We never recommended a stock simply because it pays a high yield. But don’t misread that stance as a lack of appreciation for dividends. We measure the success of our picks based on total return, and dividends make a difference, explains Rich Moroney, editor of Dow Theory Forecasts.
The one constant you’ll find among our income options is growth; we have long gravitated toward companies that grow their payouts. Every income stock on our Buy List has grown its payout at least 2% over the last year and annually over the last three and 10 years, if they’ve paid out that long.
In the following paragraphs, we review five of our favorite income stocks; each of the stocks below earn our Focus List buy rating.
Citizens Financial (CFG) yields 4.2%, ranking it second-highest among our Buys. The company suspended dividend growth in 2020, as did many firms, then proceeded to pay the same quarterly amount for two-and-a-half years before boosting the payout 8% in July.
Before the Covid-related dividend freeze, Citizens had a history of aggressive growth, increasing the divided at least 15% each year from 2015 through 2019. The new, higher payout equals about one-third of expected operating earnings over the next year. We can’t predict a return to double-digit increases, but such growth would not surprise us.
Devon Energy (DVN) has seen its payout nearly tripled over the last year, reflecting the company’s commitment to returning at least 50% of excess free cash flow to investors. The company uses a fixed-plus-variable system for its dividend. About 86% of the most recent quarterly payout was variable.
Devon increased its dividend sequentially in each of the last seven quarters. The projected dividend for the current quarter is up 61% from the year-earlier period but down from the June quarter and equates to a yield of 8.1% if extrapolated over the next four quarters. Analysts expect free cash flow to fall in 2023 and again in 2024.
These variable payouts will likely slow or stop when energy prices begin to fall, as they always do, and impact Devon’s operating results. But for as long as the company distributes fat dividends, we’ll happily collect them.
EOG Resources (EOG) recently boosted its quarterly dividend 10%, equating to a yield of 2.4%. The dividend hike builds on an 83% boost at roughly the same time last year. The company also declared a special dividend of $1.50 per share, payable Dec. 30.
The sharp increase in energy prices over the last year accelerated operating growth at EOG. Free cash flow rose 34% over the last 12 months on top of 68% growth in the same period a year ago; the company has pledged to pay out at least 60% of free cash flow in dividends.
The latest special dividend marks the fifth over the last year for a total of $7.80 per share. As with Devon, EOG’s payouts will likely recede when operating growth slows, but for now the payout remains generous.
UnitedHealth Group (UNH) has raised its payout every year since 2010, growing the dividend at an annualized rate of 51% over that period, including 17% annualized over the last five years.
The managed-care giant has demonstrated consistency in other areas as well, growing per-share profits and cash flows every year since 2009. The company's indicated year-ahead dividend of $6.20 per share accounts for just 27% of estimated earnings, leaving plenty of room for additional increases.
Property-and-casualty insurer W.R.Berkley (WRB) augments its modest quarterly dividend of $0.10 per share with special dividends, including two for a total of $1.50 per share over the last year. Berkley paid two special dividends each year from 2017 through 2019, then appeared to resume the trend at the end of 2021.
We don’t include the special dividends in our yield computation. Berkley’s indicated year-ahead dividend of $0.40 per share makes for a yield of 0.5%. But if you factor in the last two special dividends, the yield jumps to 1.9%.