3M (MMM 0.46%), American States Water Company (AWR -0.57%), and Coca-Cola (KO) may not have much in common as companies. But as investments, all three companies are Dividend Kings that have paid and raised their payouts for at least 60 years -- making them some of the longest-tenured members of the group.
However, all three stocks have also lost value over the last year, while the S&P 500 is up 22.7%. A single-digit dividend yield isn't going to be that appealing if a stock is underperforming by that many percentage points. Yet there are reasons to be optimistic about each company.
Here's why all three dividend stocks look like a good value for 2024 and beyond.
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There's a value case for 3M stock
Lee Samaha (3M): The industrial giant's stock will divide investors. However, one thing that can't be denied is the attractiveness of its current 6.5% dividend yield. While the sustainability of the dividend payout is subject to question due to its need to meet multibillion-dollar cash calls as part of legal settlements, it's worth noting that 3M is still a company generating large amounts of cash.
In fact, it's $6.3 billion in free cash flow generation in 2023 is one of the reasons why an analyst at heavyweight Wall Street company JPMorgan raised the price target on the stock recently. Meanwhile, management's restructuring plan will take $700 million to $900 million out of costs by the end of 2025.
These kinds of figures make 3M attractive for income-seeking and value investors. Suppose management's restructuring plan works and margin expansion follows alongside a cyclical return to growth in its key end markets, which include automotive, consumer electronics, and consumer products. In that case, 3M's stock price will prove to be undervalued right now.
For that to happen, management might need to make some changes to its business model or extend its restructuring actions beyond 2024.
Still, as long as 3M can continue to generate substantial cash flow, it should be able to muddle through a difficult period of restructuring, weak end markets, and cash calls from legal settlements. That will give management the time and opportunity to enact the changes necessary to get the company back on track.
Water your portfolio with American States Water and watch your passive income grow
Scott Levine (American States Water): Attaining Dividend King status is no simple feat. Going to the head of the class and achieving the royal rank of the longest-tenured Dividend King, as American States Water has done, is an accomplishment well worth substantial recognition. For 69 consecutive years, this water utility stock has raised its distribution, and its reliable business model suggests that the tide of dividends it has returned to investors won't ebb anytime soon. For income investors seeking the reliability of a Dividend King, American States Water and its 2.2% forward-yielding dividend deserve considerable attention.
While American States Water has increased its dividend for 69 straight years, it has, in fact, paid dividends every year going back to 1931. How has it accomplished such a regal feat? The company operates primarily as a regulated water utility. As such, it provides water and wastewater services to more than 264,000 customers located throughout California. It may not be the most thrilling of businesses, but what it lacks in excitement, it makes up for in its steady nature. Because its bread-and-butter business (it also operates a small electric utility subsidiary) is regulated water utility services, the company is guaranteed certain rates of return. Thus, management has clear foresight into future cash flow, allowing it to plan accordingly for capital expenditures, such as improvements to its infrastructure as well as dividends.
American States Water's dividend might now have the allure of high-yield dividend stocks, but cautious investors will find the stock especially appealing. The company's 69-year history of raising its dividend doesn't guarantee that another 69 years of similar raises are coming down the pike. Still, it's certainly a good indication that rewarding shareholders is ingrained in the company's culture. Moreover, the company's conservative payout ratio, averaging 57% over the past five years, suggests that management isn't willing to jeopardize the company's financial well-being for the sake of placating shareholders.
Coke just raised its dividend to a record high
Daniel Foelber (Coca-Cola): Investors gravitate to Dividend Kings for their consistency. And while there have been better-performing stocks than Coca-Cola, the beverage giant is the perfect Dividend King when looking strictly at the dividend.
Around the same time every year, investors have been able to count on Coke to announce a dividend raise. Coke has gotten so precise that it has announced a dividend raise sometime between Feb. 15 and Feb. 20 every year for the last five years. The recent announcement came on Feb. 15 when Coke declared its 62nd consecutive annual dividend increase, this time bumping the payout by 5.4% from $1.84 per year to $1.94 per share -- good for a forward yield of 3.3%.
The size of Coke's dividend raise tells you a lot about how the business is doing. For example, raises were fairly large in the mid-2010s. But there was a stretch in the late 2010s and early 2020s when Coke implemented a mere one cent per share per quarter raises.
Using the size of dividend raises as a litmus test for the strength of the business doesn't work for all companies, but it has been a useful gauge for Coke. The company takes its dividend very seriously and is only going to make a substantial raise if it thinks it can afford it and build on top of it in the future.
After all, Coke pays the third-highest dividends out of any consumer staples company. It paid $7.95 billion in dividends over the last 12 months, behind only Philip Morris at $7.96 billion and Procter & Gamble at $9.09 billion. It's a lot to ask a company to fund an after-tax bill that high year in and year out, let alone make that bill increasingly higher. And yet, that is what Coke investors have to expect and will continue to expect.
The best Dividend Kings are able to grow their earnings at least as much as their dividends. That way, dividends don't deplete cash reserves on the balance sheet or lead a company to take on debt. The last year was one of the best Coke has had in a while.
Sales and earnings growth are back. Operating margins are strong, clocking in at a whopping 28.3%. That's an incredibly high margin for a company that sells a physical product. Coke's margins are a key reason why it can afford its dividend. Off $45.75 billion in trailing-12-month revenue, it has earned $10.7 billion in net income, more than enough to afford the $7.95 billion it paid in dividends.
Coke's business and dividend look solid, and the price-to-earnings ratio is 24 -- not bad for such a high-quality business. This is the sweet spot for Coke, and investors would do well to take advantage of the opportunity.
