With global inflation, higher interest rates, geopolitical instability and ongoing growth concerns all impacting today’s stock market, safe haven stocks are in more demand than ever.
Historically, dividend-paying stocks have been good opportunities for investors to secure returns during difficult economic times so which ones have the hallmarks of safety and stable yields?
As the world’s largest lithium company, Albemarle (NYSE:ALB) is in a prime position to take advantage of rising lithium demand associated with the electrification of vehicles.
The company may also be a surprisingly good option for conservative dividend investors. Albemarle stock currently yields 1.35 percent and has consistently raised its dividends for the past 29 years.
Despite yielding just a bit below the S&P 500 average of 1.57 percent, Albemarle’s current payout ratio is a tiny 5.7 percent. As such, the company has a great deal of room left to increase its dividends.
This tiny payout ratio also provides Albemarle’s dividend with a high degree of security. Investors should, however, take into consideration the possibility that this ratio will rise due to lower earnings on the short-term horizon.
Albemarle’s dividend is also safeguarded by its impressive profitability and relatively good financial health. Over the past year, Albemarle’s net margin has been 33.6 percent, and its return on equity has been 36.1 percent. The company’s debt, meanwhile, is a relatively manageable 34 percent of its equity.
Investors should note that Albemarle’s current pricing reflects potential market risks to the company’s dominant position. Recently, Albemarle acknowledged that it could begin losing market share to Chinese competitors in what is becoming a weaker commodity market. This goes some way toward explaining Albemarle’s low 5.3 forward price-to-earnings ratio.
Investors prioritizing income may also want to consider the fact that Albemarle’s dividend has grown at a relatively modest rate.
Over the past 10 years, management has increased the distribution at a compounded annual rate of just 5.7 percent. Recent earnings reports have also worried investors, as the company’s earnings per share have plummeted over the past year. In Q3, for example, Albemarle earned $2.57 per share, down 66.2 percent from the year-ago quarter.
Given Albemarle’s $23.53 in overall cash flow per share over the trailing 12-month period and an annual payout of just $1.60, however, the company has a great deal of room to increase its distributions if and when management believes it can no longer generate higher returns by investing in new projects.
It’s also worth noting that even at today’s lower net income levels, the company is generating more than enough earnings each quarter to cover dividends for an entire year at present levels.
With a history of dividend increases that stretches back 52 years, retail major Target (NYSE:TGT) is among the S&P 500’s few dividend kings.
Currently yielding 3.97 percent, Target stock has seen a rapid increase in its dividend payouts over the past several years as management has gradually returned more cash to shareholders. Over the past decade, Target has raised its dividend at an impressive 11.1 percent compounded annual rate.
At the moment, Target’s dividend payout ratio is 60.4 percent. While fairly high, this number is far from unsustainable. This is especially true in light of the fact that Target’s earnings are expected to rise at a compounded rate of about 13 percent over the coming 5 years.
Assuming it can hit something close to this growth projection, Target will likely be able to continue its long trend of dividend increases.
It’s also worth noting that Target currently appears to be on sale from a dividend yield perspective. With the exception of a brief period in 2017 when the stock’s yield exceeded 4 percent, shares of TGT currently offer investors the best income opportunity of the past 35 years.
While Target’s dividend is attractive, it’s also important to consider the stock’s current valuation. Shares of Target have slid considerably over the past year as the company has grappled with a variety of market headwinds.
In 2022, Target was one of the first retail stocks to sell off amid concerns of excessive post-pandemic inventories. More recently, the company has struggled to contain what it estimates will be a $500 million full-year loss of product due to organized retail crime.
These headwinds may have brought TGT shares to a point of considerable undervaluation. The stock trades at 14.7 times expected forward earnings, 9.3 times cash flow and 0.48 times sales.
While there’s little doubt that Target has had its share of challenges, the company’s recent performance suggests that it may be at the outset of a turnaround. Q2’s earnings of $1.80 per share were up more than 350 percent from the year-ago quarter, while total inventories were down 17 percent. For Q3, the company expected earnings of $1.20 to $1.60 per share.
Target does still carry certain risks, especially as management expects overall sales to decline for the full year of 2023. The company’s 1.24 debt-to-equity ratio is also somewhat concerning, as Target could face pressure from higher interest rates.
Nevertheless, the median analyst price forecast implies an upside of nearly 30 percent for TGT shares. Paired with a high dividend yield and decent expected earnings growth, this may make Target a compelling investment for both value and income investors.
Chubb (NYSE:CB) is a major player in the insurance and reinsurance business, and like many insurance stocks CB shares offer a decent dividend.
Chubb currently yields 1.57 percent, almost exactly matching the S&P 500 average. It has successfully raised this dividend for 30 consecutive years.
At just 20.3 percent, Chubb’s dividend payout ratio is also low enough to give management room for many more years of distribution increases.
Unlike many dividend stocks, Chubb has not seen its share prices drop and yields rise in response to higher interest rates. In fact, the stock’s price has increased 8.5 percent over the last three months and is largely flat YTD.
Much of the fact that Chubb shares haven’t suffered this year can be attributed to its recent performance. In Q3, the company reported year-over-year net income growth of 158 percent alongside an 8.4 percent increase in premiums written on a constant-dollar basis.
Looking forward, analysts also expect Chubb’s earnings to rise at a healthy compounded rate of 14.5 percent over the coming five years.
Even with the stock’s rebound over the past quarter, Chubb may still have a bit more room left to run. The median target price for CB shares is $250, about 14.2 percent above the current price level.
Chubb also enjoys a modest 11.5 forward price-to-earnings ratio and and 1.2 price-to-earnings-growth ratio. Given these metrics and Chubb’s decently positive growth forecast, there’s an argument to be made that the stock is still undervalued.
For all of Chubb’s advantages, investors should recognize that management has raised the stock’s dividend slowly over many years. Over the trailing 10-year time horizon, Chubb’s dividend has increased at a compounded annual rate of 5.4 percent.
This relatively low rate of growth is expected to continue into the future, with the 3-year projection estimating a 4.1 percent compounded annual dividend increase. As such, Chubb may not be the best choice for investors seeking more aggressive dividend growth.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.