Updated by Nate Parsh on May 17th, 2019
The ‘holy grail’ of dividend growth investing is to find businesses that offer:
- Growth potential
- High dividend yields
- Consistent and safe operations
This article takes a look at 4 businesses that have:
- High dividend yields above 4%
- Above average total return potential
- Consistent operations backed by a long dividend history
This combination is difficult to find in today’s low interest rate environment. Low interest rates increase the share prices of high dividend stocks, reducing their yields.
The trade off between growth and dividends makes it difficult to find stocks with both a high payout ratio and solid growth prospects. The more a company pays out in dividends, the less it has to reinvest in growth.
Management must be very efficient with its capital allocation policies to have both a high dividend payout ratio and solid growth prospects. There is little room for error.
Finding businesses that consistently pay rising dividends and also have safe operations is difficult. Strong competitive advantages in the business world are rare.
For instance, there are currently only 57 Dividend Aristocrats. To be a Dividend Aristocrat, a company must:
- Be in the S&P 500
- Have 25+ consecutive years of dividend increases
- Meet certain minimum size & liquidity requirements
You can download an Excel spreadsheet of all 57 (with metrics that matter) by clicking the link below:
The list of Dividend Kings (50+ years of dividend increases) and Dividend Achievers (10+ years of dividend increases) are also quite short, providing further evidence on the rarity of durable competitive advantages.
Businesses with long dividend histories have proven the stability of their operations. This article analyzes 4 consistently high paying dividend stocks, listed in order of increasing rank according to expected returns.
Consistent High Yield Stock #4: Exxon Mobil Corporation (XOM)
Exxon Mobil is a diversified energy giant. The company has a current market cap of $323 billion and produced $290 billion in revenue last year.
The company is one of the 6 oil & gas supermajors found in the world along with:
- BP (BP)
- Eni SpA (E)
- Total SA (TOT)
- Chevron (CVX)
- Royal Dutch Shell (RDS-B)
Exxon Mobil and Chevron are the only two energy giants to be listed among the Dividend Aristocrats.
Exxon Mobil is well-known among dividend growth investors because of its consistently high dividend yield. The current 4.5% yield is well above its decade long average yield of 3.1%. The company also has an impressive dividend growth streak, having raised its dividend for 37 consecutive years.
You can see a continued discussion of Exxon Mobil’s dividend safety in the following video:
Exxon Mobil increased its dividend by 6.1% for the upcoming June 10th payment. The company has compounded its dividend at a rate of 6.9% from 2009 to 2018.
Prior to the oil market downturn, the company generated nearly 90% of earnings from its upstream segment. Since then, Exxon Mobil has managed to reduce its reliance on its upstream segment. The company generated 60% of its earnings from its upstream segment, 26% from its downstream segment and 14% from its chemical segment in 2018.
Exxon Mobil reported first-quarter results on April 26th. The company earned $0.55 per share, missing estimates by $0.18 and declining nearly 50% from the previous year. Revenue decreased 6.7% to $63.6 billion, which was $3.7 billion below estimates. U.S. Upstream operations declined 78% due to lower liquids prices and an asset impairment charge. Downstream operations lost $256 million due to higher maintenance costs and lower margins. On the plus side, upstream production improved 2.4%.
The company is expected to earn $4.20 per share in 2019, which would be a drop of 14% from the previous year. Despite this, we anticipate Exxon Mobil can grow earnings-per-share at a rate of 13.2% annually over the next five years. This is because the company has greatly increased its capital expenditures in order grow production from 4 to 5 million barrels of oil per day through 2025.
Besides aggressive spending to increase production, we also find the company’s Permian basin holdings to be quite attractive. The oil giant controls approximately 10 billion barrels of oil equivalent in the area and should be able to achieve production of at least 1 million barrels per day by 2024.
Due to the company’s size and scale, Exxon Mobil is able to produce a lot of free cash flow.
Source: Earnings Presentation, slide 3
The company generated $3.1 billion in free cash flow in the first quarter of 2019 and paid out $3.5 billion in dividends for a payout ratio of 113%.
