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Exploring the Dividend Seven: Top Picks for Steady Income
In this podcast, Motley Fool analysts Matt Argersinger and Anthony Schiavone join host Mary Long to discuss:
- Criteria for entering the “Dividend Seven.”
- The potential for Home Depot as a growth stock.
- Key metrics essential for dividend investors.
- Long-standing companies consistently raising dividends.
To catch full episodes of all The Motley Fool’s free podcasts, check out our podcast center. For beginner investors, don’t miss our guide to investing in stocks. A complete transcript follows the video.
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This video was recorded on Dec. 08, 2024.
Matt Argersinger: Think about the number of recessions, business cycles, or wars that have occurred over a 50-year span. Yet, here we have a company that has raised its dividend every year.
Ricky Mulvey: I’m Ricky Mulvey, introducing senior analyst Matthew Argersinger. Today, he and Anthony Schiavone present their version of the Magnificent Seven, which they call the Dividend Seven—a selection of strong companies that offer dependable income. They tell Mary Long about a major retailer resilient against Amazon, a leading financial firm managing $10.7 trillion in assets, and what qualifies a company for the Dividend Seven.
Mary Long: Many listeners are familiar with the Magnificent Seven, an influential group of tech stocks. However, you have created a different list: the Dividend Seven. What criteria did you establish for this selection? There are seven stocks, indeed.
Matt Argersinger: Exactly, Mary. Crafting this list was an enjoyable challenge. The Magnificent Seven has undoubtedly captured investors’ attention recently, and as we regularly cover dividends on our podcast, we thought, what if we created a Dividend Seven inspired by the same concept? To do this, we developed seven key criteria for our selection.
First, we focused on dominance. Just as the Magnificent Seven features market leaders, we wanted companies with significant scale and market share. Next, we established dividend criteria. The companies on our list had to demonstrate at least 100% dividend growth over the last decade, meaning their dividends had doubled. Furthermore, they should exhibit a strong commitment to dividends, reflected in their payout ratios and capital allocation.
In terms of dividend yield, we aimed for yields that exceed the current S&P 500 yield, which stands at around 1.2%, a historic low. Our target yield for each company was a minimum of 2%. Additionally, we required evidence of business growth; we wanted companies showing increasing revenue and cash flow, suggesting positive trends moving forward.
Next, we considered financial strength—a robust balance sheet and substantial cash flow ensure that these companies can endure economic fluctuations. Finally, we sought something special about these companies that makes them stand out beyond their corporation status in the U.S.
Mary Long: Today, we will briefly spotlight the seven companies on your list. However, within this selection, there is often a trade-off between yield and growth in dividend investing. Having both factors in mind, does this selection favor one over the other, or is it a balance?
Matt Argersinger: It’s a balancing act that many dividend investors face: Should they chase high yields of 3, 4, or 5% or opt for companies with lower yields but greater potential for earnings and dividend growth? Fortunately, we found a balanced approach with these seven companies, which average a dividend yield of about 2.5%. Although some might view that as modest, remember, the S&P 500’s yield is currently just 1.2%, making our average yield notably higher.
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Growth and Dividends: The Power Players of Today’s Market
Mary Long: Today, we’re focusing on companies that have not only maintained but also grown their dividends substantially over the past decade. This list has a great mix, highlighting companies that balance both yield and growth. Let’s dive into the profiles of these standout performers.
Spotlight on Diverse Dividend Growers
This list features a variety of companies, including a REIT, a bank, a consumer goods business, a retailer, a fast food chain, a drug developer, and an asset manager. First on our list is Prologis, known as a leader in logistics real estate. It’s not surprising to see this company here, given its prominence in the dividend space.
Prologis stands as the world’s largest REIT, with over $200 billion in assets under management. In the last decade, it has impressively increased its dividend and achieved a remarkable 190% return. CEO Hamid Moghadam describes Prologis as “the toll taker in the world of global commerce.” This analogy reflects the company’s crucial role in facilitating global supply chains.
Matt Argersinger: Prologis operates 5,600 buildings covering 1.2 billion square feet across four continents. This extensive footprint positions it as a backbone for global commerce, impacting 2.5% of worldwide GDP annually. As companies today focus heavily on supply chain management, Prologis is critical, particularly in the post-COVID landscape where inventory control has become even more essential.
