10 Dividend Stocks with Sustainable Payout Ratios
In this article, we discuss 10 dividend stocks with sustainable payout ratios. You can skip our detailed analysis of dividend stocks and the importance of payout ratios, and go directly to read 5 Dividend Stocks with Sustainable Payout Ratios.
Investors have traditionally shown a strong preference for dividend stocks because of their ability to generate income. When seeking stocks that provide a steady income stream, investors often lean toward companies that have a track record of consistently increasing their dividends over time. Such companies typically maintain low payout ratios, indicating robust cash generation capabilities. Payout ratio is a measure indicating the percentage of a company's net income or free cash flow that is distributed as dividends. A lower payout ratio is generally considered favorable because it implies that the company has the potential to sustain or even increase its dividend payments in the future. Adam Kramer, who oversees the Fidelity Multi-Asset Income Fund, discussed payout ratios in a report. Here is what he said:
"It's important to analyze the stability of a company’s cash flows when assessing the level of payout. When the payout ratio is more than 50%, you always stress test that ratio."
A high payout ratio indicates that a company is allocating a substantial portion of its earnings towards dividend payments, resulting in a reduced amount of funds available for potential investments in the future growth of the business. In a study conducted by Wellington Management, dividend-paying stocks were categorized into quintiles based on their dividend payouts. The top 20%, known as the first quintile, comprised the highest dividend payers, while the bottom 20%, the fifth quintile, included the lowest dividend payers. The second quintile stocks showed better performance than the S&P 500 Index in eight out of the 10 time periods from 1930 to 2022, while the first and third quintile stocks tied for the second place, outperforming the Index 67% of the time.
The study revealed that the success of second-quintile dividend-paying stocks could be attributed to the sustainability issues associated with the excessive dividend payouts of the first quintile. Additionally, the average dividend-payout ratio since 1979 for the first two quintiles of dividend payers within the Russell 1000 Index was highlighted in the study. The first-quintile stocks had an average dividend payout ratio of 74%, while the second quintile had a more moderate 40% average payout ratio. Maintaining a high payout ratio, such as 74%, may pose challenges for a company if it undergoes a decline in earnings. In such circumstances, the company might be compelled to reduce its dividend, a move often interpreted in financial markets as a sign of weakness. This reduction frequently leads to a decline in the company's stock price.
Mastercard Incorporated (NYSE:MA), Apple Inc. (NASDAQ:AAPL), and Thermo Fisher Scientific Inc. (NYSE:TMO) are some of the best MLP dividend stocks with sustainable payout ratios discussed among others in this article.
Photo by Scott Graham on Unsplash
Our Methodology:
For this article, we scanned Insider Monkey’s database of 910 hedge funds as of Q3 2023 to find stocks with sustainable payout ratios popular among hedge funds. Our focus was on companies that consistently distribute dividends to their shareholders. From this initial selection, we narrowed down the list to include only those companies with a 5-year average payout ratio below 30%, indicating a robust cash position. Subsequently, we identified the top 10 companies meeting these criteria and arranged them in ascending order of the number of hedge funds that held stakes in each of them. Hedge funds’ top 10 consensus stock picks outperformed the S&P 500 Index by more than 140 percentage points over the last 10 years (see the details here). That’s why we pay very close attention to this often-ignored indicator.
10. The Sherwin-Williams Company (NYSE:SHW)
Number of Hedge Fund Holders: 71
5-Year Average Payout Ratio: 28.7%
The Sherwin-Williams Company (NYSE:SHW) is a multinational company primarily engaged in the manufacturing and distribution of paint, coatings, and related products. The company offers a quarterly dividend of $0.605 per share and has a dividend yield of 0.79%, as of January 23. It has been growing its dividends for the past 44 consecutive years. The company's 5-year average payout ratio comes in at just 28.7%, which makes SHW one of the best stocks with sustainable payout ratios.
At the end of the third quarter of 2023, 71 hedge funds tracked by Insider Monkey owned stakes in The Sherwin-Williams Company (NYSE:SHW), compared with 78 in the preceding quarter. The overall value of these stakes is roughly $3 billion. With nearly 1.5 million shares, D E Shaw was the company's leading stakeholder in Q3.
9. The Cigna Group (NYSE:CI)
Number of Hedge Fund Holders: 74
5-Year Average Payout Ratio: 9.81%
The Cigna Group (NYSE:CI) is a global health services company that operates in various segments of the healthcare industry. The company's dividend growth streak currently spans over three years and it offers a quarterly dividend of $1.23 per share. The stock's dividend yield on January 23 came in at 1.61%. With a 5-year average payout ratio of 9.81%, CI is one of the best dividend stocks with sustainable payout ratios.
