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3 Obvious Dividend Stocks That Outperformed the S&P 500 and Nasdaq Composite Over the Past 3 Years
Passive income investors dream of finding companies that can pay reliable, growing dividends while beating the market at the same time. A company must increase its profits to distribute more money to shareholders over time. To increase profits, the company must be in good financial shape and navigate economic cycles to increase its dividends, even if earnings growth slows.
WM (NYSE: WM), ExxonMobil (NYSE: XOM), and Owens Corning (NYSE: OC) are three companies generating near-record profits and using the dividend as an important way to reward patient shareholders.
Three Motley Fool contributors were asked to highlight dividend stocks that have outperformed the major indexes over the past three years (based on total return) and are worth buying now. Here’s what they came up with.
Image source: Getty Images.
WM growth is accelerating
Daniel Foelber (WM): Formerly known as Waste Management, WM has seen impressive returns for a company that makes money from collecting, transporting and processing commercial, industrial and residential waste and recycling. The stock is hovering around an all-time high and has produced a total return of 57.3% over the past three years, handily outperforming the S&P 500 and the Nasdaq Composite.
WM Total Return Level Data by YCharts
WM is a good example of why an industry-leading company with an effective business model can command a premium valuation, even if it is not in a popular high-growth sector like technology.
WM’s sales growth stagnated and its margins declined noticeably in 2020 and 2021. But in recent years, WM has seen a massive recovery in its margins and accelerated revenue growth. Revenue has increased more than 25% in the last three years.
WM Revenue Data (TTM) by YCharts
WM benefits from an integrated business model that covers the entire integrated waste management value chain. By collecting, transporting, treating and disposing of waste, WM has better control over where the waste goes and comes from. A comparison would be large integrated oil and gas company like ExxonMobil versus a company that just extracts oil and doesn’t take care of the other aspects of the industry.
Because waste is a necessary part of life, WM enjoys consistent cash flow from a reliable customer base. In the long term, you benefit from a growing population and a growing economy. More people and greater economic production contribute to increased production, consumption and waste.
Over the last decade, WM’s dividend has doubled and reduced its share count by 13.9%. The company’s high free cash flow generation supports further dividend increases.
The yield is just 1.4%, but that is more a result of the good share price performance rather than a lack of dividend increases. Unfortunately, the stock’s strong performance has made it expensive. It has a forward P/E ratio of 28.5.
The story continues
WM is at the top of its game, so it could be a stock worth paying for despite its high price. The company has a clear path to growing profits and dividends. With a payout ratio of just 46.7%, WM can afford to grow dividends at a faster rate than profits – although the company prefers a hybrid capital return approach that includes buybacks and dividends .
All in all, WM has everything it needs to continue outperforming the market in the coming years.
Energy Prices May Go Up and Down, But ExxonMobil Keeps Moving Forward
Scott Levine (ExxonMobil): While the S&P 500 and Nasdaq have soared year-to-date, ExxonMobil stock has left them both in the dust. The S&P 500 and Nasdaq are up about 12% since the start of the year, and ExxonMobil shares are up nearly 20%. Outperformance has been even better over the past three years, with ExxonMobil producing a total return nearly four times that of the S&P 500 or Nasdaq.
Despite its recent rise, ExxonMobil stock, with its 3.2% forward dividend, remains a great opportunity for investors looking to bolster their passive income streams.
After reporting a strong end to 2023, ExxonMobil also delighted shareholders with Q1 2024 financial results. Beating analyst estimates for Q1 2024 revenue of $73.2 billion, ExxonMobil reported U.S. $83.1 billion in revenue. And his auspicious vision of what’s to come has also energized the bulls’ enthusiasm. With plans to expand its assets in Guyana, Brazil, and the Permian Basin, ExxonMobil projects it will grow earnings at a compound annual growth rate of more than 10%, from $8.89 per share, from 2023 to 2027.
Operating across the entire value chain, ExxonMobil is an energy stalwart that represents one of the best options for investors looking for quality oil dividend stocks. The company has demonstrated unwavering dedication to rewarding shareholders. With the dividend increase in 2023, the company has recorded 41 consecutive years of increasing its distribution and, in 2023, ExxonMobil repurchased $17.5 billion in shares. In light of its strong performance last year and its outlook for 2024, it is highly likely that the company will increase again in 2024.
A stock for real estate market bulls
Lee Samaha (Owens Corning): The S&P 500 is up 26.5% over the past year, and the Nasdaq-100 is up 34.4% over the same period, but you don’t need to buy fashion or technology stocks to outperform. Owens Corning’s building materials stock is up 59% in comparison, and there’s reason to believe it still has significant upside potential.
The roofing, insulation and composites company has heavy exposure to the North American housing market and its shares have scaled a wall of concern on the matter since the beginning of 2023. There is little doubt that the housing market is going through a rough patch right now, as relatively high interest rates put pressure on mortgage payers. In fact, Owens Corning’s revenue is expected to remain stable between $9.7 billion and $9.8 billion between 2022 and 2024.
Still, interest rates are unlikely to stay high forever and the company is doing what you would expect it to do in a bear market. In other words, it is taking advantage of its financial strength to buy attractive industrial assets and prepare for the turn of the cycle.
Management is acquiring door company Masonite International for an implied value of US$3.9 billion. The agreement strengthens Owens Corning’s position in the North American real estate market. It adds a complementary set of products sold to the same base of builders, contractors, distributors, home centers and homeowners it already sells to. As such, management believes it will create a $12.6 billion revenue company with earnings before interest, taxes, depreciation and amortization (EBITDA) of $2.9 billion, of which $125 million will come from generating of post-deal synergies (sourcing, supply chain and sales, general and administrative benefits) within two years of the deal.
Let’s hope the real estate market is in recovery mode by then, and with a current enterprise value (market capitalization plus net debt) of $17.3 billion, Owens Corning continues to look like a good value stock for bulls of the real estate market.
Should you invest $1,000 in waste management right now?
Before buying Waste Management stock, consider the following:
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Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has no position in any of the stocks mentioned. The Motley Fool recommends Owens Corning and Waste Management. The motley fool has a disclosure policy.
3 Obvious Dividend Stocks That Outperformed the S&P 500 and Nasdaq Composite Over the Past 3 Years was originally published by The Motley Fool