One of the more interesting discussions in dividend investing revolves around how a company should spend its earnings.
There are two options. First, companies can invest in themselves, growing their sales and giving them enough resources for planned expansions or acquisitions. Should management play its cards right, this can be a catalyst for massive growth. It can also spend its earnings on shareholders to share buybacks or dividends. This increases shareholder value and makes the company more attractive to long-term investors.
However, there's also a question about how much a company should give back to its shareholders. The dividend payout ratio, expressed as a percentage, indicates how much of the company’s earnings after expenses and taxes are allotted for dividends or buybacks.
Many experts agree that a company should allocate less than 50% of its net income in dividends. Unfortunately, some companies pay more than 50%—or even more than 100%—of their earnings to investors, creating an unsustainable practice bound to generate financial backlash over the long run.
Dividend Aristocrats need to balance out their ability to pay dividends, increase said dividends, and keep a portion of their earnings for expansion.
With that in mind, I’ve looked through the entire list of Dividend Aristocrats and screened for those with less than 40% payout ratios but, crucially, offer more than 3% dividend yields—which I think provides an excellent blend of stability, income, and dividend growth potential.
Archer Daniels Midland Co. (ADM)
Archer Daniels Midland Co. made quite a few headlines last month—and not in a good way. There were talks of anomalies in the Nutrition segment’s accounting. CFO Vikram Luthar was placed on administrative leave. Executive bonuses were delayed, the Q4 report was postponed, and share prices fell more in one day than during the kickoff to The Great Depression.
In addition, the company is contending with weakening demand for meat alternatives. Margins are also expected to decline in 2024. So, why is this stock included in this list?
Well, first, ADM is a Dividend Aristocrat. The consistent and reliable dividend increases mean something to investors. The company currently pays $1.85 per share per annum, representing a 3.41% yield based on its last closing price. Archer Daniels Midland has also increased dividends for nearly 50 years.
Secondly, the company is unlikely to miss its dividend payouts due to a lack of funds as the payout ratio is only 22.89%.
Thirdly, the stock price has dropped 19.50% since the news emerged about the accounting issues. That’s quite a discount for dividend growth stock. Interested inventors may view this as an opportunity to dip their toes in a well valued stock, or opt to wait for further news. Or, for risk-takers, you can buy now and wait for things to change.
Franklin Resources, Inc. (BEN)
Franklin Resources, Inc. is one of the world’s largest investment management companies with a solid reputation as a Dividend Aristocrat. It operates in over 150 countries and provides investment management services to many client bases. Its brands include K2, ClearBridge Investments, Lexington Partners, Martin Currie, and more.
BEN’s Q1 2024 was mixed. Top-line values ended flat YoY, while the bottom line increased by 52%. Diluted EPS also grew 56% YoY. Operating income also grew 6%.
Now, frequent readers might notice that I often have stock recommendations that, shall we say, run contrary to analyst consensus. BEN is no exception, with its current Moderate Sell rating that dates back to three months ago.
Remember, because Dividend Aristocrats tend to be established companies with stable operations, they are not typically subject to massive price swings. The second reason is that you can recover any paper losses incurred when purchasing Aristocrats over a longer time horizon. Plus, you get to buy a great company at a discount, so what’s not to love?
With that in mind, I recommend BEN as a potential buy. Its annual dividend is $1.21, or roughly 4.33%, with a 32.16% payout ratio. Additionally, the company has increased dividends for 44 years.
Exxon Mobil Corp. (XOM)
Exxon Mobil Corporation is undoubtedly a stock with its fair share of headlines. Whether that’s enough to discount it entirely or is just a thing of the past is up to the investor. The multinational company operates in the exploration and development of oil and natural gases. XOM currently operates two segments focused on its environmental impact: Product Solutions and Low Carbon Solutions.
Now, the company’s latest quarterly report was a rough read. Revenue and net income fell 11% and 40% YoY, respectively. Meanwhile, EPS ended at $1.91, a $1.18 drop from last year’s $3.09.
Still, we can’t discount that Exxon is a stable, mature company with solid revenue streams and prospects for expansion. Besides, it still managed to beat EP estimates by 12.22%. The company also pays a $3.72 annual dividend, representing a 3.48% yield, and has increased its dividend payouts for 42 years.
Final Thoughts
Investors pay dividends to be aware of how companies pay their shareholders. Remember, they are responsible for growing their business to offer more value in the long run. Dividends are nice but shouldn’t be a stock’s singular selling point.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
