When it comes to investing in dividend stocks, there are many ways to find high-quality companies to buy. We like to focus on those companies that have long track records of dividend increases, as such companies have already passed the test when it comes to sustainable, growing income for shareholders.
One such list of long-lived dividend stocks is the blue chips, a group of more than 350 stocks that have all raised their dividends for at least 10 consecutive years.
These companies generally have shareholder-friendly management teams that are willing to boost the amount of capital returned each year, while also having the ability to raise their payouts through thick and thin from an economic perspective. However, not all blue-chip stocks are created equal. In this article, we’ll focus on three blue chips that have above-average yields and dividends we believe would be safe during a recession.
| TGT | Target | $162.26 |
| TROW | T. Rowe Price | $123.36 |
| MDT | Medtronic | $93.14 |
Blue-Chip Stocks: Target (TGT)
Target (NYSE:TGT) is a general merchandise retailer that operates in the U.S. The company offers a huge assortment of food products, including dry groceries, dairy, frozen items and perishables. In addition, Target has a large apparel business, including many of its own private labels. The company has a long list of electronics, toys, animal care, home décor and much more.
Target was founded in 1902, and today, it has about 2,000 stores across the U.S. The company produces about $110 billion in annual revenue and trades with a market capitalization of $75 billion.
Target’s current yield of 2.1% compares quite favorably to the 1.4% yield of the S&P 500, implying shareholders of the retailer achieve 50% greater income each year by holding Target shares over the broad market. While there are certainly stocks with higher absolute yields, with Target’s relative outperformance against the broad market on a yield basis and its impressive streak of dividend growth, it stands above the pack.
Target has raised its dividend for an extremely impressive 54 consecutive years, putting it in very rare company. This makes Target among the best-of-the best in the market today on dividend increase streaks. It also means that it has proven it can withstand any economic condition.
The last 54 years have contained several recessions — some of them severe — and Target has withstood them all, raising its dividend regardless. We see Target’s mix of non-discretionary products — such as groceries and healthcare products — as supporting earnings during future recessions sufficiently for the dividend to continue to be raised indefinitely.
Indeed, even with the ultra-impressive streak of dividend growth, Target’s payout ratio for this year is still only about one-third of earnings. So the company could withstand a huge hit to earnings and still raise its dividend for years to come.
With these factors in mind, we see Target as offering shareholders a strong yield and recession resistance to go along with its half-century of dividend increases.
T. Rowe Price Group (TROW)
Next on our list of blue-chip stocks is T. Rowe Price Group (NASDAQ:TROW), a publicly-owned investment manager based in the U.S. The company provides investment services to individuals, institutions, retirement plans, intermediaries and institutional investors. T. Rowe invests in public equity and fixed-income markets globally, utilizing a variety of investment strategies. It also has a small venture capital business where it makes investments of less than $5 million in early-stage companies.
T. Rowe was founded in 1937. Since then, it has grown to almost 8,000 employees, $7 billion in revenue and a $28 billion market cap.
TROW shares yield a robust 3.5% today, which is about 2.5X that of the S&P 500. On that measure, T. Rowe offers a sizable benefit to income-focused shareholders. In addition, the current yield is meaningfully higher than it typically has been for the company. Thus, the yield not only offers higher income to shareholders but also indicates the stock is likely undervalued.
The company also has an impressive dividend increase streak of 36 years. This is all the more impressive given the inherent cyclicality of investment firms. Indeed, firms such as T. Rowe and its competitors tend to see assets under management ebb and flow based upon market conditions, which are, in turn, often based upon prevailing economic conditions. The fact that T. Rowe has managed to boost its dividend for nearly four decades means it has found ways to operate quite profitably during recessions. This is key for income-focused investors.
The firm’s payout ratio is higher than it typically is, coming in at nearly 60% for this year. That is due primarily to huge amounts of payout growth in the past few years, however, as the company has returned more and more cash to shareholders. We don’t believe the payout would be at risk during a recession given the company’s track record in prior recessions.
Blue-Chip Stocks: Medtronic (MDT)
Our final pick is Medtronic (NYSE:MDT), a company that manufactures and sells a wide variety of medical devices worldwide. It operates through cardiovascular, medical surgical, neuroscience and diabetes operating unit segments, producing a huge variety of medical devices for dozens of applications. Medtronic was founded in 1949. It produces about $32 billion in annual revenue and trades with a market cap of $125 billion.
Medtronic yields 2.7% today, roughly double that of the S&P 500. So, like the others, it offers a significant advantage from a pure income perspective. The current yield is also quite high compared to the company’s historical yield, which is closer to 2%.
Medtronic’s dividend increase streak stands at 45 years. Like the other two stocks on this list, it has proven its ability to weather all economic storms when it comes to returning cash to shareholders. Medical devices tend to hold up well during recessions given most of them are non-discretionary. In other words, most of what Medtronic makes are products that are required for health reasons. Therefore, economic conditions don’t necessarily play a part in the decision for the patient to buy or not.
Medtronic is set to pay out half of its earnings this year. Given this and the inherent recession resistance, we see no scenario that would cause the company to need to cut its dividend in the coming years.
Final Thoughts
When searching for companies with sustainable dividends, the best place to start is with a list of great dividend stocks, such as blue-chip stocks. These companies have at least 10 years of consecutive dividend increases, and in the cases of Target, T. Rowe and Medtronic, many years more than that. These three companies have many years of dividend increases ahead of them, but also current yields that are well above average.
On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article.