Expanding our view, Exxon Mobil generated $36 billion of cash flow from operating activities in fiscal 2018 and spent $19.6 billion on capital expenditures for free cash flow of $16.4 billion. The company distributed $13.8 billion of common share dividends during the same time period for a free cash flow dividend payout ratio of 84%.
While the longer term payout ratio is still elevated, it gives investors reassurance that the dividend is in much better shape than if just the most recent quarter was considered.
Using our expected earnings-per-share estimate for the year, the stock has a forward P/E of 18.1. We have a 2024 target P/E of 13 for the stock. If our target were to occur by 2024, then valuation would be a 6.4% impediment to total annual returns over this period of time.
Total annual returns for Exxon Mobil would include the following:
- 13.2% earnings growth
- 4.5% dividend yield
- 6.4% multiple reversion
In total, we expect that Exxon Mobil can offer a total annual return of 11.3% through 2024. We find that the market has taken a short term view of the company’s business performance. Long-term investors looking for exposure to the energy sector are encouraged to consider adding Exxon Mobil at the current price.
Consistent High Yield Stock #3: Verizon Communications (VZ)
Verizon Communications is the second-largest domestic communications company behind AT&T (T). The company was formed by a merger between Bell Atlantic Corp and GTE Corp in June of 2000. The company trades with a market cap of $235 billion, with annual sales of $131 billion.
There are only a few major players in the U.S. telecommunications industry due to the capital-intensive nature of the business. Telecommunications is also a highly regulated industry. These two factors make it very unlikely that there will be many new competitors in this space. This means that Verizon has to compete against just a handful of competitors.
Dividend growth investors are often attracted to large telecommunications companies not for their earnings growth, but for their ability to pay high dividends. Verizon doesn’t disappoint in this area, as the stock currently yields 4.2%, which is more than twice that of the average yield of 1.9% for the S&P 500. The stock’s 10-year average dividend yield is 4.9%.
Plus, Verizon has a secure dividend payout, which is discussed in greater detail in the video below:
Verizon has increased its dividend for the past 14 years, which means it is not a member of the Dividend Aristocrats or the Dividend Kings. This is due to the company holding its dividend constant in the early part of the 2000s. The company is a member of the Dividend Achievers.
Verizon has compounded its dividend by 2.4% over the past decade. It raised its dividend by 2.2% for the November 1st payment.
Verizon is able to increase its dividend on a regular basis because of the size of its business.
Source: Earnings Presentation, slide 6
The company generated more than $32 billion in revenue in the first quarter of 2019. Verizon earned $1.20 per share, which was $0.04 ahead of estimates and a 2.6% increase from the previous year. The company expects to earn $4.80 per share in 2019, up just 2% from the previous year.
We target a 4% growth rate through 2024, slightly below its 10-year historical average due to low guidance from the company.
Verizon is also able to generate a robust free cash flow, which helps the company pay for its high dividend yield
Source: Earnings Presentation, slide 11
In the most recent quarter, Verizon produced free cash flow of $2.8 million, which was a 33% increase from the previous year. The company also paid $2.4 billion in dividends during the quarter, for a dividend payout ratio of 86%.
While this payout ratio is elevated, the dividend appears much safer over a longer period of time. Verizon generated $34.34 billion of cash flow from operating activities in fiscal 2018 and spent $16.66 billion on capital expenditures for free cash flow of approximately $17.7 billion. The company distributed $9.8 billion of common share dividends during the same time period for a free cash flow dividend payout ratio of 55%.
Verizon also has very compelling growth prospects, giving it an attractive blend of income and growth for total return investors.
The company is set to benefit immensely from the growing popularity of Internet of Things technology, which includes voice assistants, connected speakers, and connected home devices manufactured by companies like Google (GOOG) (GOOGL) and Apple (AAPL).
While Verizon is not a direct manufacturer of these devices, the company will be a provider of connections and networking that will allow it to see revenue growth from this fledgling industry.
In addition, Verizon is in the beginning stages of rolling out its 5G service in more than 30 cities in the U.S. this year. The company has selected 20 U.S. cities that will offer Ultra Wideband service, including Boston, Dallas and Washington D.C. More cities will be revealed later this year.
