Juicy, juicy dividends. Who doesn’t love getting paid for doing nothing?
Well, other than waking up and simply holding onto the shares you already bought. But that’s pretty easy, isn’t it?
There are a number of dividend growth stocks out there offering big dividends. I’m talking yields of over 5%.
Plus, these dividends are growing year in and year out, like clockwork. That protects your purchasing power against inflation. And if all of that weren’t good enough already, some of these stocks look downright cheap. Because whether it’s socks or stocks, we all like a good deal.
Today, I want to tell you about 5 cheap dividend growth stocks offering 5%+ yields.
Ready? Let’s dig in.
The first dividend growth stock I want to highlight is Kinder Morgan (KMI).
Kinder Morgan is a North American energy infrastructure company. Kinder Morgan specializes in owning and operating pipelines and terminals that move oil and gas. Since Kinder Morgan operates, or owns an interest in, approximately 82,000 miles of pipelines and 143 terminals, this is one of the largest infrastructure companies in all of North America.
No matter what happens to the price of underlying commodities, Kinder Morgan gets paid. It’s effectively a “toll booth” for energy commodities. Now, it won’t knock your socks off with growth. But the yield is outstanding.
Kinder Morgan’s stock is yielding 6.3%. Wow. That’s some serious income, even in a world in which rates have risen.
Now, again, getting back to my prior point, you do have to sacrifice growth in order to access that yield. No free lunch. You can never have it all. And that’ll be a recurring theme throughout today’s piece.
Kinder Morgan has increased its dividend for five consecutive years, which is a track record that’s shorter than it ought to be because of a 2016 dividend cut that came on the heels of a mismanaged balance sheet. The three-year DGR is 5.1%, and I think it’s reasonable to expect low-single-digit dividend growth per year. Based on forward guidance for DCF/share, the payout ratio is 52.1%. That’s healthy.
There is nothing demanding about the valuation here. The best way to value a pipeline business like this is to look at the multiple of cash flow. Kinder Morgan is guiding for $2.13 in DCF/share for this fiscal year, putting the forward multiple at 8.3. To be fair, that’s actually pretty close to its own five-year average, which is near 8.
However, this stock has been in the penalty box for years, and justifiably so. But we invest in where a business is going, not where it’s been. By just about every standard, this is a very low and undemanding multiple of cash flow. For income-oriented dividend growth investors, a well-covered 6.3% yield on a cheap name with recurring revenue is awfully interesting.
The second dividend growth stock I want to bring to your attention is Altria Group (MO).
Altria is one of the world’s largest tobacco companies. This is a “sin” stock. Works for some. Not for others. And that’s okay. Me? I’m a fan of personal freedoms.
If an adult chooses to buy and consume a legal product, more power to them. And I’m happy to profit from that. Well, profit Altria does. And they return most of that profit back to their shareholders in the form of a massive dividend.
Altria’s stock is yielding 8.5%. The stock can move sideways and still earn an 8.5% annual return. As long as it doesn’t decline much, you’ve got a pretty nice floor on your return, based on just the dividend alone.
Again, though, you’re not going to get much growth here. This is a mature business selling a product in secular decline. It’s a bit of a melting ice cube in some ways, but the ice cube is huge and appears to have many more years of melting in front of it before it’s in danger of disappearing. That’s been true for decades already, as evidenced by Altria’s 53 consecutive years of dividend increases, making it a rare Dividend King.
The 10-year DGR is 8.1%, although more recent dividend raises have been in the 4% range. The 74.5% payout ratio, based on FY 2023 guidance for adjusted EPS at the midpoint, is high and constrains the dividend growth, but Altria has been navigating a high payout ratio for many years.
This stock looks modestly undervalued to me. Based on that aforementioned adjusted EPS guidance, the forward P/E ratio is 8.8. So we’ve got a P/E ratio that’s pretty close to where the yield is – both with an 8-handle. That’s remarkable. Not something you see very often.
That said, Altria has been cheap for years. The market has been sniffing out the challenges and secular decline in its core product, and that’s led to compressing multiples. Again, though, I’ll note that the yield gets you to a pretty good return all by itself.
The business just has to avoid collapse. We last analyzed and valued Altria in August, estimating fair value for the business at nearly $48/share. The stock’s price is currently below $45. Decent upside. But it’s really that yield that stands out. If you’re okay with the nature of the products and their secular decline, as well as the debt load, it’s a compelling income play.
The third dividend growth stock I want to bring up is Truist Financial (TFC).
Truist is an American bank holding company. Boy, it’s not often that you’ll see a bank on a list like this. But we are in strange times. That’s because the idiosyncratic failure of a few banks has sent bank stocks reeling on the fear of contagion. But here’s the thing about Truist: This is one of the largest banks in the US. It’s the seventh-largest US commercial bank by deposits.
If Truist has problems, the entire country has problems. The failure of Truist would require a kind of cataclysmic event that would have me worried about much more than a particular stock. But when others are fearful, that’s typically a good time to consider being greedy. And while you wait for a rebound to play out, you’re getting paid handsomely.
