With inflation roaring and the stock market slumping, now may be a good time to consider dividend stocks.
Strong dividend stocks provide a reliable stream of income along with the potential for capital gains. Morningstar listed three popular dividend stocks, all of which earned one of its moat designations.
That means the companies have a competitive advantage in the area of high customer switching costs, economies of scale, intangible assets such as brands or patents and/or the network effect.
All the data below are as of Sept. 1.
Edison International (EIX), a fully regulated California utility: Wide moat
“Currently yielding around 4%, Edison provides one of the better yields in the utilities sector,” David Harrell, an editorial director with Morningstar Investment Management, wrote in a commentary accompanying the list.
“Dividend growth has been solid, at 6.3% annualized over the past five years, despite financial pressure from wildfires.”
Going forward, “dividend growth is likely to be more modest, due to the issuance of new equity that will dilute earnings-per-share growth,” Harrell said.
“But management is supportive of continued dividend increases. During an earnings call earlier this year, [Chief Financial Officer Maria Rigatti] noted she was proud of an 18-year history of consecutive annual increases and that she looked forward to building on that history.”
Genuine Parts (GPC), an auto-parts distributor: Narrow moat
“This company's commitment to annual dividend hikes is beyond question, as this year's raise was the 66th consecutive annual increase,” Harrell said. “The company even provided a modest raise in 2021 despite a loss in the previous fiscal year.”
Management shoots for a dividend payout ratio of 50% to 55% of prior-year earnings, so future increases should be close to trailing earnings growth.
“But Genuine Parts also provides a good example of how consistent dividend growth doesn't necessarily lead to high yields,” Harrell said.
That’s because “the rate of dividend increases doesn't keep pace with appreciation of the share price.”
The stock's current yield is 2.3%, down from 2.6% just two months ago.
Philip Morris International (PM), which sells tobacco products outside the U.S.: Wide moat
The company is trying to buy Swedish Match (SWMAY) , the Stockholm producer of nicotine and tobacco products. Morningstar analysts say the acquisition could benefit Philip Morris by giving it access to the U.S. market.
“An increase in cash flow would be welcome news for future dividend increases, as the firm's payout ratio has remained above 90% in recent years,” Harrell said. “And it will likely hit that level again this year, based on consensus earnings estimates.”
The payout ratio is dividends per share divided by net earnings per share.
Meanwhile, “with all of its revenue generated outside of the U.S., Philip Morris is facing a currency headwind due to the strong U.S. dollar,” Harrell said. The company currently yields around 5%.