Verizon currently trades at $57. Using the company’s guidance of earnings-per-share of $4.80 for the current year, the stock’s P/E is 11.9. This is below the 10-year average P/E of 14. If the stock were to meet this P/E by 2024, then valuation would be a 3.3% tailwind to total annual returns.
Total returns could be as follows:
- 4.0% earnings growth
- 4.2% dividend yield
- 3.3% multiple expansion
We expect that Verizon can offer a total annual return of 11.5% through 2024.
Verizon does carry $136 billion of debt on its balance sheet, which may make some investors concerned. However, Verizon generates a high level of free cash flow that leave the company plenty of room to continue to pay and raise its dividend in the future.
Consistent High Yield Stock #2: Altria Group (MO)
Altria Group was founded by Philip Morris in 1847 and has grown to become a giant in the tobacco industry. The company sells the Marlboro cigarette brand in the U.S. and a number of other non-smokeable brands, including Skoal, Copenhagen and the Ste. Michelle wine brand. Altria also has a 10% ownership stake in global beer giant Anheuser Busch Inbev (BUD). The company has a market cap of $98 billion, with nearly $20 billion in annual sales.
Despite declining rates of cigarette usage, Altria’s Marlboro remains the most popular brand in the U.S. Given the strength in this product name, the company is able to charge a premium price without losing market share. Marlboro maintains approximately 40% market share in the U.S.
Tobacco companies often pay high dividend yields. For example, Philip Morris (PM), which was spun off from Altria in 2008, offers a yield above 5% at the moment. Altria currently yields 5.9%, which is more than 3 times the average yield of the S&P 500. The stock’s 10-year average dividend yield is 5.3%. Altria has increased its dividend for the past 49 years.
Altria has a secure dividend. Additional information regarding Altria’s dividend safety is provided in the following video:
Even by its own standards, the company has been generous with dividend increases over the past few years. Altria gave investors two dividend increases in 2018. First, investors received an 6.1% increase for the April 10th, 2018 payment. Two quarters later, the company raised its dividend with a 14.3% increase for the October 10th, 2018 payment.
Fortunately for the company, the tobacco industry is not a very capital intensive business. Altria paid out just $38 million in capex in the quarter and $238 million in all of 2018.
Altria generated $2.25 billion in free cash flow in the first quarter while paying out $1.5 billion in dividends for a payout ratio of 67%.
Last year, the company produced $8.15 billion in free cash flow while paying out $5.4 billion in dividends for a payout ratio of 66%. Altria’s dividend payout ratio is quite low and we expect that the company will be able to continue growing its dividend even as smoking rates continue to decline.
Even as cigarette consumption has declined, Altria’s business performance has allowed it to offer nearly five decades of dividend growth.
The company reported first quarter earnings on April 25th, 2019.
Source: Earnings Presentation, slide 3
Altria earned $0.90 per share in the quarter, which was $0.03 below estimates and a 5.6% decline from the previous year. Revenue declined 6% year-over-year to $4.4 billion. These totals look slightly more impressive when the company’s 14.3% decline in cigarette volumes is taken into account.
The company expects to earn $4.21 per share this year, a 5.5% increase from 2018. We expect Altria to grow earnings-per-share by a rate of 4% through 2024 due to expected cigarette volume declines.
Why are we bullish on the company despite smoking declines? Besides being able to occupy a large portion of U.S. tobacco industry, we like the company’s opportunities and investments in other areas.
For example, the Food & Drug Administration recently announced that it has authorized sale of Philip Morris’ IQOS heated tobacco system in the U.S. market. Under an exclusive licensing agreement, PM USA, a wholly-owned subsidiary of Altria, will market and sell the IQOS product lines, starting with the Atlanta, Georgia market.
At the same time, Altria made a $12.8 billion investment, representing a 35% equity stake, in e-vapor manufacturer Juul Labs.
Source: Earnings Presentation, slide 17
As you can see, Juul has seen its market share in its product category grow to impressive heights in just one year.
These developments should offer Altria additional growth as usage of E-Vapor products has been growing among consumers.
Source: Earnings Presentation, slide 14
In addition, Altria announced on December 10th, 2018 that it was taking a $1.8 billion investment in Canadian marijuana producer Cronos Group. This investment would give the company a 45% stake in Cronos Group with a warrant to acquire an additional 10% ownership interest. It is worth noting that 33 U.S. states as well as Canada have legalized marijuana in some capacity. Altria’s investment gives the company an opportunity to capitalize on the cannabis industry.
