Especially these days -- when jobs don't feel all that secure and inflation continues to raise the cost of living -- every little bit of extra cash a person can get hold of can certainly be put to good use. This reality makes companies that not only pay dividends but also increase them incredibly attractive for those of us who want to keep cash coming in even as our costs keep going up.
Dividends are never guaranteed payments, so finding companies that can reliably boost cash flows is often easier said than done. Still, they're worth searching for, so three Motley Fool contributors went looking for businesses that appear to have what it takes to hand their shareholders more cold, hard cash.
They picked Target (TGT 0.18%), Realty Income (O -0.17%), and Kinder Morgan (KMI -0.64%). Read on to find out why and decide for yourself whether one or more of them may deserve a bit of your hard-earned cash.
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A popular retailer priced to buy, with a relatively high yield
Eric Volkman (Target): If you want a stock that's nearly assured to boost its payout before long (and who doesn't), it's wise to pick from the growing list of Dividend Kings. These are the rare S&P 500 component companies that have raised their payouts at least once a year for a minimum of 50 consecutive years.
Target is one of the newer Kings, with a streak of dividend raises "only" 52 years long.
It's also a stock making something of a comeback. Target was a retail industry rock star during the height of the pandemic, becoming an even more valuable go-to shopping destination for consumers stuck at home.
However, the company was careless after this, stocking up on inventory it couldn't sell effectively and failing to cope with the supply chain difficulties that were rife at that time.
The company has been recovering from this, but its profitability (and its share price) are still some distance from the lofty heights of the early 2020s. A certain degree of investor mistrust lingers, and for some, it's hard to forget those management miscues from a few years back.
Target has improved notably in recent times, though, and still has plenty of potential. Yes, sales were down by 4% year over year in its most recently reported quarter, but the retailer very much surprised on the upside with a monster 36% leap in headline net income.
Inflation seems to be moderating, so we might soon see the return of top-line growth; this should support continued profitability improvement.
With improving fundamentals, it's almost guaranteed that Target will maintain its dividend streak this year. This would be more than a welcome move, as the payout is already a comparatively high yielder at nearly 3%. That's more than double the average percentage on the S&P 500 index.
Lots of tiny raises and a monthly payout
Jason Hall (Realty Income): Dividend investors have long appreciated Realty Income. It has a monthly payout and has increased it every single year since it went public in 1994.
That puts this real estate investment trust (REIT) on some pretty elite lists of dividend growth stocks. But management has long held itself and the company to an even higher standard of dividend growth. How about a payout increase every single quarter? That's right: The company's shareholders see a raise every three months!
It's been happening for decades, too. In December, the company increased its dividend for the 105th straight quarter. That's a little more than 26 years of consecutive quarterly payout increases. That means investors in the company should see their next one in April.
How does the company do it? To start: by being conservative with the payout. It ended 2023 with an annualized dividend of $3.08 per share, while it earned $4 in adjusted funds from operations (FFO) per share. FFO is a better measure of profits for REITs than net income. That works out to a payout ratio of 76% of FFO, a pretty sizable cushion for a REIT to maintain.
Second, and just as important, management has focused its business and capital allocation on some of the most resilient, disruption-resistant industries: 89% of its rents are built to thrive across a variety of economic conditions, and are not threatened by e-commerce. And the company has been very smart about the properties it acquires, using debt responsibly and not overpaying.
At recent prices, it's an attractive investment. The yield is close to 6%, and that dividend growth streak is likely to remain intact for many more years to come.
It has telegraphed -- but not formally announced -- a likely boost
Chuck Saletta (Kinder Morgan): On its investor relations page, energy pipeline company Kinder Morgan indicates that it expects to pay about $1.15 per share in dividends for 2024. On a quarterly basis, that works out to $0.2875.
Looking over its dividend history, the company has paid $0.2825 over each of the past four quarters. That's $0.005 higher than the $0.2775 that it had paid out over the four quarters before those.
So Kinder Morgan has more or less telegraphed that it expects to announce another modest $0.005 quarterly increase in its dividend later this year.
Of course, no dividend payment is truly guaranteed until it actually gets paid, but investors have good reasons to believe that Kinder Morgan will follow through on that increase. In particular, in its February investor presentation, it indicated that it expects its distributable cash flow to increase by 8% to $2.26 per share in 2024. That same presentation also called for the company's seventh consecutive annual dividend increase in 2024.
Its distributable cash flow is money that Kinder Morgan can use to pay its dividends, pay down its debts, buy back its shares, or invest in its future. If that measure grows as expected, then it will easily generate enough money to cover that modest projected boost in its payout -- while also retaining cash flow for those other key financial purposes.
While an even higher payment would be nice, Kinder Morgan was forced to cut its dividend in late 2015 after overextending its balance sheet. Ever since then, the company has focused on assuring more sustainable cash flows to its shareholders.
Ultimately, a slowly growing dividend that's well supported by healthy operations and a reasonable balance sheet beats a bigger one that's at greater risk of being cut. As a result, investors should appreciate the fact that having been once bitten, the company is now certainly twice shy about making the same missteps that caused its problems nearly a decade ago.
Get started now
Target, Realty Income, and Kinder Morgan each offer their investors a reason to believe that they could get paid a bit more for taking on the risks of owning their companies' shares. If those prospects seem good enough to you to warrant an investment, then now is a great time to consider buying them. After all, you need to own a company's shares before they go ex-dividend in order to have a chance of receiving its dividend payment.
So make today the day you look for ways to get your investments to adequately repay you. If you start seeing more of your investment get paid back to you over time via a solid and growing dividend, you'll likely be very glad you did.
