There's a simple rule for those seeking income from dividend stocks—make sure you diversify. When inflationary pressures are building up, like now, and bond yields are rising, some top-quality dividend stocks are coming under pressure. Higher rates hurt non-cyclical stocks such as power and gas utilities and telecom operators.
But when the economy is going strong and consumers have more money to spend on discretionary items, that’s when industrial and consumer stocks outperform. In this group we particularly like Nike (NYSE:NKE).
Nike’s powerful comeback this year is a reminder to bears that the Oregon-based sportswear giant hasn’t lost its allure for income investors. And it’s doing many things right in order to revive lackluster sales in its home market.
Trading near its record high, the stock closed yesterday at $83, Nike shares are up more than 45% in the past year, proving it's one of the best dividend stocks to own in this bull run. The biggest sign that the company is on the right track to deliver superior returns is the revival of sales growth in North America.
After three quarters during which US sales contracted, the company reversed that trend in the second quarter as consumers, encouraged by a strong economy, tax cuts and rising wages, flocked back to malls.
This reversal in the domestic market comes at a time when Nike remains a powerful brand overseas, from where the company generates more than half its revenue. China sales rose 35% in the quarter ended May 31, while revenue from Asia Pacific and Latin America gained 12%. Sales in Europe, the Middle East and Africa rose 24%.
Nike’s strong global brand provides a solid hedge against any slowdown in US sales. But so far, the company doesn’t see any sign that consumers will put the brakes on their spending. Nike is now forecasting annual sales growth in the high-single digits, up from a previous estimate for growth in the mid- to high-single digits.
This positive momentum really bodes well for Nike’s faithful investors, who have relied on the company’s dividend payments and understand the cyclical nature of its business. Nike stock currently pays $0.20 per share on a quarterly basis, translating to an