One of the key advantages of dividend stocks is their potential to enhance total returns. While stock prices can be volatile, dividends provide a consistent income stream that can help offset market fluctuations. According to Hartford Funds research, dividends have historically contributed a significant portion of total returns for long-term investors.
So, what should you consider when buying income stocks? Dividend growers, companies that consistently increase dividend payments over time, offer higher returns. Typically, they have established businesses and are in a healthy financial position with robust cash flow growth. In volatile markets, dividend growth can generate higher returns while reducing risk.
Also, the sustainability of the dividend must be a top priority. So, the business must have a solid competitive position that protects the longevity of earnings growth. Finally, the stock must have a low payout ratio, the percentage of income paid out as dividends.
A history of dividend payments indicates a quality business likely to generate higher long-term returns. Here are stocks to buy for income investors to supplement earnings from other sources.
In a rising rate environment, diversification and stability are crucial factors to consider when selecting income stocks. BlackRock’s (NYSE:BLK) extensive global reach, broad client base and strong relationships with those clients contribute to the stability of its business.
As a leading global asset manager, BlackRock has a diversified revenue stream. It offers investment strategies and technologies to institutional and retail clients globally. These strategies provide active and passive investments in money market instruments, equities, fixed income and alternative assets. The firm offers these investments through mutual funds, ETFs, pooled investments and separate accounts.
Blackrock has clients in over 100 countries. Due to its diverse product offerings and scale, the financial services giant can easily navigate changing market conditions and reduces its sensitivity to interest rate fluctuations. Its strong position in the fixed-income market, coupled with its ability to adapt investment strategies as interest rates rise, provide a solid foundation for maintaining dividend stability. The stock yields over 3%, making it an appealing investment for income-seeking investors.
As expected, Blackrock’s scale and diverse product offerings are yielding results. It has a 13-year track record of dividend growth. The 5-year dividend growth rate of 13.60% reflects its ability to adapt and generate shareholder value over time. Moreover, the payout ratio is under 60% leaving ample room for dividend raises.
Cisco Systems (CSCO)
Cisco (NASDAQ:CSCO) operates in the networking and communications equipment sector. Increasing demand for connectivity and digital infrastructure makes Cisco well-positioned to benefit from long-term growth trends.
Its networking solutions and cybersecurity services are critical infrastructure for organizations. As the company’s CEO Chuck Robbins noted in the second quarter earnings release, “The modern, highly secure networks we are building serve as the backbone of our customers’ technology strategy.”
Its core networking segment accounts for approximately 50% of revenue. Although this segment can be cyclical, the business is evolving to a more resilient subscription model. It is expanding its collaboration and security software offerings. Also, it is growing in segments like The Internet of Things (IoT) that have massive potential.
Even in a rising rate environment, the company’s solid business fundamentals and strong market position support its ability to generate consistent cash flows to sustain dividend payments. The company announced a dividend increase in February 2023. With cash flows from operating activities of $4.7 billion in Q2 fiscal year 2023 (FY2023), this trend will continue. Moreover, the more than $22 billion in cash and cash equivalents and investments on its balance sheet provide an extra cushion.
Investors looking for dividend stocks to buy for income should consider CSCO stock. First, it is cheap at a forward price-to-earnings (P/E) of 12x. Secondly, it has a compelling dividend yield of 3.34%. Besides, as a leading technology company, Cisco has a solid record of paying dividends. It has consistently increased its dividend payments over the past 11 years.
Conagra Brands (CAG)
After a successful turnaround, this branded food giant is back on track. Conagra (NYSE:CAG) is a leading packaged food company with a solid history of paying dividends. Furthermore, it has now increased its dividend payments for three consecutive years.
In a rising rate environment, defensive sectors like consumer staples, where Conagra operates, perform relatively well. These sectors provide essential products that consumers continue to demand regardless of economic conditions. Thus, they are some of the best dividend stocks to buy for income. Conagra’s diverse portfolio of trusted brands, including Hunt’s, Slim Jim and Birds Eye, positions it to benefit from the stability and consistent demand associated with consumer staple products.
Conagra’s pricing power and strong cash flows support its ability to sustain and grow its dividends. For instance, in the quarter ending February 2023, it generated $436 million in free cash flow. Organic net sales were up 6.1%. Moving forward, management expects service level and productivity improvements to drive margin recovery. To this end, they raised FY2023 EPS to between $2.70 and $2.75, an increase of 14-17% from the previous year.
Despite the raised guidance, CAG stock is down 6% YTD. According to Finviz, the stock is cheap at a forward P/E of 13x. Meanwhile, as you wait for capital appreciation, the stock pays you a healthy 3.6% dividend.
On the date of publication, Charles Munyi did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.