With interest rates still near their all-time lows, income investors continue to hunger for anything with a solid and growing dividend. Fortunately, the market is always offering something on sale for investors trying to build a safe dividend portfolio.
Read on to learn about 10 high-quality, high-yield blue chips trading near their 52-week lows, and more importantly, why now could be a great time to add them to your own diversified dividend portfolio.
Several of these companies are in our Top 20 Dividend Stocks and Conservative Retirees dividend portfolios, and most of them have high marks using our proprietary Dividend Safety Scores, which have successfully predicted dividend cuts for major companies such as Kinder Morgan and ConocoPhillips. Investors can learn more about Dividend Safety Scores here.
Coca-Cola is one of the greatest examples of blue-chip dividend growth stocks available on the market. In fact, with 53 straight years of dividend increases Coke is among the most elite of dividend stocks, earning a dividend king label.
Of course, with obesity a growing concern worldwide, and U.S. soda sales sales declining for 11 consecutive years, Coke management has to address the market's concern about where its future sales, earnings and free cash flow, or FCF, growth will come from.
Fortunately, management has a solid three-stage plan to keep the dividend growth alive and well for decades to come. First of all, the company is selling off 39 bottling plants through the end of 2017. This will effectively make the new Coca-Cola a smaller, more profitable company, as it will mainly serve as the marketer and distributor of Coke's syrups.
This is less capital intensive, and management expects the company's FCF margin to increase an impressive 50%, from 18% to 27% once the transition is complete.
Secondly, management has also targeted $3 billion in cost cutting by 2019 from its nonbottling operations that should help further boost margins, and strengthen its dividend profile.
Lastly, Coke is focusing more of large cash reserves on acquiring and expanding into water, tea, and juices, whose global sales are projected to grow at a 5% compound annual growth rate over the coming decades.
The combination of all three legs of the company's largest-ever business model evolution should be enough to allow it to continue growing its generous dividend, by around 5.9% annually over the coming years.
This should mean a nice, market-beating 9.2% total return for investors. And since Coke is 31% less volatile than the market overall, this means that on a risk-adjusted basis Coke makes an outstanding long-term core holding for any dividend growth portfolio, especially at the current price.
McDonald's has long been a favorite among dividend lovers, and for good reason. The company just raised its dividend by 5.6%, marking 40 straight years of rising payouts to shareholders. More importantly, CEO Steve Easterbrook has made strong progress in his efforts to turn the world's largest fast food purveyor into a faster-growing "modern, progressive burger company."
That includes a renewed focus on higher-quality ingredients, more-popular menu changes (such as all-day breakfast and the new McPick 2 value options), and and an increased use of technology via the highly successful "experience of tomorrow" restaurant modernization efforts.
All these efforts have resulted in renewed same-store sales growth across all the company's regions. More important for dividend investors is management's plan to transition the company to an all-franchise operation. Specifically, management is targeting a goal of refranchising 4,000 company-owned stores by the end of 2018 as part of a larger plan to get to 95% franchisee ownership.
Why is management so gung ho on the franchise model? Simply put, it's a less capital-intensive business model in which McDonald's would get a cut of total restaurant sales in exchange for focusing on international marketing and brand-building efforts. In other words, management's current plan, which is expected to reduce expenses by $500 million a year, will boost free-cash-flow margin and allow McDonald's to continue growing its generous, and highly secure dividend, for many more years to come.
T. Rowe Price is one of America's largest financial managers, with a solid track record of mutual fund outperformance over the last 20 years relative to its peers. This has allowed for impressive growth in assets under management, which stood at $777 billion at the end of June of 2016.
The shareholder-friendly corporate culture has resulted in impressive dividend growth, with T. Rowe Price's 29 consecutive years of dividend growth placing it in the revered ranks of a dividend aristocrat.
While 2016 has been a tougher year, with organic growth likely to come in at just 1% (thus explaining the market's punishing of the stock price), over the long-term, T. Rowe Price's strong brand, and sticky, retirement fund-heavy asset base should continue to mean steady, secure cash flows to keep the dividend both highly secure, and growing.
Going forward, T. Rowe Price is likely to see continued steady organic growth thanks to two big competitive advantages. First, its fund managers continue to be among the best in the industry, with 85%, 81% and 90% of its funds beating its peers on three-, five-, and 10-year bases.
Secondly is the company's successful and increasingly popular target-date retirement funds, which should benefit from investors' increasing desire for hands-off, passive investing vehicles. Over the last five years the assets under management in this fund category has tripled from $60 billion to $178 billion, and even in 2016, organic growth has been a consistent 3% over the last several quarters.
Which means that T. Rowe Price's current low share price is a market overreaction to a challenging 2016 and its generous, rock-solid dividend is likely to continue growing strongly in the coming years and decades.
