When it comes to income investing, we think investors should look for blue-chip stocks that have a few key features that go beyond the ordinary dividend stock. In particular, we prefer dividend stocks that have the ability to grow their payouts over time, as well as those that have very safe and reliable payouts, even during recessions.
Dividend safety is especially important when stock prices are falling. Many companies cut their dividend payouts in 2020 during the coronavirus pandemic, particularly in the retail and energy sectors. In this article, we’ll take a look at three blue-chip stocks we think offer investors the best combination of dividend growth potential and dividend safety.
The three blue-chip stocks on this list all provide investors with world-beating dividend increase streaks. Their long histories of annual dividend growth are the result of resilient profits during recessions, diversified business models, and management teams that are willing and able to return cash to shareholders.
For these reasons, these blue-chip stocks that offer very strong dividend safety, and consistent dividend growth for many years to come:
Blue-Chip Stocks: The Colgate-Palmolive Company (CL)
Colgate-Palmolive was founded more than 200 years ago, so it certainly has stood the test of time. When evaluating a buy-and-hold dividend stock, this characteristic is quite attractive.
Colgate operates in a number of consumer staple markets, which are segmented into Oral Care, Personal Care, Home Care, and Pet Nutrition. Colgate has carefully curated a portfolio of products that are used every day by consumers all over the world, including its famous toothpaste.
Colgate generates more than $16 billion in annual revenue, and trades with a $66 billion market capitalization. Colgate is a strong dividend pick because it offers investors recession resilience, a reasonable payout ratio, a world-class dividend increase streak, and the ability to grow the dividend for many years to come.
Colgate sells consumer staples, which are recession-resilient. Staples by their very nature are things consumers buy irrespective of economic conditions. This affords Colgate steady and growing profits over time. It also has afforded Colgate a dividend increase streak of 57 years, making it a Dividend King, a group of stocks with 50+ consecutive annual dividend increases.
Despite this streak of increases, Colgate’s payout ratio is just over 50% of earnings. As a result, the payout is not only very safe, but the company also has a long runway to continue raising the dividend for many years to come.
Colgate has raised its payout at an average rate of ~4.4% per year in the past decade, so it is providing meaningful growth for dividend investors. Colgate should have little trouble raising its dividend each year going forward, even in a deep recession.
The Coca-Cola Company (KO)
Coca-Cola is the world’s largest beverage company, owning or licensing a portfolio of more than 500 non-alcoholic brands. The company began in 1886 with its world-famous Coca-Cola brand in the U.S. but has since expanded into a variety of carbonated and still beverages, including tea, coffee, juices, waters, and more, selling its products in nearly every country in the world.
Coca-Cola produces about $36 billion in annual revenue and trades at a market capitalization of ~$216 billion.
Coca-Cola, similarly to Colgate, offers investors a measure of dividend safety because of the nature of its products. Coca-Cola sells primarily low-cost beverages that fit just about any budget under any circumstance. In other words, the company’s products may not be essential, but they are cheap enough to purchase that revenue and earnings tend to hold up quite well during recessions.
This means that Coca-Cola producing steadily-rising earnings in just about any market condition, leading to its extremely impressive 58-year streak of dividend increases. Like Colgate, Coca-Cola is also a Dividend King.
Coca-Cola struggled in 2020, as the coronavirus pandemic negatively impacted the global economy. Total revenue declined 11% last year, but the company saw a recovery as the year progressed. Revenue declined 5% for the fourth quarter, fueling hopes that Coca-Cola will return to growth in 2021.
Coca-Cola’s payout ratio is slightly elevated at an estimated 76% of earnings this year but, given we expect the company to grow earnings at a mid-single-digit rate over the next five years, we see the payout as very safe.
In addition, Coca-Cola’s average dividend increase in the past decade was a very impressive 5.7%, so nearly six decades of dividend increases hasn’t kept the company from continuing to reward shareholders.
Emerson Electric (EMR)
Emerson Electric was founded in the late-1800s from a small electric motor manufacturer to a global, diversified engineering powerhouse. The company provides an enormous list of engineering products to customers worldwide, including commercial customers and consumers.
Emerson produces almost $18 billion in annual revenue and trades with a market capitalization of $51 billion. Like the other two stocks in this article, Emerson is a Dividend King, having achieved that designation with a 64-year streak of consecutive dividend increases.
Emerson made the list because it offers investors access to earnings growth, which can be translated to dividend growth over time, and because its dividend is very safe. The company has proven to be extremely durable, even with the challenge of the coronavirus pandemic.
In the most recent quarter, Emerson’s total sales were flat from the prior-year period, while earnings-per-share increased 24% year-over-year. The company expects net sales growth of 4%-8% for the current fiscal year, along with adjusted earnings-per-share of $3.70 for fiscal 2021.
The company is expected to pay out slightly more than half of its earnings this year, so its dividend is very safe. Emerson has also stood the test of time when it comes to producing reliable earnings over the long-term, which means it can pay dividends in any economic circumstance.
In addition, we see mid-single-digit earnings growth for the foreseeable future, so Emerson should be able to raise the payout indefinitely without undue stress on its financials. Emerson’s average dividend raise in the past decade was 3.8%, and we foresee a similar growth rate in the payout going forward.
On the date of publication, Bob Ciura did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.