RSP - 3 'Dividend Divas' To Help You Sleep Well At Night

2023-12-22 07:00:00 ET

Summary

• Dividend stocks have been punished in 2023, underperforming growth stocks and facing competition from high-yield savings accounts.
• The Equal Weight S&P 500 has seen a recent broadening of the rally, creating potential opportunities for beaten-down dividend stocks.
• Just before publishing this article, I decided to buy all three of these dividend divas.

If we could say there was one type of stock that was punished in 2023, it would be dividend stocks.

Not all, but overall, the value play was not a successful one for many investors, as growth, particularly mega cap growth, led the charge for the markets during the majority of the year.

In recent weeks, we have seen some broadening of the rally, which has been long overdue as the Equal Weight S&P 500 ( RSP ) had its widest gap from the standard S&P 500 ETF ( SPY ) in recent memory.

Year-to-date, the gap is still wide, with RSP producing returns of 10.5% on the year compared to the S&P 500 climbing 23.5%.

So, growth was a big driver of outperformance, and in addition, dividend stocks had to compete with rising interest rates, in which a lot of investors looked to risk free high-yield savings accounts with 4%+ rates.

However, with the Federal Reserve signaling an end to the hiking cycle and looking to actually cut rates multiple times in 2023, now could be the time to look for those beaten down dividend stocks .

Not too often do you get the opportunity to buy high-quality stocks at cheap valuations.

Let's look at 3 Dividend Aristocrats that appear to be trading at intriguing valuations.

To be a Dividend Aristocrat, one of the requirements is that the company increases their dividend for at least 25 consecutive years.

These are companies that are able to generate strong amounts of free cash flow which allows them to do this year in and year out.

Three Dividend Aristocrats That Look Appealing

Dividend Aristocrat #1 - Automatic Data Processing, Inc. ( ADP )

ADP is a cornerstone of the American economy, as they cater to businesses both large and small. The company provides cloud-based HR type solutions across the globe. ADP operates within two segments

1. Employer Services and Professional Employer Organization ("PEO"). The Employer Services segment offers strategic, cloud-based platforms, and human resources ("HR") outsourcing solutions. Its offerings include: payroll services, benefits administration, talent management, HR management, workforce management, insurance, retirement, and compliance services, as well as integrated HCM solutions.
2. PEO Services. This segment provides HR outsourcing solutions to businesses through a co-employment model. This segment offers employee benefits, protection and compliance, talent engagement, expertise, comprehensive outsourcing, and recruitment process outsourcing services.

ADP is a company that has been around for more than 70 years, and they are currently headquartered in Roseland, New Jersey. The company has a market cap of $96 billion and over the past 12 months, shares are down 4%.

On the year, shares of ADP are essentially flat, badly underperforming an S&P 500 (SP500) that is up roughly 25%. However, when we look back over time, ADP has performed in-line with the S&P 500 over the past 5 years, and they have strongly outperformed the S&P 500 over the past decade by a wide gap.

Given that the large majority of businesses in America are small businesses, there is a need for services like those that ADP offers.

Every single business, small or large, needs to perform the tasks that ADP performs, it just comes down to whether or not those companies want to keep those tasks in-house or outsource them.

In 2024, many companies are going to be looking to become more efficient. More efficient does not necessarily mean cutting costs, but that is one way. They could look to outsource payroll or HR-related tasks, which benefits a company like ADP.

Meta Platforms ( META ) labeled 2023 the "Year of Efficiency," and that has paid great dividends for the company this year. I believe many small businesses will be looking to follow suit, especially as we lurch towards a period of potential slower economic growth.

Over the course of the past 12 months, ADP has generated free cash flow ("FCF") of $3.6 billion, which is up 3% from the same trailing 12 months a year ago. Over the past 12 months, ADP has paid out $1.99 billion in dividends , giving the company a FCF payout ratio of 55%, plenty of coverage as it pertains to the safety of the dividends.

Speaking of the dividend, ADP is no newcomer to the Dividend Aristocrat list, as they have been paying a growing dividend for nearly 50 years, which would then make them a dividend king. The company dividend currently yields 2.0% and they have a strong 5-year dividend growth rate of nearly 15%.

