Investors seeking stable investments to provide them with regular income have always flocked towards dividend stocks. Amid whatever turbulent business cycles that the global economy might go through, dividend-paying stocks tend to be a relative sanctuary of stability.
A recent study by Hartford Funds revealed that from 1940 to 2023, dividend income’s contribution to the total return of the S&P 500 Index ($SPX) averaged 34%, with significantly less volatility. Further, with the Federal Reserve largely backing its view for multiple rate cuts this year, dividend stocks could become a more attractive option for yield-seeking investors.
Taking this into account, here are three stocks that have not only been paying regular dividends for years, but also enjoy a strong position in their respective markets, backed up by a strong fundamental performance.
Dividend Stock #1: Costco Wholesale
Founded in 1976, Costco Wholesale (COST) operates a chain of membership warehouses offering a wide selection of merchandise. The Washington-based company deals in groceries, apparel, appliances, electronics and home improvement supplies, among others. Its market cap currently stands at an impressive $315.5 billion.
Costco stock is up 6.4% on a YTD basis, and it offers a dividend yield of 0.57%. Costco has been raising dividends for the past 19 years, and its payout ratio of 27.06% leaves it with enough room to continue on this path in the coming years.
Results for the latest quarter, reported in early March, were a mixed bag. Costco reported a fiscal Q2 2024 earnings beat, but a miss on the revenue front. However, net sales for the quarter increased by 5.7% from the previous year to $57.3 billion. The EPS of $3.92 denoted yearly growth of 18.8%, and surpassed the consensus estimate of $3.63. Moreover, Costco's EPS have topped expectations in each of the past four quarters.
Also, the company exited the quarter with a cash balance of $9.1 billion, compared to long-term debt levels of $5.9 billion.
Overall, through the last 10 years, Costco has been growing its warehouse numbers at 3.2% per year, while membership numbers have been growing at 6% per year. This subscription-based strategy is a stable and recurring source of revenue for Costco. Further, the company's ability to grow its membership numbers from existing locations further adds to its defensive appeal.
Analysts are expecting Costco to report earnings growth of 7.62% and 9.42% in FY 2024 and 2025, respectively.
Overall, Wall Street has deemed the stock a “Strong Buy” with a mean target price of $774.58. This denotes an upside potential of roughly 10% from current levels. Out of 29 analysts covering the stock, 19 have a “Strong Buy” rating, 3 have a “Moderate Buy” rating, and 7 have a “Hold” rating.
Dividend Stock #2: The Cigna Group
Based out of Connecticut, the Cigna Group (CI) was formed in 1982 by the merger of The Connecticut General Life Insurance Company and INA Corporation. It is a global health services organization offering a variety of products and services. Among its many offerings are commercial insurance, behavioral health coverage, and international health insurance. Its current market cap is at $106.15 billion.
Cigna stock is up 20.6% so far this year, and it offers a dividend yield of 1.4%. Its low payout ratio of 19.6% provides Cigna with plenty of room to increase its dividends in the future.
The latest quarterly numbers for Cigna sparked a rally in early February, as the company reported a beat on both revenue and earnings. In Q4, Cigna's revenues came in at $51.1 billion, up 11.7% from the previous year. EPS rose by 35.3% from the year-ago period to $6.79, surpassing the consensus estimate of $6.54. Notably, for the past five quarters, Cigna's EPS have topped expectations. The company exited the December quarter with a total medical customer base of 19.8 million, an increase of 10% from the previous year.
It's worth pointing out that CI held up well on this week's news of Medicare rate changes, as the company draws nearly all of its revenues from the commercial sector.
Recently, the company launched its Behavioral Health Practice Group. This is an outpatient program for mental health that will be integrated into its medical health services and medical care offerings. Further, Cigna is expecting its Specialty Pharmacy business to be its next growth driver, as the market appears to be sizeable. To that end, the company expects long-term adjusted income from its Specialty and Care services sub-segment to grow at a pace of 8-12%, faster than the 2-4% adjusted income growth seen in its PBM business.
Analysts are expecting Cigna to report earnings growth of 13.03% in FY 2024, followed by 12.52% growth in FY 2025. Overall, analysts have a rating of “Strong Buy” for the stock, with a mean target price of $380.63 - which denotes an upside potential of about 5.4% from current levels. Out of 21 analysts covering the stock, 15 have a “Strong Buy” rating, 2 have a “Moderate Buy” rating, and 4 have a “Hold” rating.
Dividend Stock #3: General Dynamics
We conclude our list with General Dynamics (GD), founded in 1952. The Reston, Virginia-based company is a leading global aerospace and defense company that operates through five business segments: aerospace; combat systems; mission systems; marine systems; and information technology. Its market cap currently stands at about $79.7 billion.
GD stock is up 11.7% on a YTD basis. Offering a dividend yield of 1.81%, General Dynamics has been raising its dividend for 29 years, making it a “Dividend Aristocrat.” With a payout ratio of 43.93%, the dividend is well-covered by earnings.
In its late January earnings report, General Dynamics posted a mixed set of numbers, as revenues surpassed the consensus estimate, while earnings came up short. The company reported Q4 revenues of $11.7 billion, up 7.5% from the previous year. Although the company's EPS of $3.64 came in lower than the consensus estimate of $3.68, it was up by 1.68% from the year-ago period. Moreover, GD's EPS has exceeded the Street estimates in four out of the past five quarters.
General Dynamics mentioned on its earnings call that its long-range business jet, the G700, was nearing completion of the delayed final technical inspection authorization, which contributed to the Q4 miss. With the FAA's G700 certification announced in late March, the company's earnings are expected to receive a boost in FY 24.
Further, although unfortunate, the continued geopolitical flashpoints across the globe should provide an underpinning of support for GD, as the company derives more than 70% of its revenues from the U.S. government - a key backer of Ukraine in its war with Russia. Analysts are forecasting earnings growth of 21.38% for GD in FY 2024, followed by 11.72% in FY 2025.
Overall, analysts have deemed GD stock a “Strong Buy,” with a mean target price of $295.93 - which indicates an upside potential of about 2% from current levels. Out of 17 analysts covering the stock, 12 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, and 4 have a “Hold” rating.
