Many investors have turned to PepsiCo (NASDAQ: PEP) for its dividend. At a yield of approximately 3%, it significantly outperforms the S&P 500 on payout returns. The index's average yield currently stands at less than 1.9%.
However, you can also find dividend stocks that exceed PepsiCo's yield. More importantly, these stocks earn the profits necessary to continue funding the payout. Further, they show paths to predictable growth that point to future dividend hikes.
If you're seeking stocks such as these that are also trading at an opportune buy point, you should consider Cardinal Health (NYSE: CAH), Prudential Financial (NYSE: PRU), and Verizon Communications (NYSE: VZ).
Image source: Getty Images.
Cardinal Health supplies medical products and pharmaceuticals to different types of healthcare facilities. It also provides logistics, business, and patient services that can enhance and improve healthcare efficiency.
As a Dividend Aristocrat, this company has a business model that's supported yearly increases in the payout for over 30 years. The latest payout hike takes the dividend to just over $1.94 per share. At current prices, that amounts to a yield of around 3.7%.
The company should easily support this payout. The dividend payout ratio, meaning the portion of net income devoted to dividends, comes in at about 36.6% on a forward basis. Given these conditions, investors should not worry about dividend sustainability.
That said, COVID-19 has offered a mixed outlook for the company. Canceled elective procedures have negated any gains from the increased demand in supplies. Consequently, diluted earnings per share increased by only 2% year over year in the most recent quarter. Also, analysts forecast earnings growth of only 0.4% for the year.
This has led to lackluster performance as the stock has risen by 4% for the year. Nonetheless, even if the stock sees little activity, Cardinal Health should remain a significant cash generator.
Prudential is in the business of retirement and wealth management products. But you should also become familiar with Prudential as a dividend stock. Payouts have risen every year since 2009, and this year's annual dividend of $4.40 per share produces a cash return of 6.9%. Despite the high dividend payout, the payout ratio comes to about 57%.
That takes into account a forecasted 23.9% reduction in earnings on the year. However, if a prediction of a 26.5% increase in earnings for fiscal 2021 holds, the dividend payout ratio would fall significantly, leaving the potential for further payout hikes.
That said, unlike other stocks that fell during the pandemic, Prudential has not recovered most of its lost value. All of its business segments took a downward turn amid the crisis, leading to a loss in the first quarter. Time will tell whether this is a buying opportunity or whether the stock price will remain depressed.
However, at a forward P/E ratio of only 6.8, investors may want to take a chance. This makes Prudential not only a lucrative income stock but potentially a growth name as well.
Verizon stock has seen only modest growth over the last few years. Intense competition in the wireless sector and the massive cost of a 5G upgrade have weighed on the company's profits as well as its stock price.
So far, this has not affected the payout. Verizon has increased dividends every year since 2007, and this year it's on track to distribute $2.46 per share in payouts. This produces a yield of almost 4.6%. At a payout ratio of 55.3%, the company appears positioned to cover the payout and increase dividends in the foreseeable future.
Investors can buy this stock at a reasonable valuation, as it currently trades at a forward P/E ratio of about 11.6. Furthermore, thanks to the merger between T-Mobile and Sprint, only three companies remain in this space. With the massive amount of capital required to build a 5G network, more competition is unlikely.
With earnings forecasted to decline 1.2% this year and rise by only 2.9% next year, Verizon will probably remain an income-oriented stock. Still, the potential for 5G remains unknown. As demand for this service rises, it could lead to faster profit increases that could also bring stock price growth.
10 stocks we like better than Verizon Communications
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Verizon Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of June 2, 2020
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.