With the 10-year Treasury rate at 4.8%, income-orientated investors may be uninterested in stocks, given the S&P 500's dividend yield is just 1.6%. One of the best ways to stay involved in the stock market while also collecting a reliable source of passive income is through companies that have paid and raised their dividends no matter the market cycle.
Air Products and Chemicals (APD 0.43%), Coca-Cola (KO), and Emerson Electric (EMR 0.27%) don't yield as much as the risk-free rate. However, they still have healthy dividends and track records for creating shareholder value through organic growth, acquisitions, stock buybacks, and dividend raises. Here's why each dividend stock is worth buying now.
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Air Products has delivered decades of dividends
Scott Levine (Air Products): Tracing its history back to 1940, Air Products, a leading supplier of industrial gases, has developed into a popular stock among income investors. For more than 40 years, the company has consistently provided investors with annual increases to its dividend -- a feat not many companies have achieved. Those looking to procure steady passive income, therefore, would be well suited to power their portfolios with Air Products and its 2.5% forward-yielding dividend.
While some companies that have logged multidecade streaks of annual dividend increases boost their payouts only nominally, Air Products has demonstrated greater generosity. Over the past 10 years, the company has hiked its dividend at an impressive 10% compound annual growth rate.
Naturally, there's no certainty that Air Products will maintain this clip of rewarding shareholders, but the company's robust backlog suggests it has plenty of growth opportunities to support future dividend increases. As of August, Air Products had a backlog representing $17.9 billion of projects in development.
One of the encouraging aspects of the backlog is the large number of projects involving hydrogen and energy transition (such as natural gas and sustainable aviation fuel). Totaling about $11 billion, these projects often include long-term supply agreements that provide management with good insight into future cash flows.
The company's conservative approach to hiking the dividend provides yet another reason income investors will want to consider Air Products. Over the past 10 years, the company has averaged a payout ratio of 61%.
Coca-Cola stock is a compelling value
Daniel Foelber (Coca-Cola): Coke is one of the most well-known and respected dividend stocks out there -- a globally recognizable brand. In the investing world, it is known for being a Dividend King with 61 consecutive years of dividend raises and one of Warren Buffett-led Berkshire Hathaway's top holdings.
Since Coke is such a tried-and-true dividend stock, it typically fetches a premium price relative to the rest of the market. And while Coke arguably deserves to be priced higher than its peers, it would be a mistake to overpay for Coke, considering it's not exactly a fast-growing company.
The good news is that Coke has gotten cheaper in recent years. So much so that Coke now trades well below its median price-to-earnings ratios over several recent time intervals.
KO PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
The reason behind Coke's lower valuation is straightforward. Its earnings have outpaced the growth in its stock price. Coke's growing operating margin is why its earnings have grown faster than its revenue -- a great sign that Coke is making the most out of its sales. And to top it all off, Coke has grown its dividend by 18% in the last five years -- which has helped bring its yield up to 3.3%.
KO data by YCharts. TTM = trailing 12 months. EPS = earnings per share.
Despite inflationary pressures, Coke continues to grow earnings thanks to its pricing power. In its recent quarter, Coke grew sales by 8%, operating income by 6%, and earnings per share by 9%, almost entirely due to price increases.
Coke's diverse brand portfolio has never looked better. Given how much the fundamentals have improved, the stock deserves to be up higher than 20% over the last five years.
Emerson Electric's automated future
Lee Samaha (Emerson Electric): Having been rebuffed in its attempted takeover of Rockwell Automation in 2017 under its former and highly regarded CEO David Farr, Emerson Electric is set to grow its automation business by other means.
The company has a proud 66-year history of increasing its dividend, and that's set to continue. The only change is how it generates the earnings and cash flow to do it. Current CEO Lal Karsanbhai is determined to restructure the company toward the growth market of automation and adjacent markets like industrial software and automated test & measurement.
That's the thinking behind the deal to sell a majority stake in its climate technologies business to Blackstone, and it's why Emerson recently completed the acquisition of automated test and measurement system company NI for an equity value of $8.2 billion. Moreover, Emerson owns 55% of industrial software company Aspen Technology.
All these steps were taken to tap into the automation market. It's an attractive end market driven by the dramatic increases in productivity generated by the use of digital technology in manufacturing, the desire to reshore manufacturing from low-labor-cost countries, and companies looking to improve their supply chains in light of the crisis following the lockdowns. It's a brave strategy that's likely to work, given the long-term secular demand drivers in place, as discussed above.
