With soaring summer heat in America, some stocks will benefit from consumers turning down their thermostats and enjoying more time indoors. This should translate to higher spending on practical products and services such as air conditioning and related items. However, consumers may also put more money toward non-essential items like beverages, food and entertainment.
We highlight three dividend stocks that can help you beat the summer heat. Each of these are companies whose top and bottom lines may benefit from summertime consumer spending. As a bonus, these firms are also suitable for people following a dividend growth strategy.
Carrier Global
Carrier Global (CARR) is a market leader in air conditioning, heating, refrigeration and building controls. Spun out of United Technologies in 2020, the company sells systems and products for homes, commercial buildings, trucks and trailers. The focus on keeping spaces cool makes Carrier an obvious beneficiary of high temperatures during the summer. In fact, the share price is up nearly 17% this year and 21% in the past twelve months.
We expect Carrier to benefit from high temperatures because overworked cooling systems need replacement, repair or maintenance. This should enhance both revenue and earnings per share and, thus, dividend growth.
Since becoming an independent company, Carrier has increased its dividend annually. The company is on the Dividend Challenger list with five consecutive increases. The dividend is snowballing at a double-digit rate because of the low payout ratio of about 28%. This value, combined with the ‘B’ dividend quality grade, should give investors confidence about the dividend safety.
Carrier is trading at a price-to-earnings ratio of ~22.7X, a reasonable value compared to the S&P 500. We view it as a “buy” now.
Coca-Cola (KO)
Coca-Cola (KO) is the global leader in non-alcoholic beverages, with sodas, water, sports drinks, ready-to-drink teas and coffees and energy drinks in over 200 countries. The company should do particularly well in the summer thanks to its many famous refrigerated brands, such as Coke, Fanta, Sprite and Fresca.
The share price is up about 13.5% year-to-date on solid performance. In the second quarter, Coca-Cola smashed earnings expectations with 15% organic sales growth, led by a 28% gain in Latin America, 30% growth in EMEA, and a 10% rise in North America. Sales rose because of volume and price increases. Coca-Cola is forecasting further growth, and it should continue to perform well.
The firm needs no introduction to dividend growth investors. Coca-Cola is one of the 66 dividend aristocrats and a dividend king, with an impressive 62-year streak of dividend increases. Because the company is mature, dividend growth is only about 3.5% to 5% annually. However, the yield is nearly 3%, offering investors income and consistent dividend increases. Safety is excellent, with free cash flow covering the dividend and an A+/A1 upper-medium investment grade credit rating.
Coca-Cola is trading near a record high, but the P/E ratio is still ~23X below the five- and ten-year averages. Consequently, we believe the stock has more room to run, especially considering its organic sales growth.
Consolidated Edison (ED)
Consolidated Edison (NYSE:ED) is the primary regulated utility in the New York City metro area. The 100+ year-old company provides electricity to 4.0 million customers, natural gas to 1.2 million customers and steam. The utility operates through Con Edison of New York and Orange & Rockland and has sold most of its non-regulated businesses. We like this equity this time of year because demand for electricity increases when temperatures rise and customers run those air conditioners for extended periods.
The utility beat non-GAAP earnings estimates in the first quarter by $0.25 and reaffirmed its 2024 guidance. The combination of high temperatures and rate base growth should allow Consolidated Edison to continue performing well. The utility is investing in its infrastructure to enhance safety and reliability as well as a transition to clean energy. With a projected 6.4% average rate base increase out to 2028, earnings per share should rise, too.
Because of good results, the share price is up about 6% this year. Consolidated Edison yields ~3.5%, and the dividend grows between 2% and 3% per annum. Although not a high growth rate, the safety is excellent, with a 64% payout ratio and operating cash flow exceeding the dividend distribution. The utility also receives an ‘A+’ dividend quality grade, placing it in the 95th percentile. Lastly, Consolidated Edison is one of the few businesses with a 100+ year history of paying dividends.
Consolidated Edison is undervalued compared to its 5-year P/E ratio range. We view this dividend king as a buy now.
On the date of publication, Prakash Kolli held a LONG position in KO and ED stocks. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or indirectly) any positions in the securities mentioned in this article.