In terms of valuation, analysts are looking for 11% EPS growth in 2024 to $9.13 per share by June 2024. This has shares of ADP trading at an earnings multiple of 25.6x, which is below the company's 10-year average of 28x.

Dividend Aristocrat #2 - The Coca-Cola Company ( KO )

The Coca-Cola company is the largest beverage company in the world, with many recognized global brands worldwide. Well-known brands include:

• Coke
• Diet Coke
• BodyArmor
• Dasani
• Minute Maid
• Powerade
• Sprite
• Smartwater
• Topo Chico
• And MANY more.

The Coca-Cola company has been negatively impacted in 2023 with the buzz surrounding the weight-loss drugs such as Ozempic, which has many investors believing Coca-Cola company products may be consumed less.

On the year, shares of KO have fallen 6% and currently have a market cap of $253 billion.

I feel like the big dip in KO shares in the fall was very overdone, and investors agree, as shares have climbed nearly 15% since the start of October.

The company has been preparing for this "health" conscious consumer for quite some time, and in doing so, CEO James Quincy has also decreased the number of SKUs for the company, focusing more on profitability than quantity of products.

The Coca-Cola Company is a cash flow machine, as they have produced more than $10 billion in free cash flow over the past 12 months compared to paying out dividends of $7.8 billion. The payout ratio is higher than I prefer, but the dividend appears to be plenty safe at the moment.

The Coca-Cola Company currently pays a dividend of 3.1%, and they have increased the dividend for more than 60 consecutive years, making them a dividend king. The yield is higher than ADP, but the growth is minimal, as KO has a five-year dividend growth rate of just 3.4%.

Analysts are calling for 2024 EPS of $2.80 per share, which equates to an earnings multiple of 20.9x, well-below the company's historical five-year average of 25.8x and their 10-year average of 24x.

Dividend Aristocrat #3 - NextEra Energy, Inc. ( NEE )

At the start of this article, we discussed beaten-down stocks, and the worst of them all have come from the utilities sector. The sector as a whole is down 10% on the year.

Throughout this article we have discussed performance, free cash flow, and value stocks, and this company we are going to highlight will touch on all of those.

NextEra Energy is a utility company based out of Florida, where they have their largest footprint. The company has a market cap of $126 billion and, on the year, shares of NEE are down 27%.

Like Coca-Cola, shares of NEE have also rallied hard off their October lows, climbing 30% over the past few months.

There is a lot to like when it comes to NEE, outside of just valuation. NEE is going to be one of the leaders in the U.S. as we transition to more renewable resources as it pertains to energy.

NEE owns Florida Power & Light Company, also known as FPL, which is America's largest electric utility that sells more power than any other utility, providing power to nearly 6 million customer accounts, or more than 12 million people across Florida.

As such, if you believe in the transition to more renewable resources, not necessarily the death of fossil fuels by any means, but rather an increase in renewable resources, then NEE is well positioned for a strong future going forward, and you can grab shares at a reasonable price.

Before we look at valuation, let's first look at the dividend. Shares of NEE currently yield a dividend of 3.0% with a five-year dividend growth rate of 11%. The company has been increasing the dividend for 28 consecutive years and counting.

Analysts are also bullish on the stock, as they are looking for 9% EPS growth to $3.40 per share.

This equates to an earnings multiple of 18.1x, which is well below the company's 10-year average of 24x, making shares look quite appealing from both a forward performance, valuation, and even dividend perspectives.

In Closing...

As the so-called REIT Guru, I'm happy to keep providing my readers with some of the best opportunities that offer superior risk-adjusted returns.

However, many of my subscribers want to know what else I'm buying; after all, I'm not putting all of my eggs in one basket (I did that once before, and it was painful).

So, just before publishing this article I decided to buy all three of these dividend divas . As I mentioned in my recent Seeking Alpha interview , I did not coin the SWAN term, but I know what it means to sleep well at night!

Happy SWAN Investing!

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