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3 Dividend Aristocrat Stocks to Buy in January: Walmart, McDonald's, and Johnson & Johnson

: As the continuation of, and increase in, dividend payments are still uncertain for many dividend-paying companies given the current, unprecedented global economic backdrop, a safer strategy for investors could be betting on dividend aristocrats that have long-term histories of consistent dividend growth. Walmart (WMT), Johnson & Johnson (JNJ) and McDonald's (MCD) are three stocks that we think not only hold strong price improvement potential as the economy recovers next year, but they could also deliver steady income because they are expected to return more capital to their shareholders as dividends.

Several recent developments are boosting investor optimism about 2021. With the U.S. Congress’ passage this week of a long-awaited second stimulus bill, and with vaccination efforts worldwide coming on strong, the market seems set to press on with its incredible bull run.

However, the rising spread of a new COVID-19 strain and uncertainties surrounding the economic growth trajectory are making some investors anxious about a potential market correction as we enter 2021. Consequently, many risk-averse investors are shifting some of their investments to quality dividend-paying stocks to ensure at least a steady stream of income.

Investing in dividend stocks might be the best option for investors right now, given the Fed’s commitment to keeping  interest rates low for the foreseeable future and with that making the bond market a relatively unattractive option for investors.

However, given these uncertainties, it is important to ensure the sustainability of a company’s dividend payment before betting on it. Dividend aristocrats are essentially 65 stocks in the S&P 500 Index that have raised their dividends for at least 25 consecutive years based on their steady cash flows, strong fundamentals, and sound business models.

Here are three  dividend aristocrats that we think could be good additions to your 2021 portfolio: Walmart Inc. (WMT), Johnson & Johnson (JNJ) and McDonald's Corporation (MCD).

Walmart Inc. (WMT)

WMT is a discount store and supermarket major that operates more than 11,500 retail and wholesale units in 27 countries worldwide. It sells groceries  and a variety of general merchandise items to more than256 million customers per week. It also serves its customers through its ecommerce website. The company operates in three segments – Walmart US, Walmart International, and Sam's Club.

WMT has  consistently increased  its dividend payments for the last 47 years. During the past 10 years, its payout has grown at a CAGR of 6.9%. While the four-year average dividend yield for WMT is 2.16%, the current annual dividend of $2.16 translates into a 1.49% yield. The company has already declared a dividend of $0.54 for the fourth quarter, to be paid next week.

Over the past three years, WMT has grown its revenue, EPS, and free cash flow at a CAGR of 3.5%, 22.5% and 14.5%, respectively. In the last reported  quarter, WMT’s total revenue climbed 5.2% year-over-year to $134.7 billion. Its U.S. e-commerce sales surged 79% while international sales have increased 1.3% year-over-year. The company’s operating cash flow has increased $8.3 billion year-over-year to $23 billion. Moreover, EPS came in at $1.80, rising 56.5% compared to the year-ago value.

WMT, along with Gatik (a Palo Alto company that develops software solutions for self-driving vehicles) has driven 70,000 operational miles in autonomous vehicles to move customer orders from its store to a neighborhood market in Arkansas. The company now plans to expand its self-driving car pilot to a second location. WMT also announced the development of full suite Pet offerings last month with the launch of Walmart Pet Care, an omnichannel pet care offering.

Hence, in line with a strong business outlook, analysts expect WMT’s current year revenue and EPS to grow 5.9% and 13.2%, respectively, year-over-year.

How does WMT stack up for the POWR Ratings?

B for Trade Grade

A for Buy & Hold Grade

B for Peer Grade

B for Industry Rank

B for Overall POWR Rating.

It is ranked #5 of 18 stocks in the Grocery/Big Box Retailers industry.

Johnson & Johnson (JNJ)

JNJ researches, develops, manufactures, and sells various products in the healthcare field worldwide. It is  popularly known for its consumer products, such as baby care, women’s health, and wound care. The company has operations in the pharmaceutical, consumer, and healthcare devices segments. JNJ is working on a potential COVID-19 vaccine and has already initiated the second global phase 3 clinical trial of its Janssen vaccine candidate.