Like many of the stocks I'm highlighting today, Target is a venerable blue-chip dividend grower, with its 48 consecutive years of rising payouts putting it just two years away from dividend king status.
Of course, you don't fall to a 52-week low without some catalyst for market pessimism, and in this case that's due to same-store sales falling 1.1% in the second quarter. Overall this year, increased competition from Amazon and Walmart has the market feeling rather bearish about the stock, which has fallen 21% since mid-April.
There are two main reasons, however, for long-term dividend lovers to take advantage of this low share price. The first is that Target's generous dividend yield of 3.4% is very well covered by free cash flow and earnings. The EPS payout ratio is only 48%. This means that the payout remains extremely safe and is likely to continue growing despite the company's recent growth challenges.
The second is that management is working hard to improve the company's operations (meaning $2 billion in targeted cost cuts), as well as focusing increasingly on online sales, as well as its higher-margin signature goods. These include style, baby, kids, and wellness goods, which are sold under private-label brands, which have stronger pricing power.
In addition, management has seen good success with both urban and flex stores, which are located in cities where Walmart, and other rivals typically aren't located. These stores are generally 25% to 50% smaller than the main big box stores, and are able to focus more on higher margin goods. In addition, because they are smaller, the productivity per employee is about double that of the larger stores.
Because high-density urban areas are underserved by big box retail, these CityTarget stores give the company a long potential growth runway relative to the 1,800 large stores that make up the majority of its current sales.
Finally, Target is attempting to leverage its stronger relative brand (more upscale with better customer service), through its REDcard loyalty program. This is a store credit card that offers 5% off any purchase made in the store and has proven a good way of keeping shoppers more loyal than most big box retail customers.
Simon Property Group is the world's largest (by market cap) retail Real Estate Investment Trust, or REIT. It owns or has interest in more than 200 upscale malls and outlet centers in North America, Europe and Asia.
Thanks to its focus on upscale properties, the company has been able to generate strong annual rent increases, despite the rise of online shopping. In fact, this year the REIT raised its base minimum rent by 4.5%, something that lower-quality mall REITs can't hope to match.
The key to this REIT's long-term success has been its exceptional management team, lead by David Simon, a veteran in the mall REIT industry who's been in the top spot since 1995. Under his tenure not only has Simon been able to maintain industry-leading occupancy rates, even in tough economic times (currently at an all-time high of 96.3%), but it is also able to invest in new malls, achieving impressive 7% to 10% cash yields on invested capital.
And thanks to its massive size, and the economies of scale that go with it, Simon Property Group has one of the strongest balance sheets in all of REITdom, with an A rating from Standard & Poor's. This allows it to have low borrowing costs and helps fund impressive FFO/share growth. In fact, year to date, Simon Property Group has reported 6.8% FFO/share growth, which is very impressive considering its massive size.
That fast-growing cash-flow results in one of the safest dividends in the REIT industry, with a ultra low EPS payout ratio of just 61%. Analysts currently expect this gold standard of mall REITs to grow its dividend by 6.3% CAGR through 2025, which when combined with its 3.6% yield, means that long-term income investors can reasonably expect about 10% total returns from this blue-chip.
Public Storage is America's largest public storage REIT. It owns more than 2,300 public storage properties around the country, with 40% of them being located in the fast-growing states of California, Texas and Florida.
Public Storage has been hit hard recently, as have all REITs, as the market has priced in the increasing likelihood of a December interest rate increase. In the case of Public Storage, it makes for a great buying opportunity at this time.
That's because of the generous 3.9% dividend, which is highly secure thanks to a 73% payout ratio. The dividend should also continue to grow at a double-digit clip. Management has numerous ways of growing its funds available for distribution (equivalent to free cash flow), which were up 10.4% year over year in the third quarter.
Those methods include: acquiring new facilities (PSA owns just 6% of America's storage facilities, meaning lots of room for industry consolidation), expanding its existing facilities ($600 million in organic growth backlog underway), raising occupancy, and raising rents.
This last method is helped by the short-term, (typically one year) leases on its storage facilities. Thanks to its strong market share in key high-growth markets, especially on the West Coast, (where tough zoning regulations mean new public storage facility construction is a slow, and expensive process), Public Storage has very sticky assets. Specifically, this is because customers aren't likely to research competing storage options, and then spend a day moving their stuff to a competitor over a savings of just $10 to $15 per month.
So with a yield near 4%, and likely 10% dividend growth for at least the next few years, at today's share price, dividend investors can expect around 14% total returns, far in excess of the market's historical 9.1% CAGR since 1871.
Kimco is America's largest community shopping center (in other words, open-air mall) REIT, with 534 properties in 35 states, and Puerto Rico. This vast scale gives it very high diversification (9,000 leases and more than 4,200 total tenants). In fact, even its two largest tenants, TJX and Home Depot, make up just 5.6% of its annual rent.
