The stock market can do just about anything in the short term. Last year, the S&P 500 lost 19.4% of its value. So far this year, it is up 19%.
Yet through all the volatility, Caterpillar (CAT 1.59%), American Water Works (AWK -0.63%), and Starbucks (SBUX 0.47%) have been there to support shareholders with stable and growing dividend payments. Here's why you can count on each company to continue raising its dividend, and why each dividend stock is worth buying now.
Image source: Getty Images.
Caterpillar has raised its dividend for 30 consecutive years
Lee Samaha (Caterpillar): It might seem unusual to put forward a highly cyclical company as a dividend candidate. After all, Caterpillar's revenue and earnings will inevitably track the construction, resources, energy, and transportation equipment spending cycles. That can lead to highly volatile earnings and cash flow.
Still, the company's track record in increasing its dividend speaks for itself. Moreover, there's reason to believe it's highly likely to continue. For example, management recognizes the inherent cyclicality in its earnings and cash flow. Through the cycle, it aims to generate $4 billion to $8 billion in machine, energy, and transportation free cash flow (FCF).
For reference, industrial companies define FCF in this way to strip out the distortion to FCF coming from their financial operations. Incidentally, Caterpillar is on track to exceed the high end of the FCF range this year. Whichever way you look at it, Caterpillar's FCF is easily covering its current $2.5 billion in dividend payout. It also suggests the company has plenty of potential to increase its dividend in the future.
Moreover, the company's long-term growth prospects look good in construction (driven by infrastructure spending commitments), resources (mining companies continue to invest in expanding capacity, notably in metals used in the energy transition like copper), and energy (the price of oil remains above $75 a barrel).
It all adds up to make Caterpillar an excellent candidate for dividend-seeking investors.
American Water Works is a utility stock that'll keep you out of deep water
Scott Levine (American Water Works): Whether you're an older investor looking to generate secure passive income or you're a younger investor carving out a niche of your portfolio for conservative stocks to balance out some higher-risk tickers -- or somewhere in between -- American Water Works is a worthy consideration. Offering investors a forward-dividend yield of 2.2%, this water utility stock is an industry leader that has consistently rewarded shareholders with a growing dividend. And management intends to continue growing it for many years to come.
While American Water Works provides water and wastewater services to the U.S. military at 18 installations, the lion's share of the company's revenue comes from its regulated businesses operations. In 2022, for example, 92% of the company's operating revenue came from the 3.4 million customers that make up its regulated businesses.
Since demand for water and wastewater services is consistent and the company charges rates that ensure a profitable return on equity, the company enjoys steady cash flows. These cash flows are also fairly predictable, providing management with the ability to plan accordingly for capital expenditures such as acquisitions, infrastructure projects, and dividends.
Over the five-year period between 2017 and 2022, American Water Works hiked its dividend at a compound annual growth rate (CAGR) of more than 9%. While the company has delighted shareholders with a steady stream of passive income, it's not as if management had imperiled the company. During this period, American Water Works averaged a conservative payout ratio of 54%.
Looking ahead, management plans to increase the dividend at a CAGR of 7% to 9% for 2023 through 2027, while it expects to grow earnings per share at a comparable CAGR, maintaining its judicious approach to the dividend -- and helping shareholders avoid any sleepless nights.
Starbucks is poised to pop
Daniel Foelber (Starbucks): One look at Starbucks' sales and earnings over the last five years, and it's easy to see why the stock has staged an epic recovery.
SBUX Revenue (TTM) data by YCharts
Trailing-12-month earnings are near an all-time high, while revenue is at an all-time high. The company's master plan is finally taking form, which leans heavily on mobile ordering, the Starbucks Rewards program, and grab-and-go ordering facilitated by drive-thrus and pickup orders. It's a far cry from the old cozy coffeehouse model. But it's the right move for driving higher order volumes and margins.
Starbucks has the pieces in place to chart its next growth stage. But the stock has gone nowhere over the last three years -- up just 1.3%. The pandemic threw a wrench in Starbucks' growth plans. But the company is now in a far better position than it was pre-pandemic in terms of making its vision a reality and real data points like Rewards members and the percentage of orders that are made using the app.
Sometimes, it simply takes time for investors to adjust to a wave of growth. And I think what we are seeing now with Starbucks is a "prove it pause," meaning investors want to see if Starbucks can really keep this up or if it's just a recovery from the worst of the pandemic.
In the meantime, investors can count on Starbucks' rock-solid dividend, which has increased every year since the company began paying one in 2010.
