One ratio that gets a lot of attention (and rightfully so) from investors is a stock's payout ratio. It tells them how much of a company's earnings are paid out in the form of dividends. Generally, the higher the ratio is, the more unsustainable the dividend is.
This isn't always the case, however. A company may be coming off a single bad earnings report or it may have many noncash items weighing down its bottom line in a particular quarter that pushes the payout ratio abnormally high. Still, the payout ratio is a good metric to focus on when evaluating dividend stocks.
Three stocks that yield more than the S&P 500 average of 1.4% but still have low payout ratios are CVS Health (CVS -0.05%), JPMorgan Chase (JPM -0.88%), and ExxonMobil (XOM 0.56%). Let's take a closer look at these dividend stocks and why they might be good additions to a portfolio.
1. CVS Health
Healthcare company CVS Health pays a dividend that yields 3.5%. Not only is this a high-yielding stock, but CVS is also a fairly safe income investment to hold in your portfolio. With a payout ratio of less than 40%, investors don't need to have the same worries about CVS as they might have about rival Walgreens Boots Alliance, which slashed its dividend payment earlier this year. CVS, with a broader business that goes beyond just pharmacy retail and that expands into health insurance through Aetna, can provide investors with much greater stability and diversification over the long run.
For the last three months of 2023, CVS reported revenue of $93.8 billion, which was up 11.9% compared to the same period last year. The company's adjusted earnings per share for the quarter totaled $2.12, which was an improvement versus the $2.04 adjusted profit it reported a year ago.
Rising costs in the healthcare industry have made investors wary about stocks like CVS Health. But with the stock trading at just 9 times its estimated future profits and a price/earnings-to-growth (PEG) ratio of just over 1, CVS Health stock could be a steal of a deal for investors who are willing to buy and hold.
2. JPMorgan Chase
Top bank JPMorgan Chase has faced some headwinds due to challenging economic conditions. Mergers and acquisitions have slowed to a crawl and people have less money to spend and invest, which has resulted in a more bearish outlook for the future. For the last quarter of 2023, JPMorgan reported net earnings of $9.3 billion, which was down 15% from a year ago as the bank has increased its provision for credit losses in anticipation of a possible recession in the near future.
But even with the drop in profit, what's encouraging is that the stock's payout ratio remains fairly low at just 25% of earnings. That leaves plenty of room for the payout to remain safe (and continue to rise) even if JPMorgan's financials worsen, giving investors a good buffer should the economy struggle.
JPMorgan stock yields 2.3% and it can make for a relatively safe long-term investment to hang on to. Trading at less than 2 times book value and 11 times earnings, the stock isn't an expensive buy, either.
3. ExxonMobil
Leading oil and gas producer ExxonMobil has been benefiting from a rise in oil prices in recent years. And even though commodity prices have been coming down a bit of late, the industry is still in better shape than in years past. ExxonMobil and other oil and gas companies have been improving efficiencies and cutting costs to be in better positions to deal with lower oil prices. And with crude oil at more than $75 a barrel, industry conditions still look good.
The proof is in the company's latest earnings report. ExxonMobil's net income for the last three months of 2023 totaled $7.6 billion and were down by more than 40% (the company recorded a $2 billion impairment charge related to "regulatory obstacles" in California). But given just how well the company did a year ago, that's still not cause for alarm. ExxonMobil's earnings per share for the quarter totaled $1.91. If the company were to average that over a period of four quarters, that would put its payout ratio at right around 50%. The current payout ratio is at 41% and a lot will ultimately depend on the price of oil. At 3.7%, its yield is the highest one on this list.
ExxonMobil has managed to increase its payouts for decades, during myriad economic cycles and events. For investors, the stock may be one of the more resilient, and safest, dividend investments to buy and hold for the long term. And at a forward price-to-earnings multiple of 11, this is another fairly cheap stock to own.
JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends JPMorgan Chase. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.
