Dividend stocks are a favorite asset class among a certain group of investors for their ability to provide steady passive income through regular cash payouts to shareholders. Additionally, many dividend-paying companies have a history of increasing their dividends over time, helping investors keep pace with inflation and potentially grow their income over the years.
With that in mind, here are three top dividend-paying stocks poised to generate passive income for the foreseeable future.
1. Lowe's Companies
Lowe's Companies(NYSE: LOW) stock is struggling in 2023, generating a total return of negative 3% year to date. One reason could be that sales growth and profitability for the home improvement retailer declined this year, in part because of tough comparisons to what was a relatively strong 2022 that benefitted from lower interest rates and a still healthy housing market. During the first half of 2023, Lowe's achieved $47 billion in net sales and $4.9 billion in net income; this was a 7.5% decrease in net sales and a 7.4% drop in net income compared to the first half of 2022.
Management has provided a somewhat discouraging revenue forecast for its full-year 2023, ranging from $87 billion to $89 billion, indicating a projected decrease of 2% to 4% compared to 2022. This guidance represents a downward revision from the company's initial 2023 estimate of $88 billion to $90 billion. Still, given the macro-environment conditions of higher interest rates and lingering inflation, it's reasonable to believe Lowe's excuse that cautious consumers are to blame for the decline in sales.
The company's commitment to returning capital to shareholders through dividends and share repurchases is rare. Lowe's has paid and raised its dividend for an admirable 49 consecutive years. If management raises it in 2024, the stock will reach Dividend King status. Today, Lowe's pays a quarterly dividend of $1.10 per share, for a current dividend yield of 2.3%. Such consistency shows Lowe's manages its finances well and can reward shareholders even during economic downturns like the Great Recession and recessionary periods during the early 1980s, early 1990s, and early 2000s.
Lowe's share repurchase program is also strong. Stock repurchases offer a tax-efficient means to reduce a company's total outstanding shares and, in theory, increase the value of the existing shares. Over the last five years, Lowe's reduced its outstanding shares from 825 million to 596 million, a decrease of 28%.
Finally, Lowe's stock looks underpriced when you compare its historical price-to-earnings (P/E) ratio to its forward P/E ratio. Specifically, the forward P/E was roughly 14 as of this writing, lower than its five-year average of 24. That suggests a potential bargain.
Image source: Getty Images.
2. McCormick & Company
McCormick & Company(NYSE: MKC)(NYSE: MKC.V), a global leader in flavor, has paid and raised its dividend for 37 consecutive years. Its current quarterly dividend is $0.39 per share, providing a current yield of 2.6% -- that's a 10-year high for the spice and sauce maker. The reason for McCormick's unusually high yield is that the stock is trading at a 52-week low after its recent quarterly earnings report.
Looking at recently released fiscal Q3 earnings, the company generated $937 million in net sales, for a respectable year-over-year growth of 6%. However, the company noted a 4% decline in worldwide sales volume and a 15% decline in sales volume in its Asia-Pacific region. Management blamed the slowdown in China on a "slower than anticipated economic recovery as well as lapping strong demand in the prior year."
Despite the sales slowdown, McCormick's already high gross margin -- a key metric demonstrating the profitability of its products -- is expanding due to higher prices. For the first nine months of its fiscal 2023, the company delivered a gross profit margin of 36.7%, a year-over-year improvement of 1.3%.
McCormick is facing a growing interest expense to pay down its $4.6 billion in net debt, but the company is on track to reach over $600 million in net income for the fourth consecutive fiscal year.
So as long as McCormick remains a global leader in flavor, the company is profitable enough to continue paying and raising its dividend while paying down its debt. Therefore, despite some short-term challenges, income-seeking investors could be getting a steep discount on McCormick at its depressed stock price.
3. Nike
The NBA season starts this week, meaning millions of fans will once again see the iconic Nike(NYSE: NKE) swoosh on the shoes of many of the best basketball players in the world. The global athletic shoe and apparel manufacturer and retailer has paid a quarterly dividend since going public in 1985 and has raised its dividend for 22 consecutive years. Today, Nike distributes a quarterly per-share dividend of $0.34, providing a current dividend yield of 1.3%.
Digging into Nike's recent financials, the company achieved quarterly revenue of $12.9 billion and net income of $1.45 billion for its fiscal first quarter of 2024 (ended Aug. 31, 2023) -- a year-over-year revenue increase of 2% and a net income decline of 1%.
Despite the slowdown in net income, the company's diluted earnings per share increased 1% year over year from $0.93 to $0.94 due to the company's robust share repurchase program. From June 2022 to August 2023, management repurchased 54 million Nike shares worth approximately $5.9 billion, lowering the company's outstanding share count by nearly 3%.
Beyond Nike's shareholder returns, the company has an impressive balance sheet for its maturity, with only $671 million in net debt (debt minus cash and cash equivalents). For comparison, Crocs, a shoe company with a $5 billion market capitalization compared to Nike's $152 billion, has a net debt of $1.86 billion.
Additionally, management recently gave guidance for its full-year 2024, which included revenue growth in the "mid-single digits" and expansion of the company's gross margin by 1.4% to 1.6%. Adding it all together, Nike's dominance as the top dog in the shoe world should continue for years to come. And even if it's no longer a growth company, it's clear that Nike is committed to returning profits to shareholders.
Are these top dividend stocks buys?
These three longtime market outperformers have fallen significantly short of the S&P 500 benchmark in 2023. Still, all three are market leaders with proven track records, and each has an impressive streak of paying and raising its dividend. Beyond their dedication to rewarding shareholders, these stocks currently boast appealing valuations; that makes them ideal buys for any investor seeking passive income.
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Collin Brantmeyer has positions in Crocs, Lowe's Companies, McCormick, and Nike. The Motley Fool has positions in and recommends Nike. The Motley Fool recommends Crocs, Lowe's Companies, and McCormick and recommends the following options: long January 2025 $47.50 calls on Nike. The Motley Fool has a disclosure policy.
