Everyone loves a stock that produces disproportionate gains compared to stocks S&P 500. A less noticeable but worthwhile achievement is when companies continually increase the dividends they pay investors. Higher dividends can lead to higher passive income and provide a convenient way to book profits without having to sell shares.
Water of the American States (NYSE:HOUR), United Parcel Service (NYSE:UPS)And claim (NYSE:ALL) have just increased their payouts to record highs. That’s why all three dividend stocks are worth buying now.
American States Water is a royal dividend stock that’s hard to see
Scott Levine (American States Water): It wouldn’t do American States Water stock justice to simply say that its dividend is now at a record high. The water utility has seen many ups and downs in its business, but has still managed to grow its dividend for nearly seven decades, making it the longest-reigning dividend king.
One might think that achieving such a feat would lead to the company gaining popularity in the investing world, but the water utility is hardly a household name. But investing isn’t a popularity contest, and income investors would be wise to pick up shares of American States Water — and its 2.4% forward yield — to bolster their passive income streams.
The company’s ability to consistently reward its shareholders with an increasing dividend arises from the nature of its business. Although the company has electricity supply and contract water subsidiaries, the regulated water supply business is the company’s bread and butter. In 2023, the regulated water business accounted for 73% and 82% of consolidated revenue and net profit, respectively. While American States Water cannot arbitrarily increase rates for its regulated water utility customers, it can submit rate requests to public utility commissions to ensure the company earns certain returns. As a result, American States Water has good foresight regarding future cash flows, which helps the company plan capital expenditures such as dividend increases, acquisitions and infrastructure improvements accordingly. American States Water has consistently rewarded its shareholders with an increasing dividend without falling into decline. Over the past 10 years, the company has delivered an average conservative payout ratio of 56%.
With shares currently trading at 15.2 times operating cash flow – a discount to the stock’s five-year average cash flow ratio of 23 – now seems like a particularly good time to dive into an investment in American States Water .
UPS has a compelling return that makes up for its recent struggles
Daniel Foelber (United Parcel Service): The company’s most recent quarterly dividend was $1.63 per share, just a penny higher than the previous payment. But UPS deserves credit for extending its historic 49% raise in 2022. The company has now increased its dividend for 15 consecutive years, with the dividend increasing by 262% over that period. The stock yields 4.3%, which is significantly better than most top dividend stocks.
When a high-quality, industry-leading company has a higher-than-average return or a dirt-cheap valuation, it’s usually because it has fallen out of favor. UPS has had a difficult few years of negative growth, which looks particularly bad compared to its rapid growth in 2020 and 2021 and in comparison FedEx – That’s a 19% increase over the last year, compared to a 20% decline for UPS.
The company’s Analyst and Investor Day presentation provides a lot of in-depth information about where the company is and where it wants to go. The key takeaways are that UPS mispredicted demand and overextended its network, thinking the surge in package deliveries during the pandemic would prove stubborn, when in reality small package delivery volumes were stagnant.
UPS is banking on its high-margin healthcare segment to fuel growth. Thanks to a mix of organic and inorganic growth, healthcare is expected to contribute approximately half of the company’s overall revenue growth through 2026.
UPS is in test mode. Last year was particularly chaotic, including multiple earnings misses and forecast cuts. The good news is that UPS has now reset expectations and given investors concrete goals and timelines to hold the company accountable. UPS also has a lot of room for upside surprises.
The company has the makings of a worthy turnaround and a solid long-term investment, especially considering its juicy 4.3% dividend yield.
Security is becoming technological
Lee Samaha (Claim): The security and access solutions company’s dividend yield is nothing special at 1.4%. However, buying stocks whose dividends have reached record levels is not just about the yield. An increase in dividends is usually a sign of confidence in the future.
As the chart below shows, Allegion could pay a much higher dividend if management wanted to.
However, it makes more sense to invest shareholder wealth in growth, and Allegion has no shortage of long-term opportunities, particularly from the convergence of electronics and mechanics in locks and access doors. While management expects the non-residential and residential appliance markets to grow at a moderate low-single-digit annual growth rate, the non-residential electronics and software market is projected to grow in the high-single-digit range.
The latter possibility concerns the advantages of internet-enabled locks and security systems. For example, the expanded functionality of a commercial building owner/manager who can control, monitor and adjust access to building areas via Internet of Things (IoT) applications.
Not only does this offer the opportunity to improve security and reduce crime (mainly attrition), but it could also serve as a tool to collect data about work flow in a building, which would ultimately lead to productivity improvements. With Allegion trading at just under 21 times the midpoint of its 2024 free cash flow (FCF) guidance, the company doesn’t seem like a particularly good value. Still, Wall Street expects Allegion’s FCF to grow by double digits in the following years, and no one doubts Allegion’s long-term growth potential.
Should you invest $1,000 in American States Water now?
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends FedEx. The Motley Fool recommends United Parcel Service. The Motley Fool has a disclosure policy.
“3 Undervalued Dividend Stocks That Just Raised Their Payouts to Record Highs” was originally published by The Motley Fool