I believe the coffee giant Starbucks (NASDAQ: SBUX) is an excellent dividend stock. It may sound like a subjective opinion, but there are objective ways to measure what makes a great dividend stock. Specifically, we can look at its dividend yield, growth history, and potential for future earnings.
I believe Starbucks excels in all three categories and should be a primary consideration for investors in dividend stocks. Here’s why.
A rewarding story of dividend growth
For starters, Starbucks’ dividend yield is currently 1.6%. Think of it this way: if you invested $ 100 today, you could expect $ 1.60 in annual dividends from that stock if it continued to pay at its current rate. For context, investors generally divide dividend-paying stocks into two categories: high-yielding and low-yielding. In general, anything over 2% is considered high yield. The rest is low yield.
Therefore, Starbucks is a low yielding dividend stock, which some investors might not like. However, in my opinion this dividend yield is high for a high quality company like Starbucks. Consider that often with high yielding dividend stocks it is a symptom of low quality stock. The majority of investors don’t want to own it, so stocks fall and the dividend yield is high. Often this is right before the dividend payment is cut.
So Starbucks is technically a low yield dividend stock. However, a dividend yield above 1.5% has always been very good for this stock.
Not only that, but Starbucks has been a great stock for dividend growth. Its most recent quarterly dividend payment was $ 0.45 per share in May 2021. But in May 2016, just five years ago, the quarterly dividend payment was $ 0.20 per share. During that time, the company more than doubled its dividend and hasn’t missed any quarterly payouts.
Considering its five-year growth and dividend over the past year, we can say that Starbucks has been an excellent dividend.
This dividend can go higher
Many dividend investors measure the health of the current dividend with a metric called the payout ratio. The payout ratio measures dividends per share relative to earnings per share (EPS). After all, it wouldn’t really be viable for a business to pay more than it earned. Generally speaking, investors like a payout ratio of less than 50%. Therefore, they could be disabled by Starbucks. Its current payout rate is over 200%.
Starbucks profit was hit in 2020, but it maintained its dividend, expecting only a temporary decline in business. In the end, it was true – sales have already picked up. However, in the meantime, its payout ratio has skyrocketed because it chose to maintain its dividend.
Historically, Starbucks has a payout ratio closer to 50%. In 2021, expect this metric to approach historical levels as earnings rebound.
When a payout ratio is low, it suggests that the company has the possibility of increasing its dividend in the future. But in the case of Starbucks, it will also have room for future dividend increases due to its robust growth.
Starbucks has already completed two quarters for its 2021 fiscal year. For the full year, it expects to generate revenue of $ 28.5 billion to $ 29.3 billion. As a prospect, prior to the pandemic, the company generated $ 26.5 billion in revenue in fiscal 2019. As a result, this year’s revenue is expected to grow between 7.5 billion dollars. % and 10.5% on a two-year basis. This is not bad for a large cap stock.
Starbucks’ revenue growth comes from a mixture of increasing sales in existing stores and opening new locations. Expect a lot more of this over the next five to ten years. Today, the company has just under 33,000 locations worldwide. By 2030, it expects to have 55,000. Between these new stores and sales growth at existing sites, management projects between 10% and 12% annual long-term revenue growth.
Additionally, as it also tries to become more efficient, Starbucks management expects earnings growth to outpace revenue growth. Given its track record over the past 10 years, I’m very optimistic about its ability to deliver by 2030. And this earnings growth will give it enough leeway to continue to increase the investor dividend at the company. to come up.
Therefore, due to its track record, current respectable performance, and potential for future earnings growth, I would say Starbucks is a great dividend-paying stock today and is worth a place in your portfolio.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.