Mary Long: Despite these strengths, Prologis’ stock price has seen a 14% decline this year. What’s the reason behind this drop?
Matt Argersinger: Anthony, do you want to address that?
Anthony Schiavone: Sure! Let’s reflect briefly on 2017 when rising interest rates prompted analysts to ask Moghadam about their potential impact. He projected a short-term drop of 10-15% but noted that in the long run, increased rates could lead to rent growth and economic activity. Fast forward to today, and we’ve seen a 14-15% decline as interest rates rose from around 3.6% to 4.2%. As a Prologis shareholder, I remain unconcerned about recent price movements, especially since we’re still enjoying a 3.5% dividend yield that’s growing at a double-digit rate.
Mary Long: It’s clear that smart management is another strong point for Prologis.
Anthony Schiavone: Absolutely.
Mary Long: Before moving on, could you explain the concept of Funds from Operations (FFO) for our listeners and how Prologis performs in this regard?
Matt Argersinger: That’s an important point! REITs operate under unique rules compared to traditional stocks. To evaluate their cash flow accurately, we use FFO rather than earnings. FFO adjusts for depreciation, a major expense in real estate, to reflect true cash flow. It also removes gains or losses from property sales to offer a clearer picture of operational performance.
Mary Long: Next on our DIV Seven list is JPMorgan, the largest bank by market capitalization. It boasts a solid dividend growth history and a yield of over 2%, surpassing many competitors, along with an impressive 200% dividend increase over the past decade. The strength behind the JPMorgan name is undeniable.
Matt Argersinger: Precisely.
Mary Long: However, what challenges could JPMorgan face moving forward?
Matt Argersinger: That’s a valid question. While it’s been a strong pick for our DIV Seven, a potential concern is that rising interest rates have benefited banks, expanding their net interest margins. However, if the Federal Reserve shifts to lower rates, it could pressure those margins. The banking sector also faces intense competition; despite JPMorgan’s dominance, rivals like Bank of America, Citibank, and Goldman Sachs are formidable players in the space.
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Stocks to Watch: Dominance and Dividends from Pepsi to Home Depot
Navigating the Financial Landscape: The Impact of Regulations and Competition
Since the global financial crisis, banks like JP Morgan have operated under strict regulations that affect their flexibility in capital allocation. Every year, JP Morgan must seek approval from federal regulators to increase dividends or execute stock buybacks. This limiting environment raises questions about their growth potential. Meanwhile, the rise of Bitcoin, with its value surpassing $100,000, alongside the expansion of decentralized finance and private credit markets, presents new competitive challenges for established banks.
Spotlight on a Reliable Performer: Understanding PepsiCo’s Dividend Power
The next company we discuss is PepsiCo, another consistent performer in the dividend space. Notably, PepsiCo has a high payout ratio of 70%. For those new to dividend investing, this means that Pepsi expects to pay 70 cents in dividends for every dollar they generate in earnings. This level is generally sustainable for companies like Pepsi, which enjoy stable revenues and have a strong financial foundation. Companies in more volatile sectors, such as oil and gas, are usually safer with a lower payout ratio.
Why Choose Pepsi Over Index Funds?
When comparing total returns over the last decade, PepsiCo generally outperformed Coke but underperformed the S&P 500. Early 2023 marked a shift in this trend, coinciding with a mini-banking crisis and the surge in AI investments. While the broader market assigns higher valuations, PepsiCo continues to offer an attractive 3.4% dividend yield—significantly higher than the S&P’s yield of 1.2%. Additionally, investing in Pepsi can provide diversification away from the tech-heavy nature of many index funds.
Home Depot: Growth Meets Steady Dividends
Home Depot recently reached an all-time high, prompting questions about its role as a dividend stock. Although Home Depot has prioritized paying and growing dividends, its stock has experienced remarkable growth. Despite challenges since early 2022 due to rising interest rates affecting the housing market, investor optimism appears to be driving the stock price higher. This may suggest hopes for an improved housing market in the coming years leading to increased renovations.
