Resilient ‘steady Eddie’ stocks are a lot more exciting than they might sound. Choosing companies that have the potential to churn out lower-octane, but more reliable business performance could mean substantial growth down the line – of course nothing’s guaranteed though.
With compounding, people often think of interest earned on cash, but dividends can also compound when reinvested.
We like companies with a track record of holding or growing the dividend steadily over time. After all, a company that’s able to pass on money to shareholders even through market crashes and recessions is probably a strong one.
But what type of stocks make good dividend compounders?
Remember, investments, and any income from them, rise and fall in value, so you could get back less than you invest. Past performance isn’t a guide to the future and you shouldn’t look at ratios on their own. Yields are also variable, and no dividend is ever guaranteed.
Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you cannot afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.
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Johnson and Johnson
Johnson and Johnson (J&J), the multinational pharmaceutical and medical technology company, is another legendary dividend payer.
The company’s had a big shake up in the last few years, but we think it’s now in a better place.
It successfully split its consumer health unit, Kenvue, into a separate company. The move should help it streamline operations and refocus on the highly profitable pharmaceutical business. Removing the slowest-growing unit, embroiled in Johnson’s Baby Powder lawsuits, could help the remaining business enter a new phase of growth.
Its most recent results came six months after the split. Performing better than expected, it appears the restructuring has worked in its favour.
It also re-confirmed its punchy compound annual growth targets of 5-7% between 2025 and 2030. If it achieves this long-term guidance, there could be an upside to current valuations. However, drug and medical device development can be unpredictable.
The big risk to achieving these targets is near-term headwinds. J&J is facing the impending loss of exclusivity for Stelara, a key autoimmune disease treatment which contributes 18% of their drug sales. Hopes will be resting on robust demand for existing cancer treatments, Darzalex and Carvykti to fill the gap left by generic competition reducing sales.
Its dependable revenues and strong free cash flow has enabled it to increase the dividend for the last 61 years. The stock currently offers a prospective yield of 3.2% with reasonable dividend coverage.
The valuation’s come down over recent months, now sitting at 14.6 times next year’s earnings. This is slightly below its historical average and with strong long-term growth potential, we think it marks an opportunity to pick up a quality company at an attractive valuation.
But investors should be aware that there are no guarantees, and the share price is sensitive to any potential missteps.
Procter and Gamble
Procter & Gamble (P&G) is a workhorse stock that’s often overlooked in favour of flashier, faster-growing brands. But its consistent growth could be valuable over time. The consumer goods giant manufactures brands like Head & Shoulders, Oral B and Tampax.
What’s impressive about P&G is its portfolio of consumer staples brands and pricing power. In the most recent quarter, it pushed through a 7% average price hike across its product range, driving organic growth, despite a 1% decrease in overall volumes. It made more money even though it sold fewer products.
Although this showcases the company's strong positioning, inflation-wearied consumers might be reaching the limit on how much they are s willing to pay and these price increases are expected to slow.
P&G is a dividend ‘king’, raising its dividend for 67 years in a row. That’s supported by very healthy free cash flows and strong dividend cover of 1.6 times. The stock currently offers a prospective yield of 2.5%.
Over time, P&G has proven it’s not just an income stock. Unlike some companies that focus on dividends at the expense of growth, P&G appears to have hit the sweet spot. This has contributed to the total re-invested return in the last five years being 78%.
Compared to peers, it has one of the highest valuations and its growth trajectory is somewhat slow. The valuation is above its long-term average, now sitting at 23.1 times next year’s earnings. We think this valuation still offers an attractive opportunity. But investors should remember nothing is immune to ups and downs, especially in the short term.
RELX
RELX, a leading data solutions provider, operates across four main segments – Risk, Legal, Exhibitions and Scientific, Technical & Medical (STM). The company provides critical data analytics services to top insurance companies, law firms, and academic institutions.
Although COVID-19 halted growth in face-to-face exhibition revenues, things are now back in full swing, and the group is growing in all segments.
We’re particularly excited about its digital products, which account for 83% of group revenue. The promising uptake of new artificial intelligence solutions and proprietary, hard-to-replicate, data and analytics should stand it in good stead going forward.
Aside from Exhibitions, its smallest division, demand for RELX's services is largely unaffected by economic fluctuations. Both academics and legal professionals require access to RELX's solutions regardless of the economy, and regulation requires companies to always be reducing risks like fraud and money laundering.
Steady, predictable growth is valuable and it’s why we like RELX. Its exceptional cash generation and 1.7 times dividend cover should support the continued growth of its dividend. The dividend’s been raised for over 10 consecutive years now and the shares have a prospective yield of 1.9%.
RELX has a resilient business model and a strong competitive position. But the valuation at around 27 times expected earnings has continued its march above the long-term average. That adds pressure to deliver and increases the chances of short-term ups and downs.
This article isn’t personal advice. If you’re not sure an investment is right for you, seek advice.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views might have changed since then. Unless otherwise stated, estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. These estimates aren’t a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.
This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.