We value several characteristics when it comes to dividend investing, because it is important to understand that not all dividend stocks are created equal. Depending upon the individual investor’s goals, stage of life, etc., different types of dividend stocks are optimal at different times. However, one thing that never changes is that we want to own high-quality dividend stocks that are proven winners over time.
There are varying ways to define quality, but longevity is certainly one of those, and there are no equals when it comes to longevity for the Dividend Kings.
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The Dividend Kings all have at least 50 consecutive years of dividend increases. In this article, we’ll take a closer look at three Dividend Kings that have not only strong yields, but very safe dividends as well.
Abbott Laboratories (ABT)
Our first Dividend King is Abbott Laboratories (NYSE:ABT), which is a global pharmaceutical company. Abbott discovers, develops, manufactures, and distributes various healthcare products worldwide. The company’s pharmaceutical products treat a huge variety of ailments, including long-term illnesses and viruses. It also has a diagnostic care business, a medical device business, and a large nutritional products segment. The company is therefore highly diversified when it comes to healthcare and pharmaceutical companies, which has helped it grow throughout the decades.
Abbott was founded in 1888, generates about $42 billion in annual revenue, and trades with a market cap of $189 billion. Abbott’s dividend increase streak currently stands at 50 years, having become a Dividend King at the end of 2021.
Looking forward, we expect the company to produce 5% annual earnings-per-share growth in the years to come, with margin gains being a meaningful portion of that projected growth. The company’s revenue growth is likely to be muted this year and next year, given it had sizable gains from COVID diagnostics in 2020 and 2021. We believe Abbott can grow long-term, but what was a tailwind has become a headwind, at least temporarily. The company’s strong position in diagnostic products and medical devices should help longer-term growth.
Even with earnings expected to decline this year, Abbott’s payout ratio is still just 40% of earnings. This means that not only is the dividend very safe, but it a long runway for growth as well. Abbott’s earnings are fairly recession resistant, given it sells mostly products that are non-discretionary, but even in the event of a sharp economic downturn, the dividend could carry on.
Based upon the low payout ratio, and 5% earnings growth, we think Abbott could raise its payout by an average of 7% in the years to come, making it a great dividend growth stock.
In addition, shares yield 1.7% today, which is ahead of the broader market. It’s also elevated for Abbott based upon the past five years of trading history, so the stock offers value on that measure.
Kimberly-Clark Corporation (KMB)
Our next stock is Kimberly Clark Corp (NYSE:KMB), which is a diversified consumer products company that operates globally. The company manufactures and sells various personal care and consumer tissue products, including diapers, feminine products, facial and bathroom tissues, paper towels, napkins, and related products.
Kimberly-Clark was founded in 1872, generates about $20 billion in annual revenue, and trades with a market cap of $46 billion. It, too, recently became a Dividend King, sporting a 50-year streak of consecutive dividend increases.
We see 5% earnings-per-share growth on the horizon, through a combination of revenue gains and margin improvements. Kimberly-Clark also had significant demand pull-forward through COVID, as demand for paper products soared, in particular. The company is working through that headwind now, but once it normalizes, we expect its robust cost saving program and modest revenue growth to get it to mid-single digit annual growth.
We see 4% annual dividend growth ahead for Kimberly-Clark, roughly in line with expected earnings growth. The company’s payout ratio is quite elevated at 80% of earnings, so growth will need to be equal to or slightly less than the rate of earnings growth to be sustainable. Kimberly-Clark’s earnings are highly predictable, so we don’t see the payout as in danger, even in the event of a recession.
Finally, the stock’s current yield is 3.4%, more than double that of the S&P 500 today, so Kimberly-Clark is a proper income stock.
3M Company (MMM)
Our final Dividend King is 3M Co (NYSE:MMM), a diversified technology and consumer products company that operates worldwide. It has several lines of business that collectively product thousands of different products. Some examples of products the company offers are safety equipment and personal protective gear, tapes and adhesives, packaging solutions, skin and wound care, dentistry products, filtration and purification systems, and stationery products.
The company was founded in 1902, produces about $36 billion in annual revenue, and trades with a market cap of $74 billion. 3M’s dividend streak is one of the best in the world at 64 consecutive years, putting it in truly rare company on the subject of dividend longevity.
We see 5% earnings-per-share growth in the years ahead for 3M, based upon a combination of revenue growth, margin expansion, and a small measure of share repurchases. Demand for the company’s product varies by line of business, but given it is extremely diversified, revenue and earnings are fairly predictable.
The payout ratio is just 54% on this year’s earnings, so the company has plenty of runway for earnings declines before the payout would be in jeopardy. Given the 64-year streak of increases, we obviously do not believe a dividend cut is a realistic probability.
We estimate 3% dividend growth in the coming years, given that recent dividend increases have been on the smaller end of the spectrum. The company is utilizing cash to deleverage, invest in growth, and acquire growth, so we see dividend growth as a lower priority.
However, the current yield is extremely high at 4.6%, so income investors likely won’t mind modest increases to the payout with triple the S&P 500’s yield coming their way from 3M.
Final Thoughts
It is important, particularly in times of market turmoil, for investors to focus on finding the highest quality dividend stocks for their portfolios. We see longevity as a key differentiator, and the list of Dividend Kings is a great place to start. Abbott, Kimberly-Clark, and 3M all have very safe dividends, high yields, and the prosect of many more years of dividend increases to come.
Written by Josh Arnold for Sure Dividend