Consistency in Returning Cash to Shareholders
Over the past decade, Home Depot has increased its dividend by an impressive 280%, the highest among the companies discussed. The company has consistently prioritized dividend payments, thanks to robust cash flow and steady revenue. Its diversification in product offerings helps defend against competition, particularly in the e-commerce space where it stands out as a major player.
The Power of Brand Recognition in Dividend Investing
As we review these stocks, it’s evident that they share significant brand recognition, from Home Depot’s distinct orange apron to PepsiCo’s ubiquitous products. This branding may correlate with their ability to pay dividends effectively, reflecting stability and resilience in the marketplace. The combination of strong branding and consistent performance plays a crucial role in investor confidence.
Dividends Worth Watching: Key Players in the Market
Understanding Market Leaders and Their Stability
Matt Argersinger: Absolutely, Mary. This phenomenon is evident throughout history. The most successful companies achieve their status through strong brand recognition and consumer trust, which helps them stand out as reliable options. For instance, Home Depot is a prime example. Unlike Home Depot, NPL Logistics primarily caters to businesses rather than individual consumers. This brand strength plays a significant role in why these companies are consistently highlighted in the Dividend Seven; their recognition makes them attractive choices.
Anthony Schiavone: I want to emphasize again the importance of financial health. Many top companies have thrived over many years, evidenced by their ability to increase dividends for over 25, 40, or even 50 consecutive years. Such longevity depends largely on having a robust balance sheet, underscoring the value of financial stability.
Mary Long: I was surprised by the next company on our list—AbbVie. Typically seen as a drug developer, AbbVie has impressively raised its dividend for 52 consecutive years. This positions it as a Dividend King, but can you clarify what that title signifies?
Matt Argersinger: Certainly! A Dividend King is a company that has increased its dividend annually for 50 years or more. Consider the challenges faced over such a long period—economic downturns, wars, and other significant events. Despite these, AbbVie has consistently raised its dividend each year, even during crises like the global financial downturn and the COVID-19 pandemic. Notably, AbbVie was spun off from Abbott Laboratories, which may be familiar to some investors; it has maintained its impressive dividend record going back 52 years.
Mary Long: Your earlier discussion highlighted that AbbVie has a low capex ratio of under 5%. Initially, I thought that was unusual for a drug development company, which relies heavily on research and development. Can you explain the difference between capex and R&D, and why that distinction is relevant?
Matt Argersinger: R&D is classified as an operating expense, which includes any costs related to tests and laboratory personnel. This money is actively spent as the business conducts its research. On the other hand, capex covers long-term investments like building facilities or acquiring intellectual property. These investments are expensed over time. AbbVie’s low capex ratio suggests it doesn’t spend extensively on large capital projects, resulting in higher free cash flow. This is pertinent for a pharmaceutical company, where financial stability is crucial given the industry’s volatility.
Mary Long: Next up is McDonald’s. This company has consistently expanded its dividend for 48 years and is making notable strides in growth. With a payout ratio near 60% and a yield exceeding 2%, what drives McDonald’s franchise model towards growth?
Anthony Schiavone: McDonald’s operates over 41,000 restaurants across 100 countries. They have served countless burgers over the decades. Despite their success, they continue to grow by leveraging their franchise model. By purchasing land and buildings for new locations, McDonald’s collects rent and royalties from franchisees. This strategy allows them to expand without incurring the significant capital costs typical of running company-owned stores. Consequently, this model contributes to their ongoing success and store openings—an impressive feat after so many years.
Mary Long: Considering current trends, GLP-1 drugs have become a hot topic. How might their impact influence McDonald’s growth, and could this relate to companies like Pepsi?
Anthony Schiavone: That’s a significant question. The effect of these drugs on food consumption metrics remains uncertain. While they may have a marginal impact on eating habits, it’s unlikely to be catastrophic for food companies. However, the ramifications could extend to Pepsi’s pricing power against competitors. As of now, McDonald’s stock is at nearly an all-time high, indicating that the market isn’t overly concerned about the potential effects of GLP-1 drugs. Only time will tell how this conversation evolves.
Matt Argersinger: I’d also like to note that we considered adding Hershey to our list due to its impressive dividend history. However, with McDonald’s and Pepsi being top priorities in the context of current trends around GLP-1, we opted to highlight McDonald’s instead.
