3 Dividend Darlings to Consider

Ryan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A few days ago I started searching for the best dividend paying companies.  Instead of just focusing on dividend yield, I looked for companies that are well-managed, have dominant positions in their respective sectors, have strong and stable businesses, are attractively valued, and pay a nice dividend.  After all, there are a lot of companies with higher dividend yields – but not very many that meet all of those criteria.

Lockheed Martin (NYSE: LMT)

My first stock is Lockheed Martin.  Admittedly, the defense sector has taken a hit--but that hasn’t stopped Lockheed Martin.  In fact, Lockheed Martin is forecasting record profits for 2013 – possibly over $9 per share and well above analysts’ expectations.  By contrast, Lockheed Martin’s competitors, Raytheon and General Dynamics, recently issued forecasts that fell short of analysts’ expectations.  Lockheed Martin’s new CEO indicated that she does not feel that it will be necessary to cut jobs this year because Lockheed Martin has a strong portfolio of products.  In addition, the Pentagon is committed to the F-35 and international sales to countries like Japan and Israel remain strong.  Plus Lockheed Martin will benefit from tax credits that it will receive for Research and Development.  Lockheed Martin has a P/E Ratio of around 10 and a forward P/E Ratio of less than 10.  And it has a dividend yield in excess of 5%.  All in all, Lockheed Martin is a great company that the market is unfairly penalizing because it is in an underperforming sector.      

Darden (NYSE: DRI)

The next stock that hit my radar was Darden Restaurants.  For those of you who don’t know, Darden is the family of restaurants that consist of well-known brands like Red Lobster, Olive Garden, and LongHorn Steakhouse, as well as lesser-known brands such as Bahama Breeze, Seasons, and Wildfish Seafood Grille.  In short, I feel that Darden Restaurants is among the best-managed casual dining companies in the world.  Over the past few years the only mistake that I have seen this company make is that it let a few of its promotions last too long, which resulted in erratic same-store sales.  But the devaluation that followed has created an attractive entry point for this stock, which is near its 52-week low.  Darden Restaurants is currently trading at a P/E Ratio of around 13 and has a forward P/E Ratio of around 12.  Add to that a dividend yield of over 4% and you can see why I like the stock.  All in all, Darden Restaurants has a compelling valuation at a time when there aren’t that many stocks that do.   

PPL (NYSE: PPL)

The final stock is PPL Corporation.  When you think of high yield stocks utility and oil companies naturally come to mind.  That is because when you think of a utility stock you associate it with stability and predictability.  You do not, however, tend to associate utilities with high growth.  PPL is certainly an anomaly, having grown earnings at 50% and revenues at 56%, which is amazing for a utility.  That is what I love about this company: it has demonstrated both stability and the ability to grow at a fast rate.  Even though PPL is hitting new highs it still only trades at a P/E Ratio of around 11, and even though I don’t expect PPL to grow at a fast rate next year I still feel that this company is attractively valued.  PPL also pays a dividend of around 5%.  All in all, PPL has a compelling valuation and is well-positioned to provide shareholders with gains through its dividend as well as through moderate share price appreciation. 

3 Factors to Consider

  1. Valuation.  All of these companies trade at price to earnings multiples of less than 14 and they all have solid underlying fundamentals.       
  2. Competitive Position.  Lockheed Martin is one of the best positioned companies in the defense sector, Darden Group is very well managed and consists of a family of strong brands, and PPL has demonstrated the ability to steal market share from its competitors without sacrificing profitability.                 
  3. Stability of Dividend.  All of these companies appear to have a dividend that is safe for the foreseeable future.    

My Foolish Take

All three of these companies are very well-managed and very well-positioned to deliver results over the next few years.  With the Dow and S&P where they are, you may want to consider taking profits from some of your high growth stocks and reallocating capital into these stocks.  At their current prices all of these stocks offer attractive entry points.  Plus these are all companies that you could feel comfortable buying and holding.  Overall, these three stocks offer modest total returns of around 10%-15% over the next few years with minimal downside risk. 


RyanPeckyno has a position in Darden Restaurants. The Motley Fool owns shares of Darden Restaurants and Lockheed Martin. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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