Truist’s stock is yielding 6.4%. To put that in perspective, that’s nearly twice as high as its own five-year average yield. The stock usually offers a competitive yield, but 6.4% is highly unusual and really quite outrageous. And, unlike the other names in today’s list, you even get a nice growth kicker here. That’s because the stock is more of an accidental high-yielder.
Truist has increased its dividend for 12 consecutive years, with a 10-year DGR of 10.2%. Even if the banking issues cause more regulation and less growth, that much higher starting yield can make up for a lot of it. Another factor that stands out is the payout ratio, which is 47%. You rarely get a low payout ratio with a high yield like this, but it’s a pretty unique situation.
Also unique is the valuation, which is shockingly low. A US bank will usually command a P/B ratio between 1 and 2, depending on the growth and quality of the bank. The five-year average P/B ratio for Truist is 1.2.
So it was on the low end already. But it’s now at 0.8. That’s the kind of depressed multiple you only see when a bank is in crisis, which just doesn’t seem to be warranted at all for Truist itself. We went over this bank not long ago, and valued the firm at just about $53/share. I see tremendous upside here on one of the largest banks in the US. Meanwhile, you’re collecting a 6.4% yield. Tough to complain about any of this.
The fourth dividend growth stock we have to discuss is Verizon Communications (VZ).
Verizon is a multinational telecommunications conglomerate. Let’s get the obvious out of the way. The US telecommunications industry is mature and saturated. If you’re looking for a compounding machine, this is the last place you’d look.
However, on the flip side, demand is strong. Try to take someone’s smartphone away from them. Ain’t gonna happen. Mobile data and mobile communication is practically as necessary to people these days as water and electricity. That creates cash cows… like Verizon. And what a cash cow it is.
Verizon’s stock is yielding 6.6%. When you’re getting a yield that high, the business doesn’t have to grow very much in order to provide a satisfactory annualized total return, which I view to be a market-like 10%.
You’re more than 60% of the way there with just the dividend. Indeed, Verizon isn’t growing very much, which relates back to what I just mentioned. The 10-year DGR of 2.5% shows that low growth. Still, for income-oriented dividend growth investors, a near-7% yield is hard to pass up. And with a payout ratio of 55.5%, based on midpoint adjusted EPS guidance for FY 2023, this outsized dividend appears to be fairly safe.
The business isn’t growing much, true. But the low valuation is already factoring that in. Based on that adjusted EPS guidance, the forward P/E ratio is only 8.4. Even by Verizon’s low standards, that’s an unusually undemanding P/E ratio.
For context, its own five-year average P/E ratio is 11.1. Every multiple is showing a disconnect. Another good example is the P/S ratio of 1.2, which is well off of its own five-year average of 1.7. This isn’t the kind of stock that’ll make you wealthy tomorrow, or even a year from now. It’s not a perfect business. Growth is muted. And there’s a lot of debt. But it’s a cheap cash cow that isn’t dying. And that might just be good enough.
The fifth dividend growth stock we have to have a conversation about is W.P. Carey (WPC).
W.P. Carey is a diversified net lease real estate investment trust. If you want to own commercial real estate, but you don’t want to deal with the massive difficulties of trying to build a property portfolio by yourself from scratch, buying shares in a real estate investment trust like W.P. Carey can make a lot of sense.
A REIT like this offers you the opportunity to instantly own a slice of a diversified portfolio of properties that are already scouted, financed, leased, and managed. W.P. Carey’s portfolio of nearly 1,500 properties are nearly 100% occupied and leased out to over 390 tenants across all kinds of industries. W.P. Carey collects that growing rent for the shareholders, and then sends that out via a large, growing dividend.
W.P. Carey’s stock is yielding 5.7%. And this isn’t some high-yield junk stock, either. W.P. Carey is a stalwart REIT. The company has increased its dividend for 26 consecutive years, and I foresee many more years of dividend growth ahead.
Now, the 10-year DGR of 6.1% is undercut by recent dividend raises that have been in the low-single-digit range. However, because W.P. Carey has CPI-linked rent escalators built into many of their contracts, the next year or two could spark a dividend growth renaissance here. Meanwhile, the payout ratio is 79.8%, based on midpoint guidance for FY 2023 adjusted funds from operations per share. That’s pretty typical for a REIT.
After a 15% correction in the stock price, the valuation has become reasonable once again.
One usually values a REIT based on cash flow, or funds from operations. So the P/CF ratio is 14.9 after the correction. That’s favorable relative to its own five-year average of 16.1.
Circling back around to that guidance, the forward price-to-adjusted-funds-from-operations ratio is 13.9. That’s somewhat analogous to a P/E ratio on a normal stock. Now, let’s be realistic. A slow-growth REIT like this shouldn’t command super high multiples. But the reality is that it’s not. The market has often assigned W.P. Carey suitably low multiples.
That said, the multiples right now are especially low. And what’s surprising is, W.P. Carey could be a beneficiary of recent inflation. This name is worth a close look, in my view.
— Jason Fieber