Mary Long: Overall, you’ve diversified our selections well, including companies across various sectors. To round out our discussion, we have the world’s largest asset manager, BlackRock. In your Dividend Show, you highlighted their iShares brand as a key factor for BlackRock’s inclusion in the Dividend Seven—what makes this aspect stand out?
Understanding iShares’ Unique Position
Matt Argersinger: BlackRock stands as a colossal force in asset management. The iShares brand has fueled its growth significantly over the past decade. Although BlackRock’s name may not be familiar to everyday consumers, it is well-known among investors, businesses, and pension funds. Currently, BlackRock manages an astounding $10.7 trillion in assets—an amount larger than the GDP of the United States, which is approximately $20 trillion. iShares has established itself as the most recognized brand in the exchange-traded fund (ETF) market, attracting substantial assets from money managers and pension funds worldwide.
The recent launch of BlackRock’s Bitcoin ETF illustrates its influence. This ETF quickly became either the largest or second largest in the market, thanks to the iShares name. Investors, looking to enter the Bitcoin space, instinctively choose iShares for its reputation for low costs and the backing of BlackRock—a globally renowned and stable asset manager. Consequently, BlackRock’s dominance appears poised to grow as it consolidates its position in the market.
Valuing Dominant Companies in the Market
Mary Long: To wrap up today’s discussion, we began with the “Mag 7” framework that inspired the creation of the Dividend Seven group, highlighting growth-oriented tech firms. Some investors may assess valuation through a PEG ratio, but not all the companies we’ve discussed fit that approach. I’d like to know your thoughts on valuing these firms. Are there any that you find overpriced, or perhaps more attractively valued today?
Anthony Schiavone: I typically start with a straightforward price-earnings ratio for evaluating these established businesses due to their predictable earnings and revenue growth. While yield might not be a direct valuation metric, it’s definitely a focal point for Matt and me. We prefer companies with a dividend yield at least 50% higher than the market average, aiming for even greater yields when possible. Historically, dividends have accounted for roughly 50% of the market’s long-term returns over the last century.
Matt Argersinger: Reflecting on Prologis, the insights from its CEO years ago resonate today, showcasing it as a leading opportunity. In contrast, Home Depot seems somewhat overvalued at this time, considering current interest rate uncertainties and the housing market situation. Overall, while these seven companies don’t strike me as cheap, their premium valuations stem from their strong market positions. Just as with the Mag 7, I anticipate that this Dividend Seven will include firms that, while pricey, are deserving of those valuations due to their quality and market significance.
Mary Long: Matt, it’s always a pleasure to converse with both of you. Thank you for guiding us through this inaugural iteration of Dividend Seven. I hope it’s the first of many discussions to come. Thank you again!
Matt Argersinger: Thank you, Mary.
Anthony Schiavone: Thanks, Mary.
Ricky Mulvey: We want to remind our audience that the individuals on this program may hold interests in the stocks discussed. The Motley Fool might have formal recommendations regarding these stocks, so you should conduct your own research before making investment decisions. All personal finance content adheres to the Motley Fool’s editorial standards and is not influenced by advertisers. The Motley Fool endorses only the products it would recommend to friends. I’m Ricky Mulvey, and I appreciate your listening. We’ll return tomorrow.
JPMorgan Chase is an advertising partner of Motley Fool Money. Randi Zuckerberg, former director of market development at Facebook and sister to Meta Platforms CEO Mark Zuckerberg, serves on The Motley Fool’s board. John Mackey, former CEO of Whole Foods Market, part of Amazon, is also a board member. Bank of America and Citigroup are advertising partners of Motley Fool Money. Anthony Schiavone holds positions in Hershey and Prologis. Mary Long has no investment in the stocks mentioned. Matthew Argersinger’s positions include Amazon, Coca-Cola, Hershey, Home Depot, Prologis, and Tesla, along with various options. Ricky Mulvey has shares in Home Depot, Meta Platforms, and Prologis. The Motley Fool holds positions in and recommends Abbott Laboratories, Amazon, Bank of America, Bitcoin, Goldman Sachs Group, Hershey, Home Depot, JPMorgan Chase, Meta Platforms, Nvidia, Prologis, and Tesla. The Motley Fool also suggests options for Prologis. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
