When photographing a basketball game, sometimes it works best to set the camera up under the basket to catch all the action “in the paint” rather than chase players. The same goes for hunting, as many hunters wait in deer stands or duck blinds for game to cross their paths. That kind of method also works well for investing. Investors can set a target dividend yield for themselves, then pull the trigger when a stock hits that mark.
“Dividend Aristocrats” can be ideal for this type of income investing. A stock becomes a Dividend Aristocrat when it increases its dividend annually for more than 25 years. This evinces many bullish features for a stock, such as enough money to keep paying dividends. After all, there’s a good chance the future of such a company is bullish, otherwise the dividend would not be consistently increased. Companies paying steady dividends also have a solid culture of sharing income with shareholders.
Of course, the standards for dividend stocks to buy can vary based on the needs of your portfolio or objectives. Depending on market conditions, a target dividend yield could be a multiple of the average S&P 500 yield, which is now around 1.35%. A dividend yield of about 3% would be twice the S&P 500 average. A metric for income investors to watch could also be the payout ratio — the amount of net income paid as dividends — in order to ensure ample cash flow to support a growing dividend into the future.
With that said, here are three stocks to consider for those interested in income investing.
Sniper Income Investing: NextEra Energy (NEE)
Discussions about income investing invariably include utilities companies like NextEra Energy (NYSE:NEE). Headquartered in Florida, NextEra has a dividend yield of around 3% with a dividend payout ratio around 50%. Those are very solid metrics, as are NextEra’s high institutional ownership of over 80% and low beta of 0.52 When institutional investors like hedge funds and pension groups own a stock, that is a bullish sign, as they are professional investors with unmatched resources.
Utilities are traditionally sound performers that can be relied on for growing investment income into the future. When a state booms like Florida has been doing, the power companies always benefit. More customers only result in a greater demand for a utility firm’s goods and services. NextEra Energy certainly has the foundation for the critical income function in an investment portfolio.
PepsiCo (PEP)
I much prefer a Coca Cola (NYSE:KO) from McDonald’s (NYSE:MCD) as my go-to wake-up drink in the morning, but I will take PepsiCo (NASDAQ:PEP) for my stock portfolio any day of the week! Truth be told, I can’t remember the last time I had a Pepsi. But it’s easy enough to make room for a Dividend Aristocrat like PepsiCo with its 3% yield and history of dividend increases.
Like NextEra, PepsiCo has a high level of institutional ownership (around 75%) and a low beta (0.54). Companies with powerful brands like Pepsi and Coke tend to have high returns-on-equity (ROE), as consumers already know the goods and services being offered. That familiarity means much of the selling is already done, increasing returns. For PepsiCo, the ROE is over 50%, while Coca-Cola has an ROE of around 42%. Legendary investor Warren Buffett considers this to be one of the most important financial metrics and reportedly looks for an ROE of 14% or more.
The consumer class around the world is expanding. As a result, there will only be greater demand for PepsiCo products, including brands like Gatorade, Frito Lay, Quaker Foods and others. With a market capitalization of over $240 billion, PepsiCo is too big to produce stunning growth. But the firm’s history of raising its dividend should deliver investment income that increases steadily into the future.
T Rowe Price (TROW)
Baltimore is home to one of the best financial institutions in mutual fund giant T Rowe Price (NASDAQ:TROW). Indeed, T Rowe Price is still going strong, with TROW stock up for the last quarter, the past six months and past one year of market action.
As a no fee family, T Rowe Price does not charge to invest in its mutual funds. But as a Dividend Aristocrat, it also pays shareholders very well to own TROW stock. The current dividend yield is more than 4%. T Rowe also has little debt and earnings were up this year, so future dividend increases can easily fit in the financial structure.
T Rowe Price has a history of treating its customers, shareholders and investors well. The firm’s assets under management have also climbed to $1.54 trillion. All told, if you’re looking for an option for income investing, TROW stock offers 37 years of dividend growth with a present yield of more than twice the S&P average.
On the date of publication, Jonathan Yates did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.