Picking income stocks can be challenging. Some companies pay dividends only to cut them in the future, and others are more focused on stock buybacks instead of dividends. However, research has shown that dividends provide investors with about 35% of their total returns over time. It varies year to year, but holding solid income stocks that consistently raise their annual payout has proven successful.
The three dividend stocks to buy below have prioritized returning cash to shareholders and all have excellent long-term growth prospects. Dive in now!
PepsiCo (PEP)
PepsiCo (NASDAQ:PEP) is a popular income and dividend growth stock. It is the No. 2 player in non-alcoholic beverages and is the market leader in salty snacks. The firm competes in almost every non-alcoholic beverage segment with many brands. It is known for drinks such as Pepsi, Gatorade, Mountain Dew, 7Up, Aquafina, Lipton, SodaStream, and more. Besides beverages, PepsiCo is the global leader in chips with brands like Lays, Doritos, Fritos and Cheetos. The firm also owns Quaker Foods. The result is a diversified product line reaching $91.47 billion in revenue in 2023.
PepsiCo is a favorite equity when it comes to income. It is a Dividend King with a 52-year streak of yearly increases. It last raised its dividend in May 2023. Investors should expect another increase next month. According to Portfolio Insight, the dividend growth rate was around 8.3% on average in the past decade. Based on past history, we expect a mid-to high-single-digit percentage increase annually.
The share price has been relatively flat in 2024, resulting in a dividend yield of approximately 3%. This yield is backed by an adequate payout ratio of approximately 65%. Free cash flow of $7.92 billion exceeds the dividend distribution requirement of $6.84 billion. The B+ dividend quality grade and the A+/A1 investment-grade credit ratings boost dividend safety.
Despite growing top and bottom lines, PepsiCo’s stock price is below its all-time high set in May 2023. It currently trades at a price-to-earnings ratio of 21.6x, below the 5-year range. However, consensus earnings are anticipated to grow in 2024 and 2025. We view PepsiCo as a buy. It is one of those stocks that investors can buy and set on autopilot as part of a dividend reinvestment plan.
Amgen (AMGN)
From its founding in 1980, Amgen (NASDAQ:AMGN) has grown into a leading biotechnology company. The firm is now valued above $160 billion. It is known for innovative blockbuster therapies like Enbrel to treat plaque psoriasis, rheumatoid arthritis, and psoriatic arthritis; Otezla for the treatment of adult patients with plaque psoriasis, psoriatic arthritis, and oral ulcers; and Prolia to treat postmenopausal women with osteoporosis.
Besides these drugs, Amgen has strengths and products in oncology, immunology, and cardiology. Total revenue was greater than $28 billion in 2023.
Amgen has paid a dividend since 2011. It is a Dividend Contender with a 12-year streak of increases. Because of the share price decline this year, the dividend yield has reached 3%. This value is below the 5-year average and more than double that of the S&P 500. The dividend is growing about 10% per year. We anticipate the rate to continue in the near term because of the moderate 46% payout ratio.
The moderate payout ratio suggests that the dividend safety is still excellent. The equity receives a B from Portfolio Insight for its dividend quality. The one detraction is the high leverage ratio of 4.4x because of acquisitions. Amgen also has a BBB+/Baa1 investment credit rating. In addition, free cash flow of $7.4 billion more than covers the dividend requirement of $4.56 billion.
Amgen’s struggling share price makes it attractive for income and dividend growth investors. AMGN stock is undervalued and trades at about 14 times anticipated 2024 earnings. As a result, we view this equity as a buy.
Chevron (CVX)
Climbing energy prices have resulted in the energy sector outperforming the other ten in 2024. High demand combined with curtailed supply will probably keep prices elevated. Integrated oil and natural gas companies, like Chevron (NYSE:CVX), should benefit.
Chevron is the second-largest American integrated oil firm. It operates in two business segments: Upstream and Downstream. The Upstream business explores, develops, produces, and transports crude oil and natural gas. The Downstream business refines crude oil into petroleum and petrochemical products. Total revenue was $196 billion in 2023.
Because of increasing oil prices, Chevron’s revenue should be more in 2024 than in 2023. Similarly, earnings per share should be greater, too. People can also buy Chevron and get a 4% yield, with a dividend climbing from 4% to 6% per year.
This yield and growth come with solid dividend safety. The firm is a 2024 Dividend Aristocrat with a 37-year streak of increases. The payout ratio is only 46%, and free cash flow of almost $20 billion easily covers the ordinary dividend requirement of $11.3 billion. Chevron earns an A dividend quality grade, meaning it’s in the 90th percentile of dividend-paying stocks. It also has an AA-/Aa2 high-grade investment credit rating, giving greater confidence about safety.
We view Chevron as a buy because of the excellent yield, dividend growth, and reasonable valuation of 12.5 times earnings.
On the date of publication, Prakash Kolli held a LONG position in PEP and AMGN. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.