Investors have gotten excited about Walmart's (WMT -0.08%) planned 3-for-1 stock split at the end of this month. When companies split their shares, it's usually an indication that management feels the company is in a growth phase. Stock-split stocks are usually industry leaders with proven track records, and there's some data to support the idea that stock-split stocks perform well over time. Stock splits themselves don't do anything for stocks other than split them into smaller pieces.
However, something else recently happened to Walmart stock that has real implications for shareholders and indicates much more value. In 2023, Walmart became a Dividend King.
Why is this important news?
Companies become Dividend Kings when they pay and raise their dividends for 50 consecutive years. Walmart raised its dividend for the 50th time since 1974 last year when it raised it 2% to $2.28 per quarter.
Dividend Kings are an exclusive class of stocks that indicates strength and reliability. Lots of things can happen in a 50-year time span, and many companies don't last that long. Even the ones that do typically go through ups and downs that could impact their performance and ability to generate enough cash to operate and cover their dividends.
Any company that can weather the effects of 50 years of doing business while continuing to raise its dividends has demonstrated that it's trustworthy for passive income.
When evaluating a dividend, investors typically look at its yield. That's definitely one important factor, and high-yielding dividends have a place in many investors' portfolios. But there's more to a dividend stock than its yield. In fact, if the yield is too high, that should alert investors to potential risk. Not all dividend-paying stocks are established and reliable. Some of them suspend their dividends, and some of them go bust.
Others might be good candidates because they always pay, but they don't always raise their dividends. That could mean there's some trouble internally, or that the dividend isn't a priority. Companies that raise their dividends annually are committed to creating shareholder value.
Does Walmart pay a top dividend?
At first glance, Walmart's dividend isn't great. It yields 1.35% at the current price, which is below the S&P 500 average. It's actually dropped a bit since the yield works inversely with price movement, and Walmart's stock has jumped on the news of its stock split.
But according to the other important factors that indicate a good dividend, Walmart's dividend checks all the boxes. Walmart is the top U.S. company by sales, and by far, with $639 billion. Amazon continues to trail it in second place, with $554 billion. It generates steady cash flow that drives the business and the dividend. It's not a growth stock, and the dividend is one of the ways that it attracts investors and creates shareholder value.
Can Walmart keep it up?
One of the reasons management might have decided that now is a good time for a stock split is that Walmart is performing beautifully. Sales increased 5.2% year over year in its fiscal 2024's third quarter (ended Oct. 31), driven by a 4.9% increase in comparable sales. Free cash flow increased from $0.7 billion last year to $4.3 billion this year.
With its strong brand, leading position, and this kind of performance, investors can expect Walmart to continue paying and raising its dividend. The stock split is an extra indication that Walmart is a top established company, and the dividend is the tangible result.
Walmart's dividend is reliable and growing, and investors can count on that to continue for the foreseeable future, making it an excellent choice for a dividend stock. If Walmart's stock split caught your attention and made the stock seem like a candidate for purchase, consider it instead for its reliable long-term dividend stability.
