Most of us are probably familiar with the concept of dividend growth investing.
Dividend investing approach seeks companies that are growing their dividend payout year in and year out. That growing cash payout tells us that the company is generating cash flow in excess of business needs. The ever-increasing dividend also tells us that the company is selling more products and making more money than ever before.
Right now, we're going to show you possibly the best high-yield dividend stock today. It sticks out in an environment where reliable dividends can be hard to find.
When we look at the list of companies that have annual dividend growth of at least 7% or more, it is dominated by a few industries that face significant challenges right now.
Let's talk about dividend investing and the one opportunity that stands above the rest.
The Banks Face New Challenges
Many leading dividend growth companies are in the banking industry.
Banks paid out more than 100% of earnings last quarter, and the FDIC is not likely to let that trend continue. It will be watching bank payouts very carefully until the pandemic is over.
Banks will be encouraged not to pay out excessive amounts of cash. So, we might see some dividend cuts or changes to the way that things are done via fiat.
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Banks may also have a massive problem if unemployment extensions are not passed.
About one-third of all renters in the United States are late with the rent.
Many of them are more than one month behind. Many of the jobs lost in the shutdown are not coming back. If we see defaults begin hitting the banking system, bank dividend growth is likely to come to a screeching halt.
Energy Also Has Problems
There are a lot of energy companies that have large dividends. But there remains the elephant in the room.
Energy is held hostage by the pandemic right now, and prices have been weak.
Earlier this year, we had the shocking turn of events when oil prices actually went negative. It is difficult for energy and energy infrastructure companies to raise the dividend in a meaningful fashion when commodity prices compress margins.
Several life insurance companies also make the list of dividend growth stocks. These companies have been struggling with low interest rates for years now. And the fed has made it clear that the problem is not going away anytime soon.
The other difficulty we have right now is that dividend growth investing has been pretty popular this year. Many of the companies with the highest rate of dividend growth are currently trading at nosebleed valuations.
As much as I love Costco Wholesale Corp. (NASDAQ: COST) and wish we had sold the house to buy the stock back in March, 41 times earnings is a steep price tag for a 10% earnings growth rate.
As much as I like the uniform business, I have the same problem with paying up for Cintas Corp. (NASDAQ: CTAS) right now.
I can go down the list. But so many of these companies are trading at levels that cannot be justified by earnings and revenue growth rates.
But one opportunity stands out as incredible.
People Gotta Eat
There is one top dividend growth company that can easily justify its valuation right now.
Shares of B&G Foods Inc. (NYSE: BGS) have almost doubled this year. However, earnings have grown even faster, rising 150% year over year. Despite the remarkable growth the company is experiencing, the price/earnings ratio is still a very manageable 17.
You may not recognize the name B&G Foods. But most of us have at least some of its products in the house.
Do you have any Green Giant vegetables in your cupboard or freezer?
That's B&G Foods.
Clabber Girl Baking Powder? Ortega tacos or sauces? Skinny Girl Salad Dressings? Cream of Wheat?
All B&G Foods.
So are Emeril brand condiments, soups, and seasonings.
All together, B&G Foods has over 50 brands offering a wide range of food and household products.
B&G Foods is a high yielding stock with a current yield of over 6%.
The dividend has been raised for 10 consecutive years by about 8% annually.
In addition to the generous dividend payout, the company uses its impressive cash flow to pay down debt. In the first half of the year, B&G Foods reduced net debt by approximately $170 million to $1.7 billion at the end of the second quarter.
CFO Bruce Wacha talked about the company's commitment to the dividend on the most recent conference call. He said, "I think from a capital allocation standpoint, we've always strived to do what we thought was best for shareholders, which is, one, returning excess cash in the form of a dividend, still a high priority."
B&G Foods in a great spot to keep growing the business. More importantly, it produces essential products that actually got a boost from the arrival of COVID-19.
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About the Author
Garrett Baldwin is a globally recognized research economist, financial writer, and consultant with degrees from Northwestern, Johns Hopkins, Purdue, and Indiana University. He is a seasoned financial and political risk analyst, with a focus on stocks, hedge funds, private equity, blockchain, and housing policy. He has conducted risk assessment projects for clients in 27 countries, and consulted on policy and financial operations for some of the nation's largest financial institutions, including a $1.5 trillion credit fund, a $43 billion credit and auto loan giant, as well as two of the largest Wall Street banks by assets under management.
Garrett joined Money Map Press as an economist and researcher in 2011, specializing in alternative strategies with an emphasis on fundamental and technical analysis.