Many dividend stocks lost their luster over the past two years as rising interest rates boosted the yields of short-term CDs and T-bills above 5%. For most investors, it made more sense to collect those risk-free interest payments instead of dividends.
But this year most analysts expect interest rates to stabilize or decline as inflation cools off. The ongoing rally in higher-growth tech stocks could also abruptly end as those popular companies struggle to maintain their rising valuations. Those factors could easily drive investors back toward higher-yielding dividend stocks over the next few quarters.
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When investors look at dividend stocks, they should seek out companies with stable earnings growth, reasonable payout ratios, track records of dividend hikes, and low valuations. I believe these three safe stocks make the cut: Coca-Cola(NYSE: KO), General Mills (NYSE: GIS), and HP(NYSE: HPQ).
1. Coca-Cola
Coca-Cola is the world's largest soda maker, but it's broadly diversified its portfolio by acquiring more brands of fruit juices, teas, bottled water, sports drinks, energy drinks, coffee, and even alcoholic beverages over the past few decades. It also refreshed its carbonated drinks with new flavors, smaller serving sizes, and healthier versions.
That expansion and evolution enabled Coca-Cola to continue growing even as soda consumption rates declined worldwide. In 2023 its organic revenue and adjusted earnings per share (EPS) grew 12% and 8%, respectively. For 2024, it expects its organic revenue to rise 6%-7% as its adjusted EPS grows 4%-5%.
Coca-Cola has raised its dividend for 62 consecutive years, and it spent just 82% of its free cash flow (FCF) on its dividend payments over the past 12 months. It pays an attractive forward yield of 3.2%, and still looks reasonably valued at 22 times forward earnings. All of those strengths make it a safe way to generate some passive income.
2. General Mills
General Mills is one of the world's largest packaged food companies. It owns over a hundred brands -- including Cheerios, Yoplait, Häagen-Dazs, and Green Giant -- and also sells premium pet food products through its Blue Buffalo subsidiary.
General Mills has faced stiff competition from private label brands and healthier products in recent years, but it's offsetting that pressure by refreshing its core brands with new flavors, acquiring higher-growth brands, and divesting its weaker brands. In fiscal 2023 (which ended last May), its organic sales rose 10% as its adjusted EPS grew 10% in constant currency terms.
For fiscal 2024 it expects its organic sales to only rise 0%-1% as its adjusted EPS grows 4%-5% in constant currency terms. The company is grappling with a near-term slowdown as it deals with softer consumer spending, inflationary headwinds, and supply chain issues, but it should eventually recover, and its stock looks cheap at just 14 times forward earnings. It froze its dividend in 2018 to cope with its acquisition of Blue Buffalo, but it started raising its payout annually again in 2021. It spent 57% of its FCF on dividends over the past 12 months, and it pays an attractive forward yield of 3.6%.
3. HP
HP is one of the largest producers of PCs and printers in the world. It sold more PCs and home printers throughout the pandemic as more people worked from home, but it suffered a slowdown after those stay-at-home tailwinds dissipated.
The macroeconomic headwinds exacerbated that pressure as companies reined in their spending on new office equipment. As a result, HP's revenue and adjusted EPS declined 15% and 18%, respectively, in fiscal 2023 (which ended last October). But for fiscal 2024, analysts expect HP's revenue to come in flat as its adjusted EPS rises 4%.
That stabilization should be supported by the broader recovery of the PC market, which can already be seen in the growth of several leading semiconductor companies, as well as its own cost-cutting and streamlining strategies. HP's stock looks dirt cheap right now at nine times forward earnings, and it pays an attractive forward yield of 3.6%.
It spent just 34% of its FCF on its dividends over the past 12 months, and it's raised its payout for 13 consecutive years. Its stock won't blast off anytime soon, but it could be a great place to park your cash until the PC market warms up again.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends HP. The Motley Fool has a disclosure policy.
