Quick Look:
- Dividend Kings companies have been raising dividends for 50+ years; they are reliable for long-term investors.
- Walmart is leading the Dow, improving margins, investing in e-commerce, and raising dividends by 9%.
- Despite inflation, Procter & Gamble focuses on core brands, consistent dividends, and strong pricing power.
- Illinois Tool Works diversified industrial segments, high margins, and strong return on capital.
Owning stocks with high yields can be an excellent strategy for generating passive income, but yields can fluctuate wildly based on a stock’s price. A soaring stock’s yield will fall, while a tumbling stock’s yield will rise, even as their payouts remain steady. A more helpful approach for finding quality dividend stocks is to examine companies’ track records of dividend increases and their potential to grow payouts in the future. This is where Dividend Kings come into play. These companies have raised their dividends annually for at least 50 years, making them a reliable choice for long-term investors. Today, there are just over 50 members of this exclusive club, and some of the most noteworthy include Walmart, Procter & Gamble, and Illinois Tool Works.
Walmart: A Surprising Leader
Year to date, Walmart has been the best-performing component in the Dow Jones Industrial Average, outpacing even the impressive gains of Amazon, Microsoft, and Apple. It’s surprising to see a retailer outperforming these mega-cap growth stocks in a growth-fuelled market, but Walmart’s results speak for themselves. The company has been executing exceptionally well at a time when many consumer-facing companies are struggling. Walmart has consistently grown its revenues and successfully reversed a declining trend in its operating margin, which now exceeds 4%. This improvement has boosted its trailing 12-month operating income to over $27 billion for the first time in nearly a decade.
Walmart’s success is not due to a single factor but a combination of strategic investments. The company nearly doubled its capital expenditures over the last five years, investing in new stores, renovating existing ones, and enhancing Walmart+, its e-commerce home delivery option. It has also focused on improving its product mix to align with consumer behaviour. These investments have paid off, with Walmart+ delivering solid results and the potential for further improvement.
In February, Walmart raised its dividend by 9% and has ramped up the pace of its stock repurchases. Its yield at the current share price is just 1.2%. However, dividends could accelerate if Walmart’s e-commerce and delivery investments translate to higher free cash flow. Despite a high price-to-earnings ratio of 30.2, Walmart’s effective capital allocation justifies its premium valuation.
Procter & Gamble: Slow and Steady Wins the Race
Procter & Gamble, commonly known as P&G, is a classic example of a slow and steady business model that delivers. Owning many leading home and personal care brands, P&G has masterfully focused on its best brands, avoiding heavy investments in new or ineffective acquisitions. Instead, it has chosen to return profits to shareholders through buybacks and dividends. Over the last decade, P&G has increased its dividend by 56% and reduced its share count by 12.6%. Therefore, earning it a spot among the longest-tenured Dividend Kings with 68 consecutive years of dividend raises.
Despite inflation pressures, P&G has demonstrated pricing power, which has helped its margins. However, sales volumes have been sluggish, reflecting the current consumer pressure. While near-term results might not be impressive, P&G continues to grow its earnings and dividends moderately. This is supported by deliberate spending and a robust portfolio of brands. Over the past year, P&G has paid $9 billion in dividends, making it one of the highest dividend payers among U.S.-based companies. Investors find P&G’s yield of 2.4% safe and attractive.
Illinois Tool Works: A Model of Industrial Excellence
Illinois Tool Works, or ITW, may not be as well-known as Walmart or P&G, but it excels in the industrial sector. ITW operates in seven core segments: automotive, test & measurement and electronics, food equipment, construction products, welding, polymers & fluids, and speciality products. This diversification and growing margins across all segments make ITW stand out.
The company expects its operating margin to be in the 26% to 27% range this year, aiming for 30% by 2030. ITW’s well-run business model is evident in its growing return on capital employed (ROCE). This metric highlights ITW’s ability to generate profits from capital and manage debt effectively.
ITW’s ROCE has soared to 38.6%, showcasing its profitability. Despite a drop in stock value this year and a lowered P/E ratio of 23.3, ITW’s track record of growing margins and generating high returns on capital makes it a compelling choice for long-term investment.
Quality Wins in the Long Run
When looking for companies to buy and hold over the long term, it’s crucial to focus beyond current valuations and consider the businesses’ future trajectories. Despite operating in different industries, Walmart, P&G, and ITW share common themes of dividend growth, stock buybacks, and effective capital allocation. They excel at playing to their strengths. Walmart leverages its value-based pricing model through a growing home delivery service. P&G and ITW maintain high-margin brands without overexpanding.
The Bottom Line: Invest with Confidence
For decades, you can confidently buy and hold; Walmart, P&G, and ITW are excellent passive income opportunities. These companies may not offer the highest yields but provide consistent dividend growth, strategic investments, and effective capital allocation. These qualities make them standout choices for any long-term investor’s portfolio. While these Dividend Kings may not dazzle with immediate high yields, their quality and reliability ensure they remain a cut above the rest.
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