Everyone loves a stock that produces outsized gains relative to the S&P 500. A less flashy but rewarding accomplishment is when companies consistently raised the dividends they pay to investors. Higher dividends can lead to higher passive income, and provide a hands-off way to book gains without the need to sell stock.
American States Water (AWR 0.49%), United Parcel Service (UPS 0.65%), and Allegion (ALLE 0.78%) just raised their payouts to record highs. Here's why all three dividend stocks are worth buying now.
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American States Water is a regal dividend stock hiding in plain sight
Scott Levine (American States Water): It wouldn't do American States Water stock justice to simply say that its dividend is now at a record high. The water utility has seen plenty of ebbs and flows in its business, but all the while it has succeeded in hiking its dividend -- for nearly seven decades, making it the longest-tenured Dividend King.
One would think that achieving such a feat would result in the company gaining popularity in the investing world, but the water utility is hardly a household name. But investing isn't a popularity contest, and income investors would be wise to scoop up shares of American States Water -- and its 2.4% forward-yielding stock -- to help strengthen their passive income streams.
The company's ability to consistently reward shareholders with a growing dividend stems from the nature of its business. Although the company has electric utility and contracted water subsidiaries, the company's bread and butter is its regulated water utility business. In 2023, the regulated water business represented 73% and 82% of consolidated revenue and net income, respectively. While American States Water can't arbitrarily raise rates on its regulated water utility customers, it can file rate requests with public utility commissions to ensure the company achieves certain rates of return. Consequently, American States Water has good foresight into future cash flows, which helps the company plan accordingly for capital expenditures such as dividend increases, acquisitions, and infrastructure upgrades. American States Water has consistently rewarded shareholders with a growing dividend without getting itself into deep water. Over the past 10 years, the company has averaged a conservative payout ratio of 56%.
With shares currently trading at 15.2 times operating cash flow -- a discount to the stock's five-year average cash flow ratio of 23 -- now seems like a particularly good time to dip your toes in an American States Water investment.
UPS has a compelling yield that makes up for its recent struggles
Daniel Foelber (United Parcel Service): The company's most recent quarterly dividend was $1.63 per share, just one cent higher than the previous payment. But UPS deserves credit for building upon its historic 49% raise in 2022. The company has now increased its dividend for 15 consecutive years, with the dividend up 262% during that time frame. The stock yields 4.3%, which is far better than most top dividend stocks.
When a quality, industry-leading company has a higher-than-usual yield or a dirt cheap valuation, it's usually because it is out of favor. UPS has had a rough few years of negative growth, which has been a particularly bad look relative to its surging growth in 2020 and 2021, and in comparison to FedEx -- which is up 19% over the last year, compared to a 20% decline for UPS.
The company's Analyst and Investor Day presentation provides many in-depth details on where the company has been and where it wants to go. The key takeaways are that UPS inaccurately forecasted demand and overexpanded its network because it thought the surge in package deliveries during the pandemic would prove sticky, when in reality small package delivery volumes have stagnated.
UPS is turning to its high-margin healthcare segment to unlock growth. Thanks to a blend of organic and inorganic growth, healthcare is expected to contribute about half of the company's total revenue gains by 2026.
UPS is in prove-it mode. The last year or so has been especially messy, including several earnings misses and guidance cuts. The good news is that UPS has now reset expectations and given investors specific goals and timelines to hold it accountable. UPS also has plenty of room to surprise to the upside.
The company has the makings of a worthy turnaround play and solid long-term investment, especially once factoring in the juicy 4.3% dividend yield.
Security is going technological
Lee Samaha (Allegion): The security and access solutions company's dividend yield isn't anything to write home about at 1.4%. However, buying stocks that have raised their dividends to record levels isn't just about the yield. A company increasing its dividend is usually a sign of confidence in the future.
As the chart below shows, Allegion could pay a much larger dividend if its management wished.
ALLE Dividend Per Share (Quarterly) data by YCharts
That said, investing shareholders' assets in growth makes more sense, and there's no shortage of long-term opportunity at Allegion, principally coming from the convergence of electronics and mechanics in locks and access doors. While management sees its non-residential mechanical and residential markets growing at a sedate low-single-digit annual growth rate, its non-residential electronics & software market is set for high-single-digit growth.
The latter opportunity concerns the benefits of internet-enabled locks and security systems. For example, the increased functionality of a commercial building owner/manager being able to control, monitor, and customize access to building areas through Internet of Things (IoT) applications.
It's not only an opportunity to improve security and reduce crime (principally shrinkage) but also could serve as a tool to gather data on workflow in a building, ultimately leading to productivity improvements. Trading at slightly less than 21 times the midpoint of its 2024 free cash flow (FCF) guidance, Allegion might not appear to be a great value. Still, Wall Street sees Allegion growing its FCF at a double-digit rate in the following years, and nobody doubts the long-term growth potential at Allegion.
