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Milk the Dividends on These 3 Cash Cows

Published 03/17/2023, 10:02 AM
Updated 09/29/2021, 03:25 AM
  • A 'cash cow' generates steady cash flow with little investment.
  • Coterra Energy's low-cost, long-life assets generate reliable cash flow throughout the ups and downs of the economic cycle.
  • Coterra management is planning to increase the base dividend by 33% in 2023.
  • Altria Group surprised the market with a new $1 billion stock buyback program.
  • LyondellBasell is a leading player in the chemicals industry and the third largest holding in the ‘COWZ’ ETF.
  • Both Altria Group and LyondellBasell are ‘Dividend Contenders,’ companies that have raised their dividend for 10 to 24 years.

With market volatility on the rise in the wake of the SVB financial collapse, many investors are seeking ways to reduce risk and enhance income.

Time for a drive out to farm country!

Sure, agricultural commodities can help protect against inflation, but we’re talking about an entirely different investment class — cash cows.

The term ‘cash cow’ refers to a company with significant market share in a mature industry. Typically, it requires minimal capital spending to maintain slow yet predictable growth. In turn, a cash cow generates steady cash flow with little investment — much like a low-maintenance cow produces milk.

Cash cows make for attractive investments because of their strong cash flows and healthy balance sheets — not to mention their ability to outperform. From 2018 to 2022, the Pacer U.S. Cash Cows 100 Index had an annualized return of 12.2%. The Russell 1000 Index (from which it derives its constituents) returned 9.1%

And while the ETF that tracks the Pacer U.S. Cash Cows 100 Index (COWZ) is a good way to gain broad exposure to a herd of cash cows, hand picking fund holdings with above average dividends is a great way to boost portfolio income. These three large cap cows offer ‘utterly’ large yields.

1. Is Coterra Raising its Dividend?

Coterra Energy (NYSE:CTRA) is a Houston-based oil and gas producer with a presence in the Anadarko Basin, Permian Basin and Marcellus Shale regions. The company’s low-cost, long-life assets generate reliable cash flow throughout the ups and downs of the economic cycle. Approximately two-thirds of revenue comes from natural gas and natural gas liquid (NGL), which are in constant demand for heating, cooking and industrial processes.

To provide value to shareholders, Coterra is aiming for at least half of free cash flow (FCF) to be returned as dividends or buybacks. The company banked $5.5 billion in FCF last year on higher commodity prices and returned $3.2 billion to investors. Last year, it pays a base and variable dividend, which amounted to $2.49 per share. This equates to a 9.8% trailing yield. But with management planning to increase the base dividend by 33% in 2023, a double-digit yield could be on the horizon.

2. Is Altria Group’s Dividend Stable?

Altria Group (NYSE:MO) has an 8.1% forward yield that is backed by the revenue generated by its cigarettes, cigars, smokeless tobacco and nicotine pouches. While this won’t earn it a spot in an ESG fund anytime soon, it will provide steady income to investors that want to benefit from industry leadership that dates back more than 100 years.

On top of beating fourth-quarter earnings expectations, Altria Group surprised the market with a new $1 billion stock buyback program. For a company that exited 2022 with $4 billion in cash, repurchasing shares should provide downside protection for the stock — which has hovered between $40 and $50 since June 2022.

While some of the cash will be used to continue to pay down debt, there should be plenty leftover for the dividend. And it is a dividend that could keep growing if Altria's 13-year streak of dividend hikes remains intact. The streak puts this cash cow in another select group of ‘Dividend Contenders,’ companies that have raised their dividend for 10 to 24 years.

3. Is LyondellBasell a Cash Cow?

LyondellBasell Industries NV (NYSE:LYB) is a leading chemical industry player and the third largest holding in the ‘COWZ’ ETF. Its products are in constant demand for food and water safety, healthcare, fuel efficiency and more in approximately 100 countries. Over $6 billion in cash was generated from operating activities in 2022, a byproduct of having the first or second largest global market share in several product categories.

LYB ended last year with a 46% higher cash position of $2.2 billion. More work is needed to reduce the $12.8 billion debt balance, but the cash flow is more than adequate to sustain the dividend. Based on the consensus estimate for next 12 months' earnings, LYB’s payout ratio is a healthy 44%.

Also a Dividend Contender, LYB has increased its dividend for 11 consecutive years. In May 2022, the quarterly dividend was raised to $1.19 per share, which gives the stock a 5.4% forward yield. Given LYB’s diversified exposure to growth markets like automobiles, construction and electronics, these cash payments will be flowing until the cows come home.

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