In today's uncertain market, investors may find comfort in holding dividend stocks -- especially when they are reliable payers that have raised their payouts annually for at least the last 20 years.
The last two decades have featured a slew of events that triggered major market sell-offs, including the financial crisis, a U.S.-China trade war, the pandemic, and last year's steep surge in inflation (and the Fed's response to it).
Yet through it all, Coca-Cola(NYSE: KO), Caterpillar(NYSE: CAT), and Leggett & Platt(NYSE: LEG) raised their payouts every single year. Here's what makes each of them a great dividend stock to buy now.
Image source: Getty Images.
Daniel Foelber (Coca-Cola): Coca-Cola stock fell nearly 5% on Thursday after comments from Walmart(NYSE: WMT) that the rising use of effective weight-loss drugs like Ozempic is resulting in lower beverage sales. Although investors shouldn't ignore shifts in consumer behavior away from unhealthy options like soda, or the prospect that folks may begin consuming fewer calories altogether, a 5% haircut for a stable stalwart like Coke in a single day seems overblown.
Having raised its dividend for 61 consecutive years, Coca-Cola is one of the longest-tenured of the Dividend Kings. The length of its streak is a testament to the strength of Coke's brand and business model. But the company doesn't get enough credit for its wise use of capital and how its investments have diversified its business and made it so much more than just a soda company.
Notable non-soda brands that Coke now owns include Bodyarmor, Costa Coffee, Gold Peak Tea, Minute Maid, Powerade, Schweppes, Simply, Smartwater, Topo Chico, Vitamin Water, and more. Sometimes, when a company expands into new product categories, it overpays for acquisitions and sees a decline in margins. That hasn't been the case with Coke.
KO Operating Margin (TTM) data by YCharts.
Coke has always had a high operating margin, especially for a company that sells a physical product. But its current operating margins are above historic levels and close to its all-time highs -- which is crucial, because Coke's revenues are still down from their early 2010s peaks.
Coke is truly a global brand. In Q2, only 46% of regional revenue and 31.8% of non-corporate regional operating income came from North America. The U.S. soda segment is still the single most important part of Coke's business -- but it no longer makes or breaks the company.
In sum, Coke is a well-run, high-margin, diversified company that you can count on for dividend growth. The stock's decline over the last six months or so has pushed Coke's price-to-earnings ratio down to 21.6 and its dividend yield up to 3.5%. Investors may want to take a closer look at buying this high-quality company on sale.
Caterpillar's long-term growth prospects
Lee Samaha(Caterpillar): This construction, mining, energy, and transportation company operates in cyclical end markets. When investors think of cyclical stocks, they usually associate them with volatile revenue and earnings, which means their dividend payments can be erratic.
However, the reality is that Caterpillar has increased its dividend for the last 29 years in a row. That's an impressive record, and the streak looks set to continue due to a combination of favorable end markets and management actions.
Management has sought to reduce the cyclicality in Caterpillar's earnings by growing its services revenue, and it's still on track to hit its goal of increasing services revenue from $14 billion in 2016 to $28 billion in 2026, not least through e-commerce initiatives, growing dealers, and selling connected assets.
At the same time, the company has a long-term growth opportunity coming from the federal government's increased infrastructure spending, as well as the possibility of an extended cycle of investment in mining machinery. The management team of its key rival, Komatsu, has already spoken of improving momentum in mining machinery sales this year.
Moreover, Caterpillar's current dividend payout of around $2.5 billion is easily covered by the $4 billion to $8 billion that management expects to generate in free cash flow through the economic cycle. It all adds up to a company with plenty of potential to grow its dividends for many years to come.
Leggett & Platt is an ultra-high-yield dividend stock available on sale
Scott Levine (Leggett & Platt): It's not easy to find a way to get paid for doing nothing. But Leggett & Platt right now offers investors an opportunity to procure prodigious amounts of passive income.
For more than 50 consecutive years, the company has increased the amount of capital it returns to shareholders via the dividend. Currently, the stock is in ultra-high-yield territory with a forward dividend yield of 6.3%. Pair that with the stock's inexpensive valuation and a conservative payout ratio and it's obvious why Leggett & Platt is a great choice for income investors.
Founded in 1883, Leggett & Platt has grown considerably from its origins as a bedspring manufacturer. Today, it's a diversified manufacturer. While beds and bedding components remain the company's bread and butter, representing about 42% of sales, it also generates significant revenues from the manufacture of products and components for the automotive, flooring, furniture, and textile industries.
Trading at 14.4 times earnings, Leggett & Platt might not immediately seem like a screaming buy, but take into consideration the fact that its 5-year average price-to-earnings ratio is 17.6, and its current valuation seems a lot more appealing. For those less concerned with the stock's price tag and more focused on whether its ultra-high-yield dividend is sustainable, it's important to note management's reserved approach. Over the past 10 years, Leggett & Platt has averaged a payout ratio of 68%.
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Walmart. The Motley Fool recommends Novo Nordisk and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.
