Insights

The Top Dividend Stock for a Lifetime of Passive Income

Some say that death and taxes are the only guarantees in life, but what if there was a third? It might be Procter & Gamble (NYSE: PG) paying a dividend. The consumer staples giant has paid one every year since its establishment in 1890, raising it annually for the past 66 years.

You probably want to know whether the future looks as bright as the past has, and you’re in luck. Here are three reasons Procter & Gamble could pay you for the rest of your lifetime.

1. A treasure chest of resilient brands

Procter & Gamble is a conglomerate of household products, which means that the company owns various brands, but they operate and sell under their own identity.

For example, it owns the Tide brand of laundry detergent. But you’ll only see Tide displayed when you see a commercial for it or go to the store and buy it. A small note on the label is the only clue that Procter & Gamble owns the brand.

The company’s dozens of brands all together include thousands of products. It has 10 product categories, including over-the-counter medicine, cleaning products, hair care, dental products, personal hygiene items, and more. It sells products worldwide, adding up to more than $76 billion in annual sales.

PG revenue (TTM). Data by YCharts. TTM = trailing 12 months.

You can see above how smooth Procter & Gamble’s growth has been over the decades. It has overcome occasional recessions and constant competition from generic brands that sell for lower prices. All of this speaks to the brand power the company has.

Having so many brands also gives Procter & Gamble the flexibility to reinvent itself, like in the 2010s, which is why you see a decline in revenue. It sold some product lines, like Duracell batteries, to Berkshire Hathaway in 2016 for $2.9 billion in stock. Procter & Gamble can grow brands and then sell them when it chooses, often raising significant capital.

2. The dividend is the gospel

Not many companies can raise their dividend every year for decades; for those that do, the dividend becomes a part of their identity. Ask any stockholders why they own shares in a Dividend Aristocrat or Dividend King (companies with 25- and 50-year dividend growth streaks), and the dividend will probably come up fairly quickly.

Procter & Gamble’s 66-year streak makes it a Dividend King and one of the longest-running active dividend growth stocks — something that management values. Sure, past results don’t guarantee future outcomes, but if anything, it shows Procter & Gamble’s commitment to the dividend, so investors can feel confident that the payout is a priority.

Currently, the stock offers a dividend yield of 2.74%.

3. A nearly impenetrable balance sheet

Companies don’t pay dividends in hope but in cash, so they need to be able to afford the cash expense of paying a dividend and growing that expense every year. Procter & Gamble has a three-part safety net that virtually ensures its ability to afford the dividend.

First, it can organically afford the dividend by simply using the free cash flow the business generates each year. You can see below how plenty of cash covers the bill; the dividend payout ratio is currently just 62%.

PG free cash flow. Data by YCharts.

Say that, hypothetically, the business stubs its toe and cash profits plummet. In that case, Procter & Gamble could tap into its balance sheet to cover its dividend in the near term. It currently has $8.5 billion in cash on its balance sheet, about a year’s worth of dividends.

The company also has a conservative leverage ratio of just 1.5 debt to EBITDA (earnings before interest, taxes, depreciation, and amortization). In other words, it could easily borrow money if needed.

And if all else fails, Procter & Gamble has dozens of brands and could conceivably sell one, or some, potentially raising billions.

The company can easily fund the dividend with existing profits, so all of this will likely stay in the “what if” part of this discussion.

Investor takeaway

Procter & Gamble delivers on every aspect of what you look for in a dividend stock. The company’s revenue has proved durable over the years, and its many products mean it doesn’t live or die by a single part of its business.

It’s highly profitable and has built its company culture around sharing those profits with investors. Its dividend growth streak is among the longest on Wall Street.

Perhaps most importantly, Procter & Gamble is financially disciplined, with a strong balance sheet and the bonus of brands it can sell at any point to raise more cash.

Add it all together, and there might not be a stock better positioned to pay dividends for the foreseeable future than Procter & Gamble.

Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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