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Kimco, down 19% since Aug. 1, offers an attractive long-term buying opportunity, thanks to three key factors.
First, open-air malls, especially in Kimco's key markets, have proven far more resilient to the disruption of online retailing, thanks to being anchored by popular brands, such as Home Depot, off-price retailers such as TJ Maxx, and supermarkets such as Walmart and Albertsons.
Combined with a dearth of new center construction over the years, this has allowed management to extract solid rental increases, as well as execute on high-margin property upgrades and new development. In fact, Kimco is forecasting net operating income, or NOI, growth of about 5% through 2020 thanks to a $3 billion growth backlog of planned investments that should generate returns of 8% to 13%.
Since the financial crisis forced it to slash its dividend (as many REITs did), Kimco has grown its payout at a 7.3% CAGR, including 2017's just-announced increase of 5.9%. With a highly secure dividend, courtesy of a payout ratio of 79%, I think this REIT should be capable of generating solid 5% to 6% dividend growth over the next few years, for a likely total return of 9.1% to 10.1%.
Founded in 1964 in New York City, Macerich is a medium-sized REIT specializing in high-end malls, with most of its 50 current properties located on the East Coast, West Coast and Texas.
Its stores generally cater to premium, luxury brands such as Tesla, Victoria's Secret and Lululemon Athletica. The high-end focus has helped the REIT to generate outsized returns on investment, with management currently working on $780 million in new developments/renovations with an expected cash yield of 8.8%.
Since the financial crisis Macerich has been growing its dividend at a 5.8% CAGR. This should continue given the strong development pipeline. And with a payout ratio of just 69%, the current yield, is secure, as well as generous.
With shares falling 15% since Aug. 1, long-term investors in Macerich have a chance to open a position at highly attractive share price; which should generate 10% to 11% in total returns over the coming years.
Like many storage REITs, Extra Space Storage has been hammered hard by the REIT correction that began on Aug. 1. In fact, it's down 14% since then, and that means the stock is a tantalizing long-term buying opportunity right now. This is one of the best storage REITs in the business, one that happens to also be growing like a weed.
In fact, Extra Space Storage just reported a 24.3% year-over-year increase in FFO per share, courtesy of its torrid pace of acquisitions. Yet with slightly more than 1,400 properties, Extra Space has just 4.9% of the total storage locations in America, which means that its potential growth runway remains very long indeed.
That's great news for dividend lovers, because the despite the current yield being very attractive, as well as secure, courtesy of a year-to-date AFFO/share payout ratio of 83.3%, Extra Space Storage has one of the best dividend growth track records of any REIT -- 35.1% CAGR since the financial crisis (the last increase was 32.2%).
Now of course that kind of growth rate isn't sustainable over the long-term,given how fragmented the storage property market is. Long-term investors can probably expect low- to mid-teens growth over the next decade. That could mean mouth-watering total returns of 15% to 20% in the coming years from this hypergrowth super REIT.
Ford has made one of the single greatest corporate turnarounds in American history, under the strong, and visionary leadership of CEOs Alan Mulally and Mark Fields. Not just has the firm come out of the financial crisis with a much stronger balance sheet, but it's managed to free itself of its legacy UAW retiree health care costs, through the 2007 creation of the VEBA, or Voluntary Employee Beneficiaries Association.
In addition, it's reworked union contracts to make future idling of plants during industry downturns much less expensive, and refocused itself on creating a much more reliable, and competitive portfolio of more vehicles that have proven big hits with consumers around the globe.
As importantly, these new models have been designed around a much smaller number of global platforms, and that has greatly reduced design and manufacturing costs and turned Ford into profit and free cash flow machine.
Meanwhile dividend investors benefit from a new, hybrid dividend policy in which management guarantees a minimum 15 cent-per-share quarterly base dividend, with an annual supplemental payout to bring the total dividend payout to 40% to 50% of adjusted annual EPS.
More importantly than the size of the current dividend though, is the fact that it is far safer than Ford's past payouts. Management has run stress tests simulating another great recession and believes that even during the next recession, and its commensurate decline in auto sales, the 60 cent-per-share dividend will remain sustainable without sacrificing the company's ability to continue developing new models.
Future dividend growth is likely to come from improved earnings that result from management's targeting an additional $3 billion in future cost reductions from a transition to just eight global platforms, as well as Mark Field's ambitious plans for Ford's personal mobility division to serve as a fleet manager for various autonomous fleets.
In other words, unlike the stagnant and slow-to-adapt Ford of the past, today's Ford is ahead of the game and being run by a visionary management team that is more than a match for its rivals, both in Detroit, overseas, and Silicon Valley.
This article is commentary by an independent contributor. At the time of publication, the author held positions in TROW, MCD and TJX.