Companies that have increased their dividend every year for a minimum of 50 years are known as Dividend Kings. These companies have had their finances through many business cycles but continue to produce enough profits each year to fund consistent increases in the dividend. Only companies with strong competitive advantages can accomplish this, which makes their stocks worth considering for the long haul.
Because it's such a tough task to accomplish, the list is very short. Only 31 companies qualified in 2021 to be known as a Dividend King. Among those, Coca-Cola (KO 0.30%), Procter & Gamble (PG 0.81%), and Target (TGT 1.99%) are strong consumer brands that should continue to pay dividends for many years. These three stocks are worth considering in 2022.
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1. Coca-Cola
Coca-Cola has paid a dividend every year for 59 years. In 2021, Coke increased the quarterly per-share dividend payment by a penny from $0.41 to $0.42, bringing the current dividend yield to 2.8%.
Coca-Cola has faced mounting headwinds in recent years from consumers preferring less sugary beverages. Coke has been able to counter those headwinds by relying on an extensive global distribution system to grow sales volume across 200 brands, including tea, coffee, premium water, and juices. Total unit case volume has increased from 26.7 billion in 2011 to 29 billion through 2020.
The only drawback to this growth strategy is that beverages other than core Coca-Cola products generate lower returns. As the company expanded beyond carbonated beverages, returns on invested capital have declined over the last decade to around 13%. A few decades ago, Coke enjoyed returns on invested capital around 30%, which is stellar. Those high returns reflect the profitable business of making syrups that Coke sells to its bottling partners that manufacture the finished product. However, Coca-Cola beverages currently make up less than half of the total retail value of the business.
The slowing demand for sugary sodas has contributed to the stock's underperformance against the S&P 500 index over the last 10 years, but it's still a solid income investment. People consume nearly 2 billion servings of all its beverage brands every year, and that drives a consistent stream of revenue and free cash flow to fund the dividend. Coke generated $11.7 billion of free cash flow over the last year and paid out 76% of that to shareholders. The dividend yield is currently more than double the S&P 500 average.
If you need to bump up your portfolio's average dividend yield, Coke is a relatively safe way to do it. You're not going to hit a home run, but most importantly, the downside is limited given Coke's consistent sales volume.
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2. Procter & Gamble
P&G is another top consumer staples company that has a long history of paying dividends. P&G sells essential household items people buy every day, which makes it a great stock to own during recessions. Its portfolio of brands includes Tide, Gillette, Charmin, and Crest, as well as many cleaning products that are useful during a pandemic.
Like Coca-Cola, selling grocery staples in high volume makes for a great dividend investment. P&G has paid a dividend for 131 years, with 65 consecutive dividend increases. The quarterly payment increased 10% in 2021 to $0.87 per share.
P&G's business has been humming over the last few years, both before and during the pandemic. P&G spent the last seven years reducing the number of brands it manufactures to improve its profitability. Management has focused on products for which product performance drives demand. It also made adjustments to marketing, packaging, and selling prices. The results have been fantastic, with the operating margin improving from around 18% to nearly 23% over the last seven years. P&G is clearly a well-managed business.
The stock has nearly doubled in value over the last five years and trades at an expensive 27 times forward earnings estimates. But the above-average dividend yield of 2.1% still looks attractive. P&G only paid out 55% of its trailing-12-month free cash flow in dividends, which gives it plenty of room to continue increasing the quarterly payments even if the business goes through a stagnant period. In that light, P&G is a safer dividend stock than Coca-Cola.
Image source: Target.
3. Target
If you're looking for growth, Target is your best bet. Over the last 10 years, the bullseye has more than doubled its dividend payment, while Coca-Cola and P&G have raised their dividend by 61% and 78%, respectively, over the same period. Target seems poised to continue this streak since it just raised its quarterly payment by 32%.
Target has paid a dividend every quarter since it went public in 1967, and management is pushing all the right buttons to drive more growth.
Target was doing fine before the pandemic, with third-quarter comp sales up a respectable 4.5% in 2019. Its strategy over the last five years to remodel stores and improve fulfillment capabilities has paid off during the pandemic. Target turned in a stellar 13% comp sales growth rate in the most recent quarter, on top of 21% growth in the same quarter during 2020.
Target is ramping up its capital spending to improve the supply chain, add more sortation centers, and remodel existing stores. That makes its recent dividend increase an income investor's dream. Sometimes investors get tempted to buy high-yield stocks, but it can be rewarding to look for companies offering a balance of income and growth even if that means accepting a lower yield.
Target's current dividend yield of 1.4% might not seem as attractive as Coca-Cola or P&G, but if the dividend doubles again over the next decade, investors could be earning 2.8% in dividends on their original investment by 2031. Keep in mind that Target could double its dividend without any more growth in free cash flow since it only pays out about a quarter of its free cash in dividends.
Given Target's superior record of revenue growth and dividend increases, this retail stock is the best option for investors looking for growth and income. It also happens to be the cheapest stock on this list, trading at just 16 times trailing 12-month earnings.
