Dividend stocks can play a starring role in a diversified portfolio when it comes to generating excellent returns. These investments tend to deliver stable sales and earnings growth plus the added benefit of immediate income. Choose to have those dividend payouts automatically reinvested, and you can amplify your returns by building up a larger position as the years pass.
That compounding process can be sped up by two factors that ironically correlate with each other. Ideally, you can find a stock that pays an unusually high yield or is priced at an attractive discount. Secure both, and you've got the potential for fantastic long-term returns. Let's look at why you might want to buy Procter & Gamble (PG 1.09%) stock like there's no tomorrow.
Keeping sales growing
P&G has had no problem growing through the difficult selling conditions that characterized the past several quarters. Even as shoppers became more cautious in their spending, the consumer-staples giant managed to keep revenue rising through 2023. Organic sales were up 4% in the most recent quarter, keeping P&G on track to grow by about 5% in fiscal 2024. "We delivered strong results...enabling us to raise our core EPS growth guidance and maintain our top-line outlook," CEO Jon Moeller said in a press release.
NYSE: PG
Key Data Points
It's worth watching sales volumes in the next few quarterly reports since growth has been weak here. Volume declined 1% last quarter, meaning P&G had to rely on price increases to power all of its organic sales growth. That's been true for its industry peers, of course, but ideally P&G can secure a better balance between price and volume growth in the coming months.
Cash flow and profits
Dividends are ultimately funded by cash flow and earnings, and P&G shines in both departments. Operating cash flow passed $10 billion over the past six months compared to $7.6 billion a year earlier, for starters.
PG Cash from Operations (TTM) data by YCharts.
P&G converts nearly all of its cash flow into earnings, too. Net profit was up a healthy 16% last quarter, helping profit margins expand even as sales growth slowed. These wins are allowing the company to easily send nearly $15 billion back to shareholders through dividends and stock repurchases each year.
The price is right
P&G underperformed the market in 2023, which has made it a relatively cheap choice for income investors. Shares cost 4.6 times sales today, down from the elevated range investors have seen in recent months of between 5 and 5.5 times sales.
Keep in mind that you're still paying a premium for P&G as compared to rivals like Kimberly Clark (KMB 0.70%), which is trading for just 2 times sales. However, that premium seems well worth it given P&G's premium market-share position and higher earnings power.
Add a roughly 3% dividend yield into the mix and you've got a great recipe for long-term returns. Elect to have those quarterly dividend payments automatically reinvested so you can accumulate more shares each year. That way, capital appreciation and cash returns will be amplified over time, likely making P&G a core holding in any diversified investment portfolio.
