2023-07-22 07:00:00 ET
Summary
- "Do you know the only thing that gives me pleasure? It’s to see my dividends coming in." - Rockefeller.
- I can assure you that there are many other things that give me pleasure, other than dividends.
- The best investment with the least risk and the greatest dividend is giving.
“Do you know the only thing that gives me pleasure? It’s to see my dividends coming in.”
That quote, which also happens to be the title to my article today, is from John D. Rockefeller, who has been widely considered the richest American of all time and the wealthiest person in modern history.
Now, I can assure you that there are many other things that give me pleasure, other than dividends. Take for example, my grandson, Asher, who recently turned one-year-old.
Another thing that gives me pleasure is the fact that all of my children are gainfully employed.
I also feel good when I leave the gym every morning, at around 7:00 am, and I head over to Starbucks ( SBUX ). I order a Grande skinny vanilla latte before I head into my office to respond to followers on Seeking Alpha.
I suppose Mr. Rockefeller also enjoyed things other than dividends, as he also had four daughters and a son (just like me).
However, as my reader know, I do love my dividends, and maybe that’s why I have such a large following (over 110,000) who share the same attraction…”to see our dividends coming in."
We All Love the Aristocrats
Most investors know that Dividend Aristocrats are some of the most reliable dividend payers around, and to qualify as a Dividend Aristocrat, a company needs to meet the following criteria:
- Be part of the S&P 500 Index
- Pay and raise its dividend for at least 25 straight years in a row
- Have a market capitalization of at least $3 billion
- Have an average daily trading volume of at least $5 million
These attributes ensure that only somewhat large, steady companies make the cut for being an aristocrat. They’re comprised of large-cap stocks with solid, cash-generating businesses.
You won’t see many fast growth companies on the Aristocrat list. Instead these “tortoise-like” slow growers typically reinvest their free cash flow, allowing them to pay it out to shareholders.
There are 67 companies that make up the Dividend Aristocrats list and today I decided to focus on three that are trading at a wider margin of safety.
Dividend Aristocrat #1 - Lowe’s Companies
The first half of 2023 has largely been about technology stocks, but one stock that has been performing quite well and is not a technology company is home improvement giant Lowe’s Companies ( LOW ).
Year-to-date, Lowe’s stock has climbed 15.5% and is up 24% over the past 12 months.
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One wouldn’t think Lowe’s would be outperforming the S&P 500 to date, but a real estate market that has endured higher interest rates and low inventory levels has helped push Lowe’s and its competitor Home Depot ( HD ) higher.
Current homeowners have enjoyed what has been a period of low interest rates leading up to the prior 18 months, as such, per Redfin, 82.4% of homeowners have a mortgage rate below 5% and 62% have a rate below 4%.
This incentivizes current homeowners to stay put, as the current average 30-year mortgage rate is close to 7%.
With more current homeowners staying put, investors are looking for an uptick in potential home improvement projects coming down the line, which will undoubtedly benefit a company like Lowe’s, which depends more on the DIY customer and less on the pro customer, although the company has made major in-roads with these customers as well.
On the flip side, it makes it extremely difficult for first time buyers, making it one of the worst environments since the Great Recession. This also is a growth factor for the company moving forward as there remains a major home shortage here in the US.
As I pointed out in a previous article , half of all U.S. homes are at least 41-years-old. Homes reach their “prime” remodeling period when they're 20- to 40-years-old. That translates into an estimated 24 million homes that are in need of repairs and/or upgrades.
Lowe’s continues to become more efficient under the leadership of CEO Marvin Ellison, who held a senior leadership role at Home Depot earlier in his career.
Over the past decade, Lowe’s has grown their free cash flow from $3.2 billion in 2014 to $6.8 billion in fiscal 2023. The company peaked out in 2021 at $9.3 billion when home improvement projects were booming during the pandemic.
That strong free cash flow has helped support a growing dividend, one that the company has increased for roughly 60 years, firmly making Lowe’s a Dividend Aristocrat and even a dividend king.
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The company currently has nearly a 2% dividend yield and still a low payout ratio of 30%, leaving plenty of room for dividend growth. Speaking of growth, once dividend stocks reach dividend aristocrat status, you often see the dividend growth rate slow, not the case with Lowe’s. Lowe’s has a five-year dividend growth rate of 20.7%.
Even with the growth in Lowe’s share price this year, the stock still looks reasonably priced when compared to its historical value.
Over the past five years, shares of LOW have traded at an average earnings multiple of 19.2x. Analysts expect January 2024 EPS of $13.35, which equates to an earnings multiple of 17.2x.
FAST Graphs
Dividend Aristocrat #2 - Stanley Black & Decker
Stanley Black & Decker ( SWK ) has been under intense pressure over the past five years with the stock falling nearly 30% over that period. After bottoming out around $75 in March 2020, the stock climbed nearly 200% over the next 12 months to ~$220 per share.
Since then, SWK shares are down over 50% since those highs, so it has been a bit of a roller coaster for investors who have stuck with the company over that period.
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A major reason for the decline has been an overabundance of inventory, which was common for many retailers in 2022 that saw major shortages in the year prior, which led to over buying after.
The inflated inventory led the company to having to reduce prices to move that inventory, which suppressed margins during the year.
