Having a track record for paying a dividend is one thing. But continuously raising the payout to a record high is a recipe for value creation. Investors have to rely on capital gains to get a return from a company that doesn't pay a dividend. But with a company that keeps raising its dividend year after year, income is generated from doing nothing. And with the dividend alone, each share becomes more valuable.
The beauty of a growing dividend is that a stock's yield will keep increasing if the price stays the same, which can act as an added catalyst to justify a stock price going up. Throw in a growing underlying business and strong fundamentals, and there are multiple factors to support a worthwhile investment.
ExxonMobil (XOM +0.62%), Target (TGT +0.68%), and Honeywell International (HON 0.27%) are three quality companies with the growth needed to support future dividend raises. Here's what makes each dividend stock a great buy now.
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ExxonMobil has decades of strong dividend growth under its belt
Scott Levine (ExxonMobil): While ExxonMobil attained a high-water mark for its dividend in 2023, investors familiar with the company know such a feat is nothing new. In fact, ExxonMobil has increased its payout to shareholders for the past 40 consecutive years -- during which it has grown the dividend at an average annual rate of 5.9%. Compounded with this impressive track record, the company's recent acquisition should have income investors particularly interested in powering their passive income stream with ExxonMobil, along with its 3.5% forward-yielding dividend.
ExxonMobil, an integrated oil supermajor, already represented one of the more appealing dividend stocks in the oil patch. However, the stock has become even more attractive since the company announced its plan to acquire Pioneer Natural Resources.
Because Pioneer's assets in the Permian Basin are in proximity to ExxonMobil's footprint, management expects the acquisition will help it optimize production and reduce operating costs. Lauding the transaction, ExxonMobil CEO Darren Woods said, "The combined capabilities of our two companies will provide long-term value creation well in excess of what either company is capable of doing on a stand-alone basis."
In addition to income investors, those looking for bargains in the marketplace will find ExxonMobil attractive. Currently, the stock is valued at 7 times operating cash flow, a discount to its five-year average cash-flow multiple of 8.5.
NYSE: XOM
Key Data Points
Target's valuation is too cheap to ignore
Daniel Foelber (Target): In late September, Target announced a quarterly dividend of $1.10 per share, payable on Dec. 10 to shareholders of record at the close of business on Nov. 15, 2023. It marks the second $1.10 per share quarterly dividend and would give Target shareholders $4.36 per share in dividend payments for 2023 -- the highest in company history.
Target is often compared to Walmart (WMT +0.86%) and Costco Wholesale (COST +1.08%), and for good reason, given the similarities of the businesses. And frankly, both Walmart and Costco have done a better job managing their inventories and inflationary pressures.
However, Target has a more discretionary product mix than Walmart and Costco. And for that reason, its performance is more vulnerable to broader economic ebbs and flows. Given the cyclical nature of Target's business, it's all the more impressive that it is a Dividend King, with 2023 marking the 52nd consecutive year Target has raised its dividend.
Target also has a far higher ordinary dividend yield than Walmart and Costco. Target's yield is 4.1% compared to just 1.4% for Walmart and 0.7% for Costco.
Granted, Costco has been known to reward its shareholders with special dividends. It paid out a $10 per share special dividend in 2020, a $7 per share dividend in 2017, and a $5 per share special dividend in 2015. However, given the infrequent nature of these special dividends, they should be viewed more as cherries on top of the investment thesis than as a reliable source of passive income.
NYSE: TGT
Key Data Points
Target has the track record, the yield, the brand power, and the industry-leading position to make it an excellent dividend stock. Perhaps best of all, Target stock is also looking like a steal now that it is down 27% year to date and 56.9% over the last two years. Target stock now trades with a price-to-earnings (P/E) ratio well below its five-year median. The same can't be said for Walmart and Costco, which are more than twice as expensive as Target stock from a P/E standpoint.
TGT PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio.
A classic mistake investors make is to look at an industry and assume that the safer, less volatile stock is a better one to own during uncertain times. And while it's true that Walmart and Costco, as businesses, have been less disrupted than Target, Target's stock has taken a massive hit, while Walmart's and Costco's haven't. Once the valuation is factored in, Target quickly becomes a safer investment, even though it isn't a safer company.
An industrial conglomerate at the crossroads
Lee Samaha (Honeywell International): For shareholders holding the stock on Nov. 10, the industrial company will increase its quarterly dividend from $1.03 to $1.08 per share. The increase marks a steady improvement, and at the time of writing, the yearly yield is 2.3%.
It's hardly a high-yield stock, but it's highly unlikely shareholders would want it to be. If anything, the company's "problem" is its failure to be more aggressive with acquisitions in recent years.
I've used quotation marks in calling that a problem because the share price decline this year (down 14%) is arguably more of an issue of entering the year on an overly rich valuation rather than any vote on the company's progress. Where Honeywell deserves criticism is in its neglect to use its entire financial firepower to grow the business.
NASDAQ: HON
Key Data Points
Honeywell is an industrial conglomerate, meaning its businesses will never fire on all cylinders at all times, but they will support each other across varied market conditions. One advantage of such a structure is that the consistency in its cash flows means it can take advantage of market weakness to buy businesses on good valuations in a downturn.
Unfortunately, that's not something Honeywell has done to a great extent in recent years. Still, new CEO Vimal Kapur is talking about a pipeline of multibillion-dollar deals, and Honeywell has a collection of businesses in exciting areas, like automation, aerospace, and sustainability. If it can augment them by using its financial firepower to enhance its growth profile, there will likely be more dividend increases in the future.
