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3 Dividend Growth Stocks With 6% to 8% Yields

By: MarketBeat

October 17, 2023 at 08:25 AM EDT

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Geopolitical turmoil in Ukraine and Israel. J.P. Morgan CEO Jamie Dimon’s stark warning about not only military conflict but also the burgeoning national debt. Massive swings in commodity prices.

With Halloween fast approaching, a witches’ brew of capital market risks has investors flying into safe haven assets such as gold and U.S. Treasuries. Even with the recent buying pressure though, the 10-year Treasury yield is hovering near its 16-year high of 4.8%.

As a potential lasting shift to defensive investments unfolds, high dividend paying stocks may also find favor. Equities that offer large cash handouts can help soften the blow of market downturns and provide reliable income. But what is reliable income?

Reliable income can be defined in several ways. Companies that generate consistent cash flow and have low debt obligations often provide shareholders with reliable income. Even better if a company consistently increases their dividends year after year. Cash distributions that outpace inflation are ideal.

While they may be a great place to bunker down in turbulent markets, not all dividend growers have high yields. And these days, not many have yields that exceed that of the 10-year Treasury. Only 8 of 67 S&P 500 Dividend Aristocrats have yields above the benchmark interest rate.

The following three dividend growth names are in an even more select group that offers annualized payouts of at least 7%.

Is Leggett & Platt’s Dividend Sustainable?

When it comes to dividend growth, Leggett & Platt, Incorporated (NYSE: LEG) is a rare breed. The global furniture manufacturer has increased its dividend for 52 consecutive years, a feat only 32 U.S. companies can claim. Among the ‘Dividend Kings,’ it has the highest forward yield at 7.4%. The problem is that the recently boosted $0.46 per share quarterly dividend may not be sustainable.

That’s because more than 100% of Leggett & Platt’s forecasted earnings will need to go toward dividends just to maintain the current payout. A company can only be in this situation for so long before the dividend has to be cut. Usually a sign of financial weakness, this will have to be rectified with stronger future earnings that enable a lower dividend payout.

Management’s long-term payout ratio is 50% of adjusted earnings. To make progress towards this goal, Leggett & Platt must return to bottom line growth after posting 18% lower earnings per share (EPS) in 2022 and being on pace for a 32% EPS decline this year. Demand for residential and office furniture (and cost inflation) will have to improve in 2024 or else this bedding king may be downgraded to a queen-sized.

Is 3M Still a Dividend King?

Despite its recent financial woes, 3M (NYSE: MMM) is still a Dividend King. The diversified industrial continued its recent pattern of raising its quarterly dividend by a penny this year to extend its streak to 66 years. Only three other U.S. large caps have longer dividend hike streaks — Dover, Genuine Parts and Procter & Gamble.

The annualized per share dividend is up to $6.00, which equates to a 6.8% forward yield. Although its financial situation isn’t as dire as Leggett & Platt, 3M’s 67% dividend payout ratio can be classified as unhealthy. Since two-thirds of next year’s profits will need to be returned to shareholders to maintain the dividend, this leaves one-third that can be reinvested in growth opportunities like new product development and market expansion.

Fortunately, 3M’s outlook is improving after two-and-a-half years of slower sales, supply chain snags and higher expenses. Wall Street is anticipating that the company will return to profit growth in 2024 thanks to stronger end market demand and easing cost pressures. A lot will be riding on management’s latest restructuring plan, which calls for corporate layoffs, simplified logistics and streamlining a massive global footprint. With the stock at a 10-year low, investors should believe in this turnaround plan before jumping at the yield.

What Is a Good High-Yielding Bank Stock?

KeyCorp (NYSE: KEY) is one of the strongest big dividend bank stocks. Like other mid-sized banks, Key is being challenged by higher deposit costs and loan loss provisions. Heading into 2024 though, commercial loan balances are improving. So is adoption of the Laurel Road for Doctors national digital bank, which is geared towards healthcare professionals. This segment is a prized jewel in the banking industry because customers tend to have higher income and credit scores.

And while the stock has been grounded by the Silicon Valley Bank collapse, deposits are expected to be flat in the second half of this year. With Key Bank shares sinking from roughly $27 to $10, the forward yield is up to 7.8%. The dividend has been raised for 11 straight years (including through the pandemic and regional bank crisis) and the 62% payout ratio is manageable — especially in a rising rate environment. In terms of high-yielding bank recovery plans, Key looks like a lock.

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3 Dividend Growth Stocks With 6% to 8% Yields

Is Leggett & Platt’s Dividend Sustainable?

Is 3M Still a Dividend King?

What Is a Good High-Yielding Bank Stock?

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