With the market offering little clues as to its ultimate trajectory, investors may want to consider dividend stocks with low payout ratios. Passive income always represents an attractive attribute but that’s only half of the story. The other half centers on sustainability of said income, which is where the payout ratio comes into play.
Essentially, this metric represents the proportion of earnings from which a company pays its shareholders in the form of dividends. While no absolute rules exist, generally speaking, the lower the range of the payout ratio, the higher probability that the underlying dividends are sustainable. Therefore, dividend stocks with low payout ratios – but still commanding relatively high yields – bring much to the table.
Of course, you’re going to have to work with me on this list. Typically, the higher the reward, the greater the risk. Nevertheless, I’ve put together an eclectic mix of dividend stocks with low payout ratios that should help investors ride out the current storm.
Going speculative as the lead-off name for this list of dividend stocks with low payout ratios, Target (NYSE:TGT) immediately draws concerns. Fundamentally, the current pensive environment resulted in consumer sentiment slipping near historic lows. What’s more, Target recently warned of a weak holiday sales cycle, sending shares down 13% for the Nov. 16 session.
If that wasn’t bad enough, management also mentioned that organized retail crime sparked $400 million in extra profit loss. Obviously, the big-box retailer isn’t having a great time. Nevertheless, adventurous investors may want to target TGT as one of the dividend stocks with low payout ratios to buy.
For one thing, in the trailing month, the stock actually gained slightly over 4%. Therefore, it’s possible that the volatility represented a one-and-done move. More to the point, Target offers a forward yield of 2.78%, ranking above the consumer staples average yield of 1.89%. In addition, its payout ratio of 36.28% should be sustainable, irrespective of recent woes.
M&T Bank (MTB)
Headquartered in Buffalo, New York, M&T Bank (NYSE:MTB) is a regional financial institution. The firm features 780 branches in New York, New Jersey, Connecticut, Pennsylvania, Maryland, Delaware, Virginia, West Virginia, and Washington, D.C. Fundamentally, regional banks may be somewhat insulated than their larger multinational peers as they focus on local communities. That’s especially true with people concerned about a global slowdown.
MTB also attracts attention because it’s one of the dividend stocks with low payout ratios. Per Dividend.com, M&T Bank features a forward yield of 2.85%. To be completely transparent, this figure rates lower than the sector average yield of 3.18%. But hear me out. The payout ratio sits at 24.75%, reflecting a sustainable and dependable flow of passive income.
As well, the company carries a cash-to-debt ratio of 6.32 times, ranking higher than 77.5% of the competition. Also, its equity-to-asset ratio stands at 0.13 times, beating out the industry median of 0.09 times.
Tyson Foods (TSN)
Although a relevant company because of its indelible products, Tyson Foods (NYSE:TSN) embodies another enterprise loaded with distractions. This time, it’s of management’s doing, with the company’s CFO arrested for a trespassing and intoxication incident. Still, if you can get over this blight, an argument exists for TSN as one of the dividend stocks with low payout ratios to consider
Per Dividend.com, Tyson offers a forward yield of 2.98%. Conspicuously, this ranks higher than the sector average of 1.89%. In addition, the payout ratio sits at a pedestrian 26.87%. As well, Tyson enjoys 10 years of consecutive dividend increases. While it’s not a Target – which has 50 years – the food processor is on a roll. Certainly, management will not want to give it up, especially since it needs to shape up.
Financially, investors can take confidence that Tyson enjoys solid profit margins. As well, its return on equity (ROE) stands at 22.3%, reflecting a high-quality business. Even with all these positive attributes, TSN trades for only 8.4-times forward earnings, which is blisteringly cheap.
Given the aforementioned troubles in the consumer economy, it’s not particularly surprising that HP (NYSE:HPQ) struggled this year. Since the January opener, shares gave up 23% of equity value. With the underlying business focusing on personal computers, printers, and 3D printing solutions, HP needs sentiment to pick up. Interestingly, though, shares gained 14% in the trailing month.
If you happen to own the conviction that most of the bad news already baked itself into HPQ, then you may want to consider its proposition as one of the dividend stocks with low payout ratios. Per Dividend.com, the company carries a forward yield of 3.41%. That’s much higher than the technology sector average of 1.37%. Additionally, the payout ratio sits at 27.57%, a sustainable level.
As well, investors should note that the company owns 12 years of consecutive dividend increases. Again, it’s not a track record that management will give up on easily. Finally, HPQ might be grossly undervalued. Currently, shares trade at 5.1-times trailing-12-month earnings, well below the industry median of 17.5 times.
Conagra Brands (CAG)
An American consumer packaged goods holding company, Conagra Brands (NYSE:CAG) represents one of the most pertinent dividend stocks with low payout ratios to consider. According to its public profile, Conagra makes and sells products under various brand names that are available in supermarkets, restaurants, and food service establishments.
One of the more attractive features of CAG centers on its higher-ranking passive income profile. Per Dividend.com, Conagra carries a forward yield of 3.77%. This figure flies above the consumer staples average of only 1.89%. To be fair, the payout ratio is edging a bit on the higher side of things at 54%. However, with the company’s relatively predictable demand structure, this payout shouldn’t be a problem.
Now, in full transparency, Conagra’s financials could use some improvement. However, it’s getting the job done. For instance, the company’s operating margin stands at 8.2%, ranking above 66% of the competition.
An American global media, marketing, and corporate communications holding firm, Omnicom (NYSE:OMC) presents a higher-risk profile among dividend stocks with low payout ratios. Per its public profile, Omnicom provides services in four fields: advertising, customer relationship management, public relations, and specialty services. Again, with global slowdown fears materializing, OMC trades in an awkward juncture.
Nevertheless, the stock performed remarkably well given the circumstances. Since the beginning of the year, OMC gained 3%. Aside from the capital gains potential, arguably most investors will tune into the passive income narrative. Here, the company features a forward yield of 3.68%, beating out the communications sector average of 2.62%. The payout ratio is reasonably low based on the high yield of 42.72%.
That’s not all. Fundamentally, Omnicom enjoys strong profitability metrics. In particular, its operating margin of 14.45% ranks higher than over 80% of the industry. As a parting bonus, OMC trades at 12.2 times TTM earnings, which sits on the discounted side of the spectrum.
Perhaps not the most exciting name among dividend stocks with low payout ratios, you’re going to have to extend me some rope with IBM (NYSE:IBM). Against absolute standards, it’s certainly not the lowest payout ratio you can find. However, Big Blue brings a combination of generous passive income and an underappreciated business.
For instance, while most tech names incurred heavy losses in the market this year, IBM stock gained over 6%. To be sure, that beats out all three of the major equity indices. In addition, the legacy stalwart pivoted to many relevant businesses, including cloud computing, artificial intelligence, and even the blockchain. Thus, you ignore IBM to your disadvantage.
Per Dividend.com, Big Blue offers a healthy forward yield of 4.57%. Again, this ranks much higher than the tech sector’s average yield of 1.37%. Now, where it gets a bit tricky is the payout ratio, which stands at nearly 69%. However, with 28 years of consecutive dividend increases, I believe IBM earns a second look.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.