Dividends are a great return on your investment because they provide a tangible return that has nothing to do with the share price. With a portfolio of dividend stocks, you can build a steady, consistent stream of passive income to supplement your earned income. However, it is not enough to simply choose which companies pay dividends. You need to ensure that the business can be relied upon to continue paying dividends and to steadily increase those profits in order to beat inflation.
What investors should be looking for are “safe” dividend stocks — companies that have a proven track record of increasing dividend payments, own a portfolio of strong brands and products, and generate copious amounts of free cash flow. Certainly, these companies may still be affected by the vagaries of the economic cycle, making their share prices unavoidably volatile. But if you’re an income investor focused solely on dividends, these three names are as reliable as they come.
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1. Procter & Gamble
Procter & Gamble (PG)Inc., the $360 billion consumer goods giant, boasts a wide range of hair care, personal care, and oral care products under major brands such as Head & Shoulders, Gillette, Olay, Oral-B, Pampers, and Braun. The company has reported a steady increase in both revenue and net profit since fiscal 2017, with sales rising from $65.1 billion to $80.2 billion over the six years through fiscal 2022. Net income from continuing operations increased from $10.2 billion to $14.7 billion over the same period. Crucially, each of those fiscal years saw Procter & Gamble generate positive free cash flow.
This consistency in generating free cash flow has allowed the company to pay a dividend for an impressive 133 consecutive years, and its dividend has also increased non-stop for 67 straight years. Judging from Procter & Gamble’s recent fiscal 2023 third-quarter earnings, it looks like this track record will continue. In the first nine months of fiscal 2023, sales rose 1.3% year-over-year to $61.5 billion, but net income fell 3.6% year-on-year to $11.3 billion due to higher expenses. Free cash flow registered a positive $9.2 billion, although this was 13% less than the $10.5 billion in the prior year. With a Procter & Gamble dividend payout ratio of 62%, along with healthy free cash flow generation, the company more than deserves its place as a safe dividend stock.
2. Kimberly-Clark
Kimberly Clark (KMB 0.01%) It is known for its wide range of brands and products that include adult care, feminine care and baby care. With their products sold in 175 countries around the world, you’ll likely recognize household names like Huggies, Kleenex, Cottonelle, and Kotex. Like Procter & Gamble, Kimberly-Clark saw its revenue increase from $18.3 billion in 2017 to $20.2 billion in 2022. However, net income over these six years fluctuated between $2.4 billion and a low of $1.4 billion. But what’s been remarkably consistent has been the company’s free cash flow generation over the years, which averaged nearly $2 billion from 2017 to 2022.
The first quarter of 2023 saw Kimberly-Clark report a 2% year-over-year increase in sales to $5.2 billion, while net income rose 8% year-over-year to $566 million. Positive free cash flow of $412 million was reported, which reversed free cash flow in the prior year’s first quarter. A quarterly dividend of $1.18 per share was also declared, representing 70% of the company’s earnings for the first quarter of 2023. This was the 51st consecutive year that Kimberly-Clark has raised its dividend, putting it firmly on the dividend payout list, and it was also the 89th consecutive year that the company has paid a dividend to shareholders. With a wealth of strong brands, pricing strength, and customer loyalty, Kimberly-Clark is well-positioned to continue to drive ever-increasing earnings going forward.
3. Clorox
Clorox (CLX -0.40%) It is a leading manufacturer of detergents and cleaning fluids with a variety of well-known brands such as Brita, Clorox, Pine-Sol and Glad. Clorox reported its sales increased steadily from 2017 to 2022, going from $6 billion to $7.1 billion. However, net income has fluctuated significantly due to higher cost of goods sold and goodwill depreciation in certain years. Despite the volatility, the cleaning products company still posted positive free cash flow in all six years, with an average positive free cash flow of $829 million annually.
This strong record of generating free cash flow has enabled Clorox to increase its annual dividend continuously over at least 37 years from 1986 to the present. For the first nine months of the 2023 fiscal year, which ended March 31, Clorox again generated positive free cash flow of $584 million, more than double the $279 million generated a year earlier. Clorox’s IGNITE strategy is set out to maximize growth and make a positive impact on the world. The company will leverage technology to achieve cost savings, leverage innovation to improve customer experience, and develop its product portfolio to enhance health and personal care. With this strategy in place and the company’s impressive record of high dividend yields, Clorox should be included as another reliable dividend stock to include in your investment portfolio.