JNJ has uniformly increased its dividend payout for the last 58 years. Over the past 10 years, its dividend payout has grown  a CAGR of 6.9%. Its current annual dividend of $4.04 translates into a 2.64% yield. Moreover, the company has a four-year average dividend yield of 2.66%. JNJ has already declared and paid a cash dividend of $1.01 per share for the fourth quarter. In the third quarter ended September 30, 2020, JNJ generated $7.65 billion as free cash flow and returned $2.66 billion to its shareholders as dividends.

Over the past three years, JNJ’s revenues, EPS and free cash flow have grown at a CAGR of 2.8%, 3.4% and 5.4%, respectively. In the most recent quarter, the company recorded a top-line of $21.1 billion, representing a1.7% year-over-year increase. Its  consumer products and pharmaceutical segments saw a recovery in revenue, and worldwide sales improved 1.7% year-over-year. EPS came in at $1.33, surging 101.5% compared to the year-ago quarter.

JNJ has a robust drug pipeline with more than 14 new drugs expected to be launched by the end of 2023. The company submitted an authorization application to the European Medicines Agency (EMA) yesterday seeking approval for Amivantamab, the first-ever treatment for metastatic non-small cell lung cancer.

The company also recently initiated rolling submissions of a biologics license application to the U.S. FDA for B-cell maturation antigen-directed CAR-T Therapy for the treatment of relapsed and/or refractory multiple myeloma. Driven by a diversified product portfolio and focus on growth, analyst expect JNJ’s revenue and EPS to grow 8.4% and 12.2%, respectively, next year.

JNJ’s POWR Ratings also reflect a promising outlook. It has an overall rating of “Strong Buy” with an “A” for Trade Grade, Buy & Hold Grade, Peer Grade, and Industry Grade. Among the 240 stocks in the Medical – Pharmaceuticals industry, it is ranked #1.

McDonald's Corporation (MCD)

MCD is one of the world's leading global foodservice retailers with more than  39,000 locations in more than 100 countries worldwide. Its restaurants offer various food products and beverages, as well as a breakfast menu. Approximately 93% of MCD’s restaurants are franchised and operated by independent local business owners. The company functions through three segments – U.S., International Operated Markets, and International Developmental Licensed Markets & Corporate.

With a four-year average dividend yield of 2.46%, MCD’s current annual dividend of $5.16 translates to a 2.41% yield. The company has been reliably increasing its quarterly dividend payout for the past 19 years and during the past 10ears the average dividends per share growth rate for MCD was 8.7% annually. Despite beaten-down sales, MCD raised its payout by 3.2% compared to the prior dividend to $1.29 in the fourth quarter.

MCD’s revenue, EPS and free cash flow have declined at a CAGR of 6.8%,1.7%, and 9.5%, respectively, over the past three years. However, that ended in the third quarter. MCD’s revenue increased 43.6% sequentially to $5.4 billion, due to higher sales-driven restaurant margins in the United States, partly offset by poor sales performance in the other two segments because of the pandemic. Franchised restaurants contributed 56.2% to the top-line. Moreover, MCD generated $2.55 billion of free cash flow, increasing 45% year-over-year. It further returned $913 million to its shareholders in the form of dividends. EPS came in at $2.35, rising 261.5% compared to the prior quarter.

Lat month, MCD announced a new growth strategy, Accelerating the Arches, which encompasses all aspects of the company's business as the leading global omni-channel restaurant brand. As the quick-service restaurants (QSRs) industry steadily recovers next year, and more people venture out after being vaccinated for COVID-19, the fast-food giant should benefit from increased traffic. Analysts expect MCD’s revenue and EPS to grow 13.7% and 34.4%, respectively, next year.

It is no surprise that MCD is rated “Buy” in our POWR Ratings system. It also has a “A” for Trade Grade, and a “B” for Buy & Hold Grade and Industry Rank. It is ranked #14  of 50 stocks in the Restaurants industry.

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WMT shares were trading at $143.78 per share on Tuesday afternoon, down $1.44 (-0.99%). Year-to-date, WMT has gained 23.01%, versus a 17.45% rise in the benchmark S&P 500 index during the same period.

About the Author: Sidharath Gupta

Sidharath’s passion for the markets and his love of words guided him to becoming a financial journalist. He began his career as an Equity Analyst, researching stocks and preparing in-depth research reports. Sidharath is currently pursuing the CFA program to deepen his knowledge of financial anlaysis and investment strategies.


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