When investors think about passive income, the focus is often on high yield. That's fine, but you should also opportunistically add in some dividend growth stocks if you want to keep up with the ravages of inflation. On that score, one of my favorite dividend growth stocks today is Hormel Foods (HRL 0.68%). Here are four reasons why.
1. Historically cheap
Hormel is a consumer staples company that sells branded food products. Its dividend yield today is around 2.6%. Some dividend investors would instantly snub the stock on the grounds that the yield is too low on an absolute level. After all, you could probably buy a CD with a yield of around 5%! But that would be shortsighted.
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Although Hormel's dividend yield is modest on an absolute basis, it happens to be high compared to the company's own yield history -- the yield hasn't been this high since the Great Recession. That suggests that the stock is actually historically cheap today.
2. Dividend growth
A historically high yield alone, however, isn't the whole story. Hormel's dividend has been increased annually for 57 consecutive years. That makes Hormel a highly elite Dividend King. A company does not achieve a record like that by accident. It has to be well-run and structured to handle both good and bad times.
What's also notable here is that the average annual dividend increase over the past decade was a generous 13%, which makes Hormel a dividend growth stock. To be fair, the most recent increase was about half of that level. But that's actually more positive than you might think.
3. Temporary headwinds
As you might expect from the historically high yield, Hormel is not hitting on all cylinders today. In fact, it is struggling on several fronts. Despite that fact, and with full awareness of the issues, it still increased its dividend by a generous 6% or so in January. But what about those problems? Should investors be worried?
The list of challenges is short but important.
- Inflation has put downward pressure on the company's margins.
- It's having a harder time than many peers in raising prices to offset inflation.
- Its acquisition of Planters is facing some transition issues as it invests to turn the brand around.
- The avian flu is hampering its ability to supply turkey products in its Jennie-O Turkey business.
Those are some non-trivial headwinds, so you can see why investors are worried. However, the company is likely to deal with all of these problems in time. And, notably, the company's balance sheet (with a debt-to-equity ratio of around 0.4) is strong enough to withstand a fairly long spell of business weakness.
Things aren't pretty today, but that's why the stock looks so cheap. If you can stomach a little near-term uncertainty, given Hormel's long-term success, it seems like a great buying opportunity.
4. The biggest investor is aligned with me
There's one more reason to like Hormel, and that's the fact that the Hormel Foundation owns around 47% of the company. This charitable organization was set up by Hormel's founders with the goal of donating money to worthy local causes and ensuring that Hormel always remains an independent company.
The main source of cash for donations is Hormel's dividend, which means the Hormel Foundation and I are fairly well-aligned when it comes to our ownership of Hormel stock.
Essentially, the Hormel Foundation wants consistent and reliable dividends and, clearly, has the clout to demand that the company operate in a way that leads to such an outcome. That makes it even more likely that Hormel will figure out a way to muddle through the current headwinds while continuing to pay a growing dividend.
A fallen angel
When you add it all up, Hormel is a well-run company that has hit a difficult stretch. Nothing in the business world goes in a straight line, so this isn't shocking at all. But given the historically high yield, it does open up an opportunity for long-term investors.
The clear appeal is for dividend growth types, but even those who are most focused on a high level of passive income might want to take a look here. Indeed, adding some dividend growth names to a largely high-yield roster can help you better deal with inflation's negative impact on your dividend stream.