As of the close of Q3 2023, 74 hedge funds in Insider Monkey's database reported having stakes in The Cigna Group (NYSE:CI), which remained unchanged from the previous quarter. The consolidated worth of these stakes is more than $2.84 billion.
Davis Funds mentioned The Cigna Group (NYSE:CI) in its Q3 2023 investor letter. Here is what the firm has to say:
“In the attractive healthcare sector, we look beyond the obvious to identify businesses that simultaneously have exposure to this growth industry and also trade at low prices. We’re especially drawn to companies like Cigna Group, whose products or services play a part in helping to mitigate healthcare’s constantly rising costs. The healthcare industry has been a growing part of the U.S. economy for decades. As a result, many companies in this sector trade at high valuations reflecting their robust but well-known reputation for growth. For value-conscious investors like us, investing in healthcare requires looking beyond the obvious to identify businesses that have exposure to this growth industry but which trade at low prices. Furthermore, recognizing that the constantly rising cost of healthcare cannot go on forever, we have been particularly drawn to companies whose products or services play some role in managing or reducing the cost of care. As a result, we have positions in Cigna Group, a well-regarded provider of managed care.
8. American Express Company (NYSE:AXP)
Number of Hedge Fund Holders: 74
5-Year Average Payout Ratio: 23.3%
American Express Company (NYSE:AXP) is next on our list of the best dividend stocks with sustainable payout ratios. The American multinational financial services company is known for its credit card, charge card, and traveler's check businesses. The company has been paying uninterrupted dividends to shareholders for the past 34 years and currently offers a quarterly dividend of $0.60 per share. The stock's dividend yield came in at 1.29%. Over the past five years, its average payout ratio stood at 23.3%.
Insider Monkey's database of Q3 2023 indicated that 74 hedge funds owned stakes in American Express Company (NYSE:AXP), up from 73 in the preceding quarter. These stakes are worth over $25.6 billion in total. With over 151.6 million shares, Berkshire Hathaway was the company's leading stakeholder in Q3.
Oakmark Funds mentioned American Express Company (NYSE:AXP) in its Q4 2023 investor letter. The firm made the following comment:
“American Express Company (NYSE:AXP) is one of the largest credit card issuers and payment networks in the world. We believe the company’s closed-loop network, brand equity and scale represent durable competitive advantages. Unlike most card issuers that process credit card transactions over third-party networks, American Express processes transactions over its own network. This allows American Express to earn greater economics than peers on each card transaction. The company retains part of this advantage in the form of higher profitability and reinvests the rest in enhanced customer rewards and service. Over time, these investments have helped American Express build its brand and attract more lucrative, high-spending card customers. We expect this business model and customer-centric approach will continue to drive industry-leading growth for years to come. Concerns over the near-term economic outlook allowed us to purchase shares of American Express at a 13x P/E on next year’s consensus earnings estimate. We think that is an attractive valuation for a company with this combination of business quality and growth.”
7. S&P Global Inc. (NYSE:SPGI)
Number of Hedge Fund Holders: 78
5-Year Average Payout Ratio: 28.6%
S&P Global Inc. (NYSE:SPGI) is a leading provider of financial information, analytics, and other services to businesses, investors, and governments worldwide. The company holds a 50-year track record of consistent dividend growth and pays a per-share dividend of $0.90 every quarter. The stock offers a dividend yield of 0.81%, as of January 23. The company's 5-year average payout ratio comes in at 28.6%, which makes SPGI one of the best dividend stocks with sustainable payout ratios.
S&P Global Inc. (NYSE:SPGI) was a part of 78 hedge fund portfolios at the end of Q3 2023, compared with 82 in the previous quarter, according to Insider Monkey's database. The total value of stakes owned by these hedge funds is roughly $7 billion.
6. Citigroup Inc. (NYSE:C)
Number of Hedge Fund Holders: 79
5-Year Average Payout Ratio: 27.4%
Citigroup Inc. (NYSE:C) is an American financial services company with a diversified range of products and services. On January 12, the company declared a quarterly dividend of $0.53 per share, which was in line with its previous dividend. It has been rewarding shareholders with growing dividends since 1990 and has a 5-year average payout ratio of 27.4%. The stock's dividend yield on January 23 came in at 3.98%.
The number of hedge funds tracked by Insider Monkey owning stakes in Citigroup Inc. (NYSE:C) grew to 79 in Q3 2023, from 75 in the previous quarter. The overall value of these stakes is roughly $7 billion. Among these hedge funds, Warren Buffett's Berkshire Hathaway was the company's leading stakeholder in Q3.
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Disclosure. None. 10 Dividend Stocks with Sustainable Payout Ratios is originally published on Insider Monkey.
