Income investors typically want to find stocks with above-average yields, generally meaning that the stocks have higher yields than the S&P 500 average. Currently, the S&P 500 Index yields about 1.5% on average.
Investors looking for safe dividends should consider the Dividend Kings, an exclusive group of just 50 stocks that have increased their dividends for at least 50 consecutive years.
Beyond yield, investors should also pick stocks with high total return potential, through a rising share price as well as dividends.
The following three Dividend Kings have safe dividends, and also appear attractively valued with future growth potential. Indeed, these three Kings could produce annual returns above 10% a year.
The Sysco Kid
Sysco Corp. (SYY) is the largest wholesale food distributor in the United States and is expanding internationally. The company was founded in Houston, Texas, in 1969 and now serves 600,000 locations with food delivery, including restaurants, hospitals, schools, hotels, and other facilities. According to estimates, the company has a 16% market share of total food delivery within the United States.
The company reported its fiscal fourth-quarter report on August 1. Quarterly revenue of $19.73 billion increased 4.1% year over year. Adjusted earnings per share of $1.34 beat by a penny. U.S. Foodservice volume increased 2.3% versus the same period in fiscal year 2022.
Sysco has grown earnings by 5.0% annually over the past five years. Acquisitions and organic growth, and share buybacks, has increased earnings. Tax cuts and share buybacks have accelerated earnings growth in recent years. The company is also in the process of cutting overhead costs, which should mildly boost bottom-line growth. We expect 7.0% earnings growth over the next five years.
Sysco has an economic moat due to its large-scale and entrenched distribution infrastructure, which gives it a cost advantage over most competitors. This moat is evidenced by the company's double-digit returns on invested capital every year, much higher than its weighted average capital cost.
SYY stock trades for a 2023 P/E ratio of 18.4, which is below our fair value estimate of 20. Modest returns from an expanding P/E multiple, as well as EPS growth and the 2.7% dividend yield could produce annual returns above 10% over the next five years.
Sysco also has a highly secure dividend, with a 2023 payout ratio of 49%.
Target Corp. (TGT) was founded in 1902 and is a major U.S. retailer. Its business consists of about 1,850 big-box stores, which offer general merchandise and food, as well as serving as distribution points for the company's burgeoning e-commerce business. Target should produce about $110 billion in total revenue this year.
Target posted first-quarter earnings on May 17, and results were better than expected on both the top and bottom lines. Adjusted EPS came to $2.05, which was 29 cents better than expected. Revenue was up fractionally year over year to $25.3 billion, beating estimates by $40 million.
Traffic was up 0.9% year over year, down from 3.9% in the same period a year ago. Comparable sales were up 0.7%, offset by a decline in comparable digital sales, so the company missed estimates of growth of 1.1%. Adjusted EBITDA came to $2.02 billion, which was much better than the $1.81 billion expected.
Target noted it reduced inventory by 16% year over year as the company bought less in order to reduce promotional activity. First-quarter gross margin was 26.3% of revenue, which was up from 25.7% a year ago. Guidance for the year was unchanged at $7.75 to $8.85 in adjusted EPS.
Target has grown its EPS at an average annual rate of nearly 13% during the last decade. The company has reduced its share count by about 4.8% per year in the last six years, although the pace of buybacks has slowed as the share price has risen.
Overall, we expect 10% annualized EPS growth from what should be a low level for 2023 given margin issues that cropped up in recent quarters. We see continued comparable sales growth as driving results, along with sizable margin expansion from low levels in 2022 and 2023, and a tailwind from the buyback.
Target stock has a 52% dividend payout ratio, indicating a safe payout. The stock has a 3.3% current yield.
Total returns could exceed 13% from EPS growth and dividends, assuming a flat P/E multiple.
A King With a 56-Year Reign
Stanley Black & Decker (SWK) is a world leader in power tools, hand tools, and related items. The company holds the top global position in tools and storage sales. Stanley Black & Decker is second in the world in the areas of commercial electronic security and engineered fastening.
On July 28, Stanley Black & Decker announced it was raising its quarterly dividend 1.3% to $0.81, extending the company's dividend growth streak to 56 consecutive years.
On August 1, the company announced second-quarter results for the period ending June 30, 2023. For the quarter, revenue fell 5.3% to $4.2 billion, but this was $70 million more than expected. Adjusted EPS was -$0.11, but was $0.25 above expectations. Company-wide organic growth fell 4%.
Organic sales for Tools & Outdoor, the largest segment within the company, declined 5% as a 1% benefit from pricing was once again more than offset by a decline in volume. North America was down 6% while Europe was lower by 3%, but both results were a deacceleration from a double-digit decline in the preceding quarter.
Adjusted gross margin expanded 50 basis points to 23.6% due to cost controls. The company's cost reduction program remains on track and delivered $230 million in pre-tax savings during the second quarter. The company's goal is to reduce expenses by $1 billion by the end of 2023 and by $2 billion within three years. Inventory was reduced by $373 million during the quarter and has been reduced by $1.4 billion since the middle of 2022.
Stanley Black & Decker provided revised guidance for 2023 as well. The company expects adjusted EPS in a range of $0.70 to $1.30.
We expect 8% annual EPS growth, while SWK stock has a 3.3% dividend yield. Total returns could exceed 11% a year.