In an environment of historically low interest rates, it’s extremely difficult to garner meaningful returns from your fixed-income investments. Bank savings accounts pay close to zilch, while government bonds have been a no-go area for the same reason.
This situation is unlikely to change any time soon, as governments and central banks keep interest rates low to shore up national economies against the fallout from the pandemic.
But all is not grim. Investing in dividend-growth stocks offers one way to build wealth for one's golden years. These stocks—which offer shares in companies that provide regular dividend increases to stakeholders—tend to be mature businesses that could provide stability and growth for any portfolio.
From this group, we highly recommend consumer staple giant Procter & Gamble (NYSE:PG). P&G is a great income stock worth stashing in a buy-and-hold portfolio, where it can sit quietly and earn escalating payouts for an investor. P&G stock, which closed yesterday at $143.12, currently yields 2.41%.
That yield may not seem exciting if you’re looking to earn a higher return on your investment, but Cincinnati-based P&G is a reliable dividend stock in both good and bad times. It has increased its dividends for 62 consecutive years, a track record few companies can match. It currently pays $0.87 a share quarterly.
This consistent dividend growth also shows the power of the company’s cash-flow generation. Its range of products, which includes such globally recognized brands as Pampers diapers, Tide laundry detergent and Charmin toilet paper, is strong enough to sustain revenue growth through wars, recessions and market downturns.
Attractive Valuation
The strength of P&G’s consumer brands has been evident during the current health crisis as well. The consumer giant has been among the few companies that have maintained their full-year earnings guidance throughout the pandemic, benefiting from the panic-buying of toilet paper and cleaning products, as the highly contagious COVID-19 virus spread.
And just as the pandemic-related boom in hygiene products wanes, P&G’s grooming business is seeing a strong growth uptrend. That segment saw organic sales jump 6% in the second quarter as shaving rates increased. The company also reported an increase in its oral care segment, which includes Crest toothpaste and Scope mouthwash.
In a recent note to clients, Morgan Stanley named Procter & Gamble its top pick due to its attractive valuation.
The note said:
“We rate PG overweight, and are raising our topline/EPS estimates further above consensus with recent strength in U.S. scanner data. We see PG as attractive here, and are moving it to our top pick in household products with higher growth and visibility, and a cheaper valuation than HPC (household products care) peers.”
P&G stock, after gaining 18% from its March lows, is trading close to a record high, with the trailing 12-month price-to-earnings multiple of 26. But some analysts believe there is more upside on the way. According to Atlantic Equities analyst Edward Lewis, the company’s recent restructuring has unlocked more growth opportunities.
Said Lewis:
“A key feature of PG’s recent operational turnaround has been how it has been largely across the board rather than a disproportionate contribution from one or two categories and regions.”
His note added:
“Shares trade at the low end of historic relative levels, at odds with the consistency and growth PG continues to demonstrate.”
Under Chief Executive Officer David Taylor, who is retiring in November, P&G cut its roster of brands from 175 to 65, focusing on the 10 product categories where margins are the highest. During the course of that process the company has also eliminated 34,000 jobs through a combination of brand sales and buyouts, as well as plant closures—slashing more than $10 billion in costs.
Bottom Line
P&G’s consistent growth and its long dividend history make its stock an ideal addition to any income portfolio.