In a year when the stock market rose 29%, driven mainly by the Magnificent Seven – accounting for around 30% of the S&P500 index – investors may want to consider portfolio diversification. One proven long-term strategy is to invest in dividend-paying stocks, which offer income and stability thanks to the discipline management needs to pay – and, ideally, increase – distributions.
Let’s take a look at three dividend-paying stocks, priced at a combined value of $300, that appear fairly valued or undervalued and have either recently paid dividends or have a long history of paying and increasing them.
While airlines have historically been bad investments, this aircraft leasing company was not one of them. AerCap (NYSE: AER)the industry leader, has richly rewarded investors with a total return of over 30% by 2024.
More importantly for income-seeking investors, the company initiated its first-ever quarterly dividend earlier this year at $0.25 per share, which equates to an annualized yield of 1%. For any stock that pays a dividend, it’s essential to look at its payout ratio (the percentage of a company’s profits paid out as dividends) to ensure it can afford to reward shareholders.
Generally, a healthy payout ratio is below 75%, which gives management flexibility in allocating capital. Based on management’s 2024 expectations of $10.70 adjusted earnings per share (EPS), AerCap has a terribly healthy payout ratio of approximately 9%.
In addition to the dividend, AerCap’s management is aggressively buying back its shares, increasing investors’ ownership stake. So far, it has approved $1.5 billion in share buybacks and repurchased 6.3% of outstanding shares. CEO Aengus Kelly recently noted that the company’s dividend and share buybacks “demonstrate the high level of confidence we have in AerCap’s future earnings and cash flows.”
The stock is trading at near a two-year high in terms of price-to-book ratio of 1.1, meaning it is valued more than the company’s assets. However, given the company’s capital allocation strategy, which requires investors to continue to benefit from dividends and share buybacks, the stock is well worth the slight premium.
While Autoliv (NYSE: ALV) may not be a household name, but it plays a critical role in saving lives as a leading innovator in automotive safety systems, including air bags and seat belts. The company recently increased its quarterly dividend by 3% to $0.70 per share, for an annualized return of 2.8%.
Autoliv suspended its dividend in 2020 when car sales slowed during the height of the pandemic and its payout ratio exceeded 100%. However, it reinstated the dividend in 2021 and has increased it annually since then. Today, the company’s payout ratio stands at just 35%, giving management plenty of flexibility with its capital allocation strategy.
Like AerCap, the company has prioritized share buybacks over the past three years, reducing the number of shares outstanding by 10%. Additionally, management recently announced an extension of its current share repurchase program, under which it will repurchase up to 7.5 million shares or up to $550 million, whichever comes first.
The stock is down nearly 10% in 2024, partly due to a decline in sales and management lowering 2024 expectations. Autoliv’s net sales fell 1.6% to $2.55 billion in the third quarter. Management recently lowered its 2024 organic revenue outlook to 1% growth from 2%, citing low customer demand and a 4.8% decline in year-over-year consumer vehicle production.
What makes Autoliv particularly attractive in a hot market, however, is that its shares are trading at a three-year low valuation, on thirteen times earnings. Given the cyclicality of car sales, it is only a matter of time before a shift occurs in Autoliv’s favor, creating an opportunity to invest in a global leader in car safety at a significant discount.
The last stock on this list is NextEra Energy (NYSE: NO)one of the largest electricity companies in the world. The stock is up about 19% through 2024 and currently pays a quarterly dividend of $0.515 per share, for an annualized return of 2.8%. Even more impressive is that management has been paying and increasing its dividend for thirty years in a row. The company is likely to increase its dividend in early 2025. Investors should expect a dividend increase of at least 10%, according to management’s previous guidance.
NextEra Energy can afford this increase with a trailing twelve month payout ratio of 59.5%, and revenue and earnings are rising. Specifically, the company generated $7.6 billion in operating revenue for the most recently reported quarter. That translates to adjusted earnings per share (EPS) of $1.03, representing a year-over-year increase of 5.5% and 9.6%, respectively. Looking ahead, management expects adjusted earnings per share to grow between 6% and 8% annually through 2027.
Unlike AerCap and Autoliv, this company does not prioritize share buybacks. As a result, shares outstanding have increased by almost 5% over the past three years. A big reason for this is that NextEra Energy has $80.5 billion in net debt, requiring almost $5 billion in repayments over the last twelve months.
This high level of debt is typical for a utility due to the expenses required to build and maintain its extensive infrastructure. However, NextEra Energy stands out as having the lowest adjusted debt-to-total capitalization ratio among its peers: just 50%, compared to a range of 58% to 70% for others in the industry.
Given its dividend history and expected growth, NextEra Energy remains an attractive stock for income-oriented investors. And with a forward price-to-earnings ratio of 21.7 – slightly below the ten-year median of 22.5 – it offers a more than reasonable valuation.
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*Stock Advisor returns December 9, 2024
Collin Brantmeyer has positions in AerCap and Autoliv. The Motley Fool has positions in and recommends NextEra Energy. The Motley Fool recommends AerCap. The Motley Fool has a disclosure policy.
The Smartest Dividend Stocks to Buy Right Now with $300 was originally published by The Motley Fool
