Who doesn't like dividends? Think about it: You get paid just for owning shares of a company. Although income stocks are pretty great, there's so much more to it than that. The best dividend stocks have a long history of returning value to shareholders, boast low payout ratios (demonstrating that distributions aren't at risk of being reduced), and have opportunities to grow their profits -- and hopefully their dividend payments -- over the long haul.
That's what makes agricultural powerhouse Archer Daniels Midland (NYSE: ADM), home garden supplier Scotts Miracle-Gro (NYSE: SMG), and transport leader Canadian National Railway (NYSE: CNI) worth a closer look. If you like dividends, then you should love these three stocks. Here's why.
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Margin expansion on the horizon
This month Archer Daniels Midland will pay its 344th consecutive dividend. For those of you keeping score at home, that's 86 years of delivering value directly to shareholders. How does the agricultural ingredients leader, which deals mostly with commodity products, turn in solid profits year in and year out to support a 3.1% yield?
The company leverages its global size as a foundational business layer from which to build and invest in higher-value ingredients. For instance, Archer Daniels Midland utilizes its corn processing infrastructure to deliver sweeteners, beverage alcohol, and 1.7 billion gallons of fuel ethanol per year -- making it the top ethanol producer in the world. Its oilseed processing facilities also make biodiesel. And its global distribution and logistics network made it possible to quickly build and scale a high-margin specialty ingredients business. In the first nine months of 2017, ADM's specialty seed operating margin of 12.6% is multiples larger than its largest business, agricultural services (1.3%).
While the volatility of global commodities markets can still overshadow the progress being made by smaller business units, management's focus on operational efficiency and the long term has never left the dividend's health in doubt. Better yet, the dividend stock may soon get a lot stronger. Archer Daniels Midland is about to transition from a multiyear strategy that included higher capital spending to a new period where shareholders may finally reap the benefits from operational improvements across the portfolio -- and with lower expenses, to boot. If agricultural margins increase from the current down cycle in the next few years, then the company's profits could reach new highs.
Consumer garden products, now with more focus
Scotts Miracle-Gro stock has been on an absolute tear in the last five years, having gained 188% with dividends included in that time. That easily beats the total return of the S&P 500, which was a healthy 109% during the period. That's also not surprising considering the home garden products leader completed fiscal 2017 with record operating cash flow of $354 million and healthy revenue growth.
Things may get a little bumpier in the next year or so, especially compared to the last five years, but that's not to imply that profitability or dividends are in jeopardy. Scotts Miracle-Gro just jettisoned its non-U.S. business to focus on American consumers and its high-growth indoor gardening business, Hawthorne, which grew sales 137% from fiscal 2016 to fiscal 2017. That means more of management's bandwidth -- and more of the company's resources -- can be devoted to higher-margin business over time.
Management warned that gross margin is expected to decrease in fiscal 2018, although shareholders should still expect year-over-year EPS growth and operating cash flow in line with last year's record performance. That's not a bad thing, just reality. More importantly, it could create opportunities for investors to grab a strong dividend stock at discounted prices in 2018 should Mr. Market throw any temper tantrums over near-term obstacles.
Coast-to-coast-to-coast cargo capabilitiy
Canadian National Railway has quietly been a solid dividend stock for income investors. It operates a mature and relatively boring business, but when it comes to dividends, boring is great. Perhaps nothing hammers home Canadian National's chops as a great invesetment better than its nearly 30% net margin through the first nine months of 2017. Or maybe its $4 billion in annual operating cash flow.
What supports those hefty earnings and operating cash flow? The $60 billion transport company doesn't do anything flashy, but it does own a formidable and sprawling network of rail lines. In fact, Canadian National Railway is the only railroad company that can deliver cargoes to North America's Pacific, Atlantic, and Gulf Coasts. The network focuses heavily on providing reliable access to manufacturers and touches several resource-rich regions in the United States and Canada.
It may be easy to overlook railroads, but they remain the most efficient way to transport bulk cargoes across land, especially at long distances. That fact, coupled with amazing levels of cash flow, may just make Canadian National Railway a dividend stock to own for life.
What does it mean for investors?
Investors that like dividends will find a lot to like -- and even love -- about Archer Daniels Midland, Scotts Miracle-Gro, and Canadian National Railway. All three stocks support reliable and growing distribution payments, are steadily growing earnings and cash flow, and won't be going anywhere anytime soon. They're some of the most boring -- and therefore, most consistent -- companies in their respective industries. What more could income investors ask for?
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