Written by Jonathan Weber for Sure Dividend
Income investors can generally choose between different assets, such as bonds or equities. Investing in bonds has the disadvantage of not offering inflation protection, and income generally isn’t growing over time. That’s why many income investors prefer to invest in dividend stocks, especially dividend growth stocks that increase their payouts regularly over time.
The Dividend Champions are one such group of stocks. Around 150 stocks have managed to grow their dividend every year for at least 25 years in a row. Some of those stocks also are contained in the Dividend Aristocrat group of stocks, but those only include ones that are S&P 500 members, which is not the case for the Dividend Champions, making the latter group more expansive.
With their long dividend growth track records, throughout all kinds of crises, including the pandemic, the Great Recession, the bursting of the dot.com bubble, and so on, the Dividend Champion stocks can make for good income investments for those investors that want recession-resilient, defensive dividend growth picks. In this article, we’ll showcase three such stocks that are offering above-average dividend yields at current prices.
1: ABM Industries Incorporated
ABM Industries Incorporated (ABM) is an integrated facilities solutions business that offers services such as electrical and lighting, janitorial services, and so on. ABM Industries has a market capitalization of around $3 billion and has successfully grown for decades.
The company’s growth was primarily driven by some organic expansion and by M&A in the past. ABM Industries has repeatedly done takeovers, including the Able Services acquisition that closed recently. With these growth drivers and some margin expansion over time, ABM Industries managed to more than double its earnings-per-share over the last decade, for a high single digit annual growth rate.
Going forward, we believe that there is a high chance that growth will be less pronounced, as ABM Industries’ larger size makes it more difficult for the company to grow its business meaningfully via tuck-in acquisitions. Nevertheless, we believe that ABM Industries should be able to grow its earnings-per-share by 5% or so in the long run.
ABM Industries’ consistency in growing its profits over time is very noteworthy. Over the last decade, there was not a single year during which earnings-per-share did not increase -- even during the crisis year 2020, ABM Industries managed to grow its profit on a company-wide basis and on a per-share basis.
The company has increased its dividend for 54 years in a row, which makes ABM a Dividend King.
At current prices, the dividend yields 1.8%, but for someone seeking a low-risk, resilient, crisis-proven dividend grower, ABM could be a great pick. Since shares trade below our fair value estimate right here, there is a good chance that ABM Industries will deliver 10%+ annual returns over the coming five years.
2: Polaris Inc.
Polaris Inc. (PII) is a manufacturer and seller of recreational vehicles, including snowmobiles, all-terrain vehicles, and motorcycles. Polaris is currently valued at close to $6 billion and is active in more than 100 different countries, where it sells its products under more than 30 different brands, including Polaris, Slingshot, Sportsman, and many more.
Recreational vehicles aren’t a very resilient type of goods, which is why Polaris’ business can be cyclical. There were some ups and downs in the company’s profits over the years, such as in 2016, when earnings-per-share were down meaningfully versus 2015 as the economy was experiencing a bit of a slowdown.
That being said, Polaris has performed very well during the pandemic, as its earnings-per-share hit new record levels in both 2020 and 2021, and the same will most likely also hold true for this year, as analysts are currently forecasting an earnings-per-share increase of 12% versus the previous year. The fact that consumers were looking for activities that can be done outdoor during the pandemic helped Polaris.
There will very likely be some ups and downs in the company’s profitability in the future, too, but we believe that Polaris should nevertheless be able to deliver solid earnings growth in the long run. Market growth, margin expansion initiatives, and buybacks should allow for a mid-single digit earnings-per-share growth rate in the long run, we believe.
Polaris has grown its dividend for 26 years in a row, which is pretty strong for a somewhat cyclical business. At current prices, the dividend yield is 2.4%, and we believe that total returns will be higher than 10% per year going forward, as Polaris trades significantly below our fair value estimate of $150 today.
3: Stryker Corporation
Stryker Corporation (SYK) is a medical devices company that was founded more than 80 years ago. Stryker is primarily active in markets such as surgical equipment, neurovascular products, and so on.
The industry Stryker is active in is not cyclical at all -- patients require care, no matter the strength of the economy. The industry also benefits from major tailwinds, such as demographic change. Aging populations mean that healthcare spending is rising both relative to overall GDP and on a per-person basis, and some of that additional healthcare spending is ending up at medical tech companies such as Stryker.
The company has increased its earnings-per-share at a compelling rate of slightly more than 10% over the last decade, and we believe that the company will continue to deliver a comparable earnings-per-share growth rate in the future, too. After all, the growth tailwinds for the industry remain in place, as do company-specific factors, such as Stryker’s ability to buy back shares over time.
Stryker has increased its dividend for 28 years in a row, throughout all kinds of macro crises. Combined with a pretty low dividend payout ratio of just 30% and a resilient, non-cyclical business model, that makes us believe that the dividend cut risk is very low for Stryker.
At current prices, Stryker offers a dividend yield of 1.3%. The total return outlook is much better, however. We estimate that Stryker will be able to deliver annual returns in the low-teens range going forward, between its substantial earnings-per-share growth, its dividend, and some multiple expansion tailwinds.
