will continue to increase.
