Now that the Federal Reserve has finally pivoted to its rate-cutting era, the case for investing in dividend stocks has become even stronger. Interest rate cuts have historically been correlated with rising prices for dividend-paying stocks, especially those with a solid track record of dividend growth.
Plus, with a “soft landing” not quite guaranteed just yet, it's worth pointing out that the best dividend stocks are often shares of companies that have experience in navigating through decades of various business cycles, making them a source of reliable passive income for investors seeking stability in their portfolios.
While many dividend stocks have lagged the returns of the broader market during the Fed's high-interest rate regime, here we've rounded up three top dividend payers from the Dow Jones Industrial Average ($DOWI) that are not only outperforming in 2024, they've also raised their dividend payouts consistently, and are still trading at reasonable valuations.
Dividend Stock #1: 3M
Founded in 1902, 3M (MMM) is a diversified multinational conglomerate known for its innovative products across various industries. Its core business segments include industrial, healthcare, and consumer. The company's market cap currently stands at $75.9 billion.
MMM has delivered a stellar performance so far in 2024, outpacing the Dow and the broader S&P 500 Index ($SPX) with its 50% return on a YTD basis.
Notably, 3M was a “Dividend King” until a historic cut earlier this year. However, the company pays a generous yield of over 2%, backed by a very sustainable payout ratio of around 40% of free cash flow.
In 3M's second-quarter results, the company beat expectations on both revenue and earnings. However, revenues were down marginally on a YoY basis, coming in at $6.3 billion, with EPS improving to $1.93 from $1.39 in the same period. Notably, this marked the sixth consecutive quarterly earnings beat by 3M, and the 15th over the past 16 quarters.
For the six months ended June 30, 3M generated net cash from operating activities of $1.8 billion, and exited the quarter with a cash balance of $10.1 billion. This was much higher than its short-term debt levels of $1.3 billion.
The company's strong stock price performance can be largely attributed to two developments. First, 3M's net debt improved significantly following the completion of the Solventum (SOLV) divestiture, decreasing from $10.02 billion to $2.78 billion. Second, the resolution of MMM's legal troubles has supported its share price growth.
Separately, new CEO Bill Brown acknowledged on the Q2 conference call that the company's “products are aging,” and has been aiming for a turnaround on the back of focused R&D spending. 3M has spent $1.2-$1.3 billion annually over the last 3 years on R&D, with the CEO noting, “before we make any adjustments to our R&D budget, I want to first explore opportunities to get more from what we currently spend.”
At a forward price/earnings (P/E) ratio of 18.83, MMM trades at a discount to the industrials sector median, suggesting the shares are still reasonably priced at current levels.
Analysts have an average rating of “Moderate Buy” for 3M stock, up from a consensus “Hold” recommendation two months ago. Out of 14 analysts covering the stock, 6 have a “Strong Buy” rating, 5 have a “Hold” rating, 1 has a “Moderate Sell” rating, and 2 have a “Strong Sell” rating.
Dividend Stock #2: IBM
International Business Machines Corporation (IBM), more popularly known as IBM, has been an IT giant for over a century. Currently, it is a leading provider of global hybrid cloud and artificial intelligence (AI) solutions, along with consulting expertise. “Big Blue” also offers a wide range of software products, and delivers traditional IT infrastructure solutions like storage and servers.
Currently commanding a market cap of $202.9 billion, IBM stock is up 35.3% on a YTD basis, easily outperforming the broader equities market.
The stock also offers a dividend yield of 3.02%, which is above the sector median of 1.025%. What's more, IBM is on the verge of being a “Dividend Aristocrat,” as it has raised dividends consistently over the past 24 years.
IBM's consistency in terms of dividend payments can be attributed to its solid balance sheet. The company closed the latest quarter with a cash and equivalents balance of $16 billion, up by $2.5 billion from the start of the year. Concurrently, short-term debt levels shrank substantially to $3.6 billion from $6.4 billion at the end of 2023.
In its results for the latest quarter, IBM beat analysts' expectations on both revenue and earnings. Q2 revenues came in at $15.77 billion, up 1.9% from the prior year. Adjusted EPS jumped by 11.5% on a YoY basis to $2.43, comfortably surpassing consensus estimates. This was the 11th consecutive quarter where IBM's EPS outpaced the average analyst estimate.
During Q2, the company reported that net cash from operating activities fell slightly year over year to $2.1 billion. Free cash flows, however, increased to $2.6 billion in the quarter, and IBM reported $4.5 billion in free cash flow for the first half of the year. For the full year, management raised its guidance to call for free cash flow above $12 billion.
Supported by its strong balance sheet, IBM is making significant strides in the AI space with a clear focus on enterprise solutions. To overcome challenges related to data privacy that hinder widespread AI adoption, the company’s WatsonX AI platform and the Granite family of models offer promising solutions. IBM Consulting further enhances its AI initiatives by integrating services with a library of role-based AI assistants, allowing for enterprise-level customization.
Wall Street isn't valuing IBM like an AI stock, with the forward P/E ratio of 21.77 representing a discount to the tech sector median. Overall, 15 analysts in coverage have a “Hold” rating for IBM stock, with 4 “Strong Buy” ratings, 1 “Moderate Buy” rating, 8 “Hold” ratings, and 2 “Strong Sell” ratings.
Dividend Stock #3: Caterpillar
We conclude our list with Caterpillar (CAT). Founded in 1925, Illinois-based Caterpillar is a leading global manufacturer of construction and mining equipment. Its product line includes construction equipment, mining equipment and power systems. The company's market cap stands at a mammoth $188.7 billion.
In 2024, CAT stock is up 27.9% so far, with the shares catching a shot in the arm this week from news of China's massive stimulus plan.
CAT also offers a dividend yield of 1.46%, backed by a modest payout ratio of about 24%. Caterpillar is a Dividend Aristocrat, having increased dividends consistently for the past 30 years.
In Q2 2024, Caterpillar's results came in above expectations. Revenues fell by 3.6% to $16.69 billion, while EPS increased by about 8% in the same period to $5.99. This was the sixth consecutive quarter where CAT's EPS surpassed expectations, and the 15th beat in the last 16 quarters.
Additionally, cash generation from operating activities rose in the first six months of the year to $5.1 billion from $4.8 billion in the year-ago period. Overall, the company closed the year with a cash balance of $4.3 billion.
As the economy moves toward a low-inflation environment, Caterpillar is well-positioned to benefit. With 44% of the nation’s bridges in need of repair and 32% of urban roads in poor condition, Caterpillar stands to benefit from infrastructure spending, backed by its strong execution and solid reputation. Beyond selling machinery, Caterpillar integrates advanced features like autonomy and customization, maximizing the value delivered to customers, which translates into higher revenues and improved margins.
Caterpillar’s service business is also set to be a key growth driver. It is expected to reach $28 billion by 2026, compared to the current $26 billion, out of the company’s $63.9 billion in FY2023 equipment sales.
At a forward P/E of 17.46, CAT trades at a discount to the sector median and its own historical average valuations, suggesting the shares are still reasonably valued.
Analysts have a consensus rating of “Moderate Buy” for CAT stock overall. Out of 19 analysts, 7 have a “Strong Buy” rating, 1 has a “Moderate Buy” rating, 9 have a “Hold” rating, and 2 have a “Strong Sell” rating.
