Many high-profile stocks can come with risks and uncertainties that make them less than ideal for investors who prioritize reliable dividend income. While it's impossible to know where a stock will be in 20 years, certain attributes in a company increase the likelihood that it will be able to maintain its dividends well into the future. These three stocks provide long-term stability, which is an essential consideration for income investors and others with limited risk tolerance.
1. Emerson Electric
Emerson Electric(NYSE: EMR) is a diversified industrial company that offers a broad range of products, including electrical equipment, valves, control and measurement devices, regulators, welding equipment, and automation software. Its products are utilized in the energy, utility, manufacturing, and chemical industries, among others.
Image source: Getty Images.
Though Emerson's end markets deal with cyclicality, its diversification across a wide range of specialized products translates to relatively stable overall demand. It is prone to periodic weakness during economic slowdowns, but its portfolio is resilient over the long term because industrial businesses need what it sells. Its broad portfolio of market-leading products gives it a robust economic moat, and its competitive advantages are further enforced by high switching costs for its customers. These are attractive characteristics in a company for investors who want to hold onto their stock positions for decades.
Emerson is committed to keeping its product portfolio aligned with evolving technologies. It is shifting its focus to automation and industrial software, and it has used acquisitions and divestitures to propel that shift. Its pivot comes with execution risk, but it's an important decision that supports the long-term investment thesis for the stock.
Emerson has increased its dividend annually for 66 consecutive years. That impressive feat, which earns it a spot on the exclusive list of Dividend Kings, has been supported by its consistently strong operations. The company's return on invested capital (ROIC), an important metric that measures operational efficiency, has been over 10% for nearly two decades. With only $7.6 billion of long-term debt, Emerson's debt-to-equity ratio indicates an exceptionally healthy balance sheet, even if you exclude intangible assets associated with its previous acquisitions.
Data by YCharts.
Emerson's payout ratio is under 60%, so it's producing more than enough earnings to support the dividend. That's not a misleading accounting ratio, either -- Emerson's free cash flow was more than $1 billion higher than its cash distributions to shareholders last year. The stock's 2.4% dividend yield and 19.5 forward price-to-earnings ratio aren't particularly exciting, but Emerson's valuation is reasonable enough for long-term investors to buy its shares with confidence.
2. PepsiCo
PepsiCo(NASDAQ: PEP) is another ROIC powerhouse with rock-solid demand stability and a balance sheet that supports continued dividend growth. It's a consumer staples giant, and its brand portfolio includes a number of household names. Pepsi is unsurprisingly the most prominent of the bunch, but the company also owns Lay's, Doritos, Tostitos, Ruffles, Tropicana, Quaker, Sabra, and numerous other popular snack and beverage brands. Its products are sold in more than 200 countries, and the company's quarterly sales exceed $1 billion in five different continental regions across the globe.
PepsiCo faces stiff competition from capable rivals, but the company's scale and diversification create tremendous stability. Consumers and businesses purchase PepsiCo products in every season and throughout the entire economic cycle, even as consumer preferences evolve. There might be relatively lean times during global recessions, but it's highly likely that people will be purchasing PepsiCo products in large volumes several decades from now. The company's steady revenue growth and fairly stable gross margins are a testament to this quality.
Data by YCharts.
PepsiCo's debt-to-equity ratio is around 2, so its capital structure includes more debt than Emerson's. That does create additional risk for shareholders in the event that unexpected performance issues arise, but that shouldn't dissuade prospective investors. The company is still well within the healthy range of liquidity and debt service obligations, even with today's elevated interest rates.
At its current share price, PepsiCo's dividend yield is around 2.9%, which is relatively high among Dividend Kings. Its 80% payout ratio might be contributing to that, but the company has comfortably produced enough free cash flow to cover its dividend payments so far this year.
3. Johnson & Johnson
Johnson & Johnson(NYSE: JNJ) is a diversified healthcare giant. It's one of the world's largest pharmaceutical companies with roughly $60 billion in annual revenue with a broad portfolio of drugs, including blockbusters Remicade, Simponi, Stelara, Tremfya, Invega, Darzalex, Imbruvica, Xarelto and Opsumit. It's also one of the world's largest medical device companies with a suite of products, including orthopedics, surgical tools, cardiovascular intervention devices, and vision products. It was also one of the market leaders in consumer health goods prior to spinning off that division as Kenvue.
As with the other stocks above, Johnson & Johnson's diversified portfolio provides it with stability. It's expensive to develop and receive regulatory clearance for pharmaceutical and medical device products, which gives it a moat -- and that moat is deepened by patent protection laws. Johnson & Johnson's drug pipeline is robust and highly rated, which is an excellent indicator for its future revenues. Demand for important healthcare products tends to be predictable, making this company's future cash flows among the most reliable on the market.
Johnson & Johnson has delivered consistently high ROIC and maintained a fairly low debt-to-equity ratio. That combination of enviable efficiency and low financial risk translates into reliable dividends. The stock's 3.2% yield is strong among the Dividend Kings too. The company's 87% dividend payout ratio might concern some investors, but Johnson & Johnson has produced $12 billion in free cash flow this year relative to $9 billion in dividends paid. Investors should feel secure based on the company's historical performance and strong fundamentals.
10 stocks we like better than Emerson Electric
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Emerson Electric wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of November 15, 2023
Ryan Downie has positions in Johnson & Johnson. The Motley Fool has positions in and recommends Emerson Electric. The Motley Fool recommends Johnson & Johnson and Kenvue. The Motley Fool has a disclosure policy.
