Many investors have heard the phrase “cash is king” relative to the current banking crisis. But it also has significance for dividend investors. A company’s cash flow, and particularly its free cash flow, is an important indicator for investors trying to determine how safe a dividend payout is. This article highlights seven dividend stocks with strong cash flows. And I’ve put an emphasis on free cash flow.
Free cash flow is simply the money a company has left (or free to use) after it has paid operating expenses and capital expenditures. This lets investors know how much cash a company can devote to things like paying down debt, stock buybacks, and dividends.
When interest rates were near 0%, money was essentially free and businesses could borrow money freely. Those days are over, and that means the playbook for many investors has to change. This is a time to look for companies that have a history of delivering a strong free cash flow. These seven companies all have a history of delivering strong free cash flow that should make the dividend payments safe and, in many cases, growing. That’s a formula that works regardless of what’s happening in the economy.
When talking about dividend stocks with strong cash flows, it’s hard not to start with Apple (NASDAQ:AAPL). To be fair, many investors don’t consider Apple to be a dividend stock, and I count myself among them. I’ve always said Apple is a growth stock that happens to pay a dividend.
Nevertheless, Apple generated a whopping $111.44 billion in free cash flow. Equally impressively, that was a 19.8% increase from the prior year. You can chalk that up to a profit margin of nearly 25%, an amount that’s approximately four times higher than the sector average.
Because Apple is still on a growth trajectory, it only pays out a small percentage of its free cash flow as a dividend. In 2022, that amounted to about $14 billion. But that only means that the dividend is well supported even if, as expected, many tech companies deliver weaker earnings in 2023.
And based on past history, investors are due for a dividend increase which may be coming as early as this upcoming quarter.
With a dividend yield of 5.22%, I wouldn’t blame you for thinking of Whirlpool (NYSE:WHR) as a possible yield trap. The appliance giant’s fortunes are inexorably linked to the health of the housing market. And right now, the patient is in critical condition.
That whacked about 50% of the company’s free cash flow in 2022. But the company is taking some aggressive steps to cut costs. The largest of which is an almost complete divestiture of its European business. That is expected to be realized in free cash flow in 2024.
In the meantime, the company expects some easing to the current undersupply condtions created by a weak housing market sometime in late 2023. That supports its forecast for approximately $800 million in FCF for 2023. And a current annual payout of $7 per share should be more than enough to keep investors interested at a time when growth will still be hard to come by.
Dow Inc. (DOW)
Like Whirlpool, Dow Inc. (NYSE:DOW) is a company that provides the best returns for shareholders when the manufacturing sector is strong. But with a dividend yield of 4.93% and an annual payout of $2.80 per share, DOW stock is an appealing choice for buy-and-hold investors.
Dow was an unquestioned winner during the pandemic, but it’s been a rough last 12 months for DOW stock. Still, it’s only down 11% in the last 12 months buoyed by an 8.8% gain in the month ending on April 13. And despite the stock having a down year in 2022, the company still generated free cash flow of $5.64 billion that easily supports a dividend payout of $2 billion for which the company says it’s dividend policy targets approximately 45% of its net income. And for good measure, Dow bought back $2.3 billion of its stock in 2022.
HCA Healthcare (HCA)
When you’re looking for dividend stocks with strong cash flows, you have to look at the healthcare sector. And that’s where you’ll find HCA Healthcare (NYSE:HCA). The company operates in approximately 180 hospitals and at around 2,000 points of care throughout the United States. That’s a massive footprint.
That’s evident in the company’s balance sheet which includes strong free cash flow. In 2022, FCF came in at $4.12 billion. That was down from 2020 and 2021, but it’s still well above pre-pandemic levels. The company has a profit margin of over 9% which is approximately double the sector average. That supports a forecast for earnings per share to grow around 12% over the next five years. And all of that will be plenty to support the $653 million the company paid in dividends in 2022.
Since the beginning of the year, analysts have started to boost their price targest for HCA stock which enjoys about 66% institutional ownership.
Nucor (NYSE:NUE) is America’s largest steel producer. And it’s self-described as one of the most efficient and cleanest steel producers in the world. That should be enough to grab the attention of ESG investors.
Or maybe not. NUE stock is down about 9% in the last 12 months and despite a strong rally to start the year, the stock is down about 5% in the 30 days ending April 13.
Perhaps that’s based on recession fears that will overcome any bounce the steel industry would expect from the infrastructure act. Even so, the fundamental story for buying NUE stock is still in place. And while the last quarter suggests that it will be tough to maintain the strong growth it showed in 2021 and most of 2022, analysts still give the stock about a 9% upside from its current levels. The company generated $8.12 billion in 2022. While that’s unlikely to continue, the dividend payout was only $533 million so investors should feel quite secure.
If you’re an investor who is looking to ride the hot hand, Accenture (NYSE:ACN) is a solid choice. The company specializes in using artificial intelligence in its consulting and IT services. On its most recent earnings call, the company cited how it has been using generative AI from its earliest stages and is well positioned to help its clients benefit from this technology.
With a P/E ratio of over 26x earnings, ACN stock doesn’t come cheap. But for a tech stock, it’s not horribly expensive either. Analysts seem to agree. They give ACN stock a consensus price target that’s about 11% above its current level.
In 2022, Accenture generated free cash flow of $8.82 billion and it’s forecasting FCF between $8 billion to $8.5 billion in 2023. The company paid out $2.45 billion in dividends last year. That means investors can look forward to the dividend, which currently pays out $4.48 annually per share to continue, and likely to grow, this year.
The last stock on this list of dividend stocks with strong cash flows is Amgen (NASDAQ:AMGN). When considering stocks in the biopharmaceutical sector, you always must pay attention to the pipeline. Amgen is well known for its cancer drug Enbrel.
Although Enbrel has been losing patent protection for the past decade, the company’s savvy efforts at building a patent thicket ensure that it will retain some patent protection for the next 12 years. And two of the patents that are crucial to its pricing power remain in place for at least another five years.
But even if the company loses some revenue from Enbrel, it has other drugs that are helping to pickup the slack. Investors will learn more when the company reports earnings at the end of April. But if you’re a long-term investor, AMGN stock looks very attractive. The company delivered free cash flow of $8.58 billion in 2022 with a dividend payout of just $4.19 billion.
Analysts are lukewarm about the near-term prospects for AMGN stock. But if you have a long-term time horizon, this looks like a value at its current level.
On the date of publication, Chris Markoch had a LONG position in AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.