Altria currently trades hands at $52. Using the company’s guidance of earnings-per-share for the current year, the stock’s P/E is 12.4. This is below our 2024 target P/E of 15. If the stock were to meet this P/E by 2024, then valuation would be a 3.9% tailwind to total annual returns.
Total annual returns for Altria will come from the following areas:
- 4.0% earnings growth
- 6.1% dividend yield
- 3.9% multiple expansion
We estimate that the stock can offer a total annual return of 14% over the next five years. Considering the company’s dividend history and investments in non-traditional tobacco products, we feel that Altria is a good candidate for purchase.
Consistent High Yield Stock #1: AT&T (T)
AT&T (T) is the largest telecommunications company in the U.S by revenue. AT&T has a market cap of $228 billion and produced $171 billion in revenue last year. The only competitor with a similar size is previously mentioned Verizon.
The company has long been a favorite of dividend growth investors both for its massive 6.6% dividend yield as well as its 35 years of dividend growth. The company’s 10-year average dividend yield is 5.6%.
We believe AT&T’s dividend is highly secure, which is further discussed in the video below:
AT&T typically increases its dividend by $0.01 per share per year and 2019’s increase was no different. For the February 1st payment, shareholders received a $0.01, or 2%, increase.
AT&T reported first quarter financial results on April 24th, 2019. The company’s adjusted earnings-per-share during the quarter was $0.86, in-line with estimates and a 1% increase from the previous year. Revenue grew 18% to $44.8 billion, though this was $284 million below estimates.
As with its competitor Verizon, AT&T has a tremendous scale-based competitive advantage in the highly oligopolistic telecommunications industry.
Source: Earnings Results Presentation, slide 6
In addition to nearly $45 billion revenues last quarter, the company generated free cash flow of $5.9 billion. The company also paid $3.7 billion in dividends during the quarter, for a dividend payout ratio of 63%.
In 2018, AT&T generated free cash flow of $22.4 billion and paid out $13.4 billion in dividends for a payout ratio of 60%. The company had a payout ratio in the 70% range for much of the last decade, so the payout ratio is coming down even as AT&T continues to raise its dividend.
We find AT&T’s combination of communications and entertainment offerings quite appealing. As we live in an increasingly connected world, more and more people use their cellular devices, data plans and other forms of connectivity.
AT&T added 179,000 postpaid smart phone net adds versus just 42,000 postpaid smartphone net adds in the first quarter of 2018. The company had a churn rate of just 0.93%. AT&T did lose 544,000 net video subscribers during the quarter.
The Time Warner merger, completed on June 15th, 2018 has also benefited the company. Revenue for Warner Bros. increased 9.4%. Revenue for HBO declined 6.3% while Turner was down 2.9%. HBO did see record viewership due to the Game of Thrones’ premiere in April. Subscription revenues for Turner grew, but ad revenues declined due to a shift of NCAA Final Four games.
AT&T is expected to earn $3.60 per share in 2019, which would be a 2.2% increase from 2018. We project that the company can increase earnings-per-share at a rate of 3.1% annually through 2024 due to the acquisition of DirecTV and Time Warner.
Shares of the stock trade at $31 at the moment. Based off expected earnings-per-share for the current year, AT&T has a P/E of 8.6. We have a target P/E of 12 on the stock. If AT&T traded at our target P/E by 2024 then valuation would be a 6.9% tailwind to total annual returns over this time period.
Total annual returns would consist of the following:
- 3.1% earnings growth
- 6.6% dividend yield
- 6.9% multiple expansion
Altogether, we expect that shares of AT&T can offer a total annual return of 16.6% through 2024, the highest projected total among the stocks on this list.
Finding stocks that have high dividend yields, long histories of steadily increasing dividend payments and strong growth prospects can be difficult in today’s market.
Exxon Mobil, Verizon, Altria and AT&T all offer impressive dividend growth histories, attractive yields and potential for high total returns over the next five years. Each company is well-known amongst dividend growth investors and all stocks receive a buy recommendation from Sure Dividend at this time.