Prior to the pandemic, SWK saw gross margins of 34% and operating margins of 16%. Fast forward just two years and SWK saw gross margins fall to 26% and operating margins fell to just 5.6%.
In 2023, management has set out a plan to not only cut costs and become more efficient, but to continue to reduce inventory levels. During the company’s Q1 earnings call, management gave investors an update stating that “the global cost reduction program delivered $230 million in pre-tax run rate savings” during the quarter, which is ahead of expectations.
In addition, management touched on their inventory reduction plan that saw a $100 million improvement in the quarter, also ahead of management’s expectations. Since mid 2022, nearly 12 full months, the company has reduced inventory by roughly $1 billion.
Also, during Q1, management reiterated their full year guidance of adjusted EPS between $0 and $2 per share as well as free cash flow coming in between $500 million to $1 billion.
Here is a closer look at the company’s $2 billion cost reduction plan, which they originally planned on reaching by 2025.
SWK Investor Presentation
In terms of the dividend, SWK, like Lowe’s Companies, has paid a growing dividend for 50-plus consecutive years, making them not only a dividend aristocrat, but also a dividend king.
The stock currently yields a dividend of 3.3%, but the dividend growth has been much slower the past five years, at just 5%.
Using the middle of the free cash flow guidance, SWK is expected to generate $4.90 per share in FCF, which would equate to a FCF payout ratio of 65%, which is on the higher end of the range, but I would expect that figure to come down over the next few years as the company returns to growth.
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Investing in SWK, you have to recognize that it's a turnaround story, so if your time horizon is short, this may not be the stock for you. However, for those of you that are more long-term focused, now could be a great time to add some SWK to your portfolio.
Investors are looking for 2023 EPS of just $0.95, which is roughly the middle of the range given by management. However, as you can see, analysts believe the company will quickly return to their pre-pandemic highs within 18-24 months.
Looking out too far always comes with risks, but it can also unlock the potential for some big gains in a particular stock if you believe the changes being made are not only beneficial, but coming to fruition like we saw in Q1. EPS growth of 400% in 2024 followed by 44% in 2025 is huge and still not reaching the potential the company saw in 2020.
FAST Graphs
Dividend Aristocrat #3 - Realty Income
Realty Income Corporation ( O ) is a net-lease retail REIT with a strong portfolio of more than 12,000 properties across the globe. The REIT has coined themselves “The Monthly Dividend Company” as they pay out their dividend every month.
The REIT has a market cap of $41 billion, but over the past 12 months, as the REIT sector has endured a rising interest rate environment, the stock has found itself down more than 10%.
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However, we believe that the rate hike cycle is nearing the end of the road with many pricing in one final rate hike on July 26, followed by a prolonged pause. A high-quality REIT with an A credit rating should be cheering this.
In addition, looking over the history of Realty Income, a stock I have owned for a number of years, anytime the stock price drops to where it equates to a 5% dividend yield has proven to be a great entry point. As you can see on the chart above, the REIT currently yields a 5% dividend yield exactly.
REITs can differ mightily in terms of not just size, but quality, which is one reason I prefer to own individual REITs over REIT focused ETFs. Realty Income has proven its consistency over the years, with 26 out of 27 years of positive earnings growth. With the strong balance sheet that earns them that A credit rating, the company enjoys favorable debt terms, which go a long way when it comes to REITs.
Having great tenants is extremely important, but you must first have great properties in strategic locations to attract those tenants. A strong portfolio is exactly what Realty Income has evidenced by their superb occupancy history, which has averaged 98.3% dating all the way back to 1998. Year to date, Realty Income has enjoyed a 99% occupancy rate.
Realty Income Investor Presentation
Over the past few years, the property type diversification has changed with the addition of gaming, which now accounts for nearly 3% of the company’s annual base rent. This is related to a recent acquisition the company made in purchasing the Encore hotel and casino in Las Vegas for $1.7 billion.
Realty Income Investor Presentation
Looking at the top 20 tenants list below, you will notice many of the names on that list because many are well established investment grade companies. This speaks to the consistency of the company, as they do not lease to just anyone, they focus on quality tenants as well.
Realty Income Investor Presentation
As I mentioned earlier, the company currently yields a 5% dividend, which is paid out on a monthly basis. In terms of dividend growth, Realty income has grown their dividend for nearly 30 years, firmly making them a dividend aristocrat.
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In terms of valuation, being that Realty Income is the highest quality when it comes to net lease retail REITs, they tend to trade at a premium. Over the past five years, shares of O have traded at a P/AFFO multiple of 19.4x. Today, based on 2023 AFFO estimates, you can pick up shares of O for 15.25x, well below their historical average.
In Closing…
Since I started the article with a Rockefeller quote, I thought I would end with the article with a quote from Sir John Templeton, who Money magazine named as “ arguably the greatest global stock picker of the century " in 1999:
“ By facing our challenges and overcoming them, we grow stronger, wiser, and more compassionate.”
In my book, the secret to success is humility and that means learning from your mistakes and always remember that
“...the best investment with the least risk and the greatest dividend is giving.”
That my friends, is what gives me pleasure!
And I’m always happy to give readers my very best ideas.
Happy SWAN investing!
Note: Brad Thomas is a Wall Street writer, which means he's not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free: Written and distributed only to assist in research while providing a forum for second-level thinking.
For further details see:
Guess What Gives Me Pleasure? (Hint: It's Not Just Dividends)