David Harrell: Hi, I’m David Harrell with Morningstar Investment Management. In this monthly video series, we take a look at the dividend prospects of three stocks that are popular with income investors.
3 Dividend Stocks for February 2023
These 3- and 5-star stocks are popular with income investors.
1) United Parcel Service UPS
2) Lockheed Martin LMT
3) Paramount Global PARA
First up this month is United Parcel Service, a company that is approaching dividend aristocrat status. Dividend aristocrats are the companies that have increased their dividends each year for at least 25 years in a row, and UPS could earn that designation in 2025. However, UPS is also a stock where the rate of dividend growth hasn’t always kept up with the appreciation in its stock price. A little over a year ago, the stock was yielding less than 2%, but in early 2022, UPS raised its dividend by nearly 50%. That increase, along with an 18.9% decline in the share price in 2022, boosted UPS’ yield to more than 3%.
UPS just announced its dividend increase for 2023, which, as expected, was more modest that last year’s—a raise of about 6.5%. Last year’s increase represented a structural change in the company’s dividend approach, bringing the payout ratio higher; it also followed a year of extremely strong earnings growth. I believe ongoing raises will probably more closely track the company’s rate of annual earnings growth.
Next up is defense contractor Lockheed Martin, which has raised its quarterly dividend rate by a consistent amount—$0.20—every year for five years running. However, that also means the increases have gotten smaller on a percentage basis. Still, the most recent raise represented a 7.1% increase, and five-year annualized dividend growth is a healthy 9.4%. But Lockheed is another example of how dividend growth can lag stock price appreciation, resulting in a lower yield. The stock currently yields around 2.6%, down from 3.1% a little over a year ago, thanks to the stock’s strong price return—nearly 37%—in 2022.
Finally, Paramount Global was formed by the reunion of Viacom and CBS and rebranded as Paramount Global in early 2022. Full disclosure: I don’t own this stock, but my spouse does. While Paramount trades at a large discount to fair value and currently provides a yield of more than 4%, future dividend growth could be minimal. Morningstar analysts note that the combined firm will invest more aggressively in creating content and in revitalizing the cable networks and Paramount studio along with paying down the debt load. Management has made no mention of the dividend, or possible increases to it, in the three earnings calls held since the merger. And the current dividend represents more than half of consensus earnings for 2022, which will be released later this month, and a larger percentage for fiscal 2023. To me, this doesn’t seem promising for any near-term dividend increases.
I’m David Harrell with Morningstar Investment Management. Thanks for watching, and we’ll see you next month.
Watch “Two Dividend Stock Picks for 2023″ for more income investment ideas.
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