Passive income investors dream of finding companies that can pay reliable and growing dividends while also beating the market. A company must grow its earnings to distribute more money to shareholders over time. To grow earnings, the business has to be in good financial shape and navigate economic cycles to raise its dividend even if earnings growth languishes.
WM (WM 1.20%), ExxonMobil (XOM -0.84%), and Owens Corning (OC -2.54%) are three businesses that generate near-record-high earnings and use the dividend as an important way to reward patient shareholders.
Three Motley Fool contributors were asked to highlight dividend stocks that outperformed the major indexes over the last three years (based on total return) and are worth buying now. Here's what they came up with.
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WM's growth is accelerating
Daniel Foelber (WM): Formerly known as Waste Management, WM has put up impressive returns for a company that makes money from collecting, transporting, and processing commercial, industrial, and residential waste and recycling. The stock is hovering around an all-time high and has produced a total return of 57.3% over the last three years, handily outperforming the S&P 500 and the Nasdaq Composite.
WM Total Return Level data by YCharts
WM is a good example of why an industry-leading company with an effective business model can fetch a premium valuation even if it isn't in a popular high-growth sector like tech.
WM's sales growth stalled, and its margins noticeably declined in 2020 and 2021. But over the last few years, WM has seen a massive rebound in its margins and accelerated revenue growth. Revenue is up over 25% in the last three years.
WM Revenue (TTM) data by YCharts
WM benefits from an integrated business model that captures the entire waste management integrated value chain. By collecting, transporting, treating, and disposing of waste materials, WM has better control over where waste goes and where it comes from. A comparison would be an integrated oil and gas major like ExxonMobil versus a company that only drills oil and doesn't handle the other aspects of the industry.
Since waste is a necessary part of life, WM enjoys consistent cash flow from a reliable customer base. In the long term, it benefits from a growing population and a growing economy. More people and higher economic output contribute to increased production, consumption, and waste.
Over the last decade, WM's dividend has doubled, and it has reduced its share count by 13.9%. The company's high free cash flow generation supports further dividend increases.
The yield is only 1.4%, but that's more a result of the stock price doing so well, not a lack of dividend raises. Unfortunately, the stock's strong performance has made it expensive. It sports a forward price-to-earnings ratio of 28.5.
WM is at the top of its game, so it could be a stock worth paying up for despite its high price tag. The company has a clear runway for growing earnings and dividends. With a payout ratio of just 46.7%, WM can afford to raise the dividend at a faster rate than earnings -- although the company prefers a hybrid capital return approach that includes buybacks and dividends.
All told, WM has what it takes to continue outperforming the market in the years to come.
Energy prices may rise and fall, but ExxonMobil keeps powering ahead
Scott Levine (ExxonMobil): While the S&P 500 and Nasdaq have both sprinted higher year to date, ExxonMobil's stock has left the two in its dust. The S&P 500 and Nasdaq have climbed about 12% since the start of the year, and shares of ExxonMobil have soared almost 20%. The outperformance has been even better in the last three years, with ExxonMobil producing a total return nearly four times that of the S&P 500 or Nasdaq.
Despite its recent rise, ExxonMobil stock, with its forward-yielding 3.2% dividend, remains a great opportunity for investors looking to bolster their passive income streams.
After reporting a strong end to 2023, ExxonMobil also delighted shareholders with its first-quarter 2024 financial results. Beating analysts' estimates for Q1 2024 revenue of $73.2 billion, ExxonMobil reported $83.1 billion on the top line. And its auspicious view of what lies ahead also energized the bulls' enthusiasm. With plans to expand its assets in Guyana, Brazil, and the Permian Basin, ExxonMobil projects that it will grow earnings at a compound annual growth rate of more than 10% from $8.89 per share in 2023 through 2027.
Operating throughout the value chain, ExxonMobil is an energy stalwart representing one of the best options for investors on the prowl for quality oil dividend stocks. The company has demonstrated steadfast dedication to rewarding shareholders. With its dividend raise in 2023, the company has logged 41 consecutive years of hiking its distribution, and in 2023, ExxonMobil repurchased $17.5 billion in stock. In light of its strong performance last year and its outlook for 2024, it's highly likely that the company will hike it again in 2024.
A stock for housing market bulls
Lee Samaha (Owens Corning): The S&P 500 is up 26.5% over the last year, and the Nasdaq-100 is up 34.4% over the same period, but you don't have to buy fashionable stocks or technology stocks to outperform. Building materials stock Owens Corning is up 59% in comparison, and there's reason to believe it still has significant upside potential.
The roofing, insulation, and composites company has heavy exposure to the North American housing market, and its stock has climbed a wall of worry over the matter since the start of 2023. There's little doubt the housing market is going through a difficult period now, as relatively high interest rates pressure mortgage payers. Indeed, Owens Corning's revenue is expected to remain steady at $9.7 billion to $9.8 billion from 2022 to 2024.
Still, interest rates are unlikely to remain elevated forever, and the company is doing what you might expect it to do in a down market. In other words, it is taking advantage of its financial strength to buy attractive industry assets and prepare for the cycle to turn.
Management is acquiring door company Masonite International for an implied value of $3.9 billion. The deal strengthens Owens Corning's position in the North American housing market. It adds a complementary set of products sold to the same base of builders, contractors, distributors, home centers, and homeowners that it already sells to. As such, management believes it will create a $12.6 billion revenue company with earnings before interest, taxation, depreciation, and amortization (EBITDA) of $2.9 billion, of which $125 million will come from generating post-deal synergies (sourcing, supply chain, and sales, general and administrative benefits) within two years of the deal.
Hopefully, the housing market will be in recovery mode by then, and with a current enterprise value (market cap plus net debt) of $17.3 billion, Owens Corning continues to look like a good value stock for housing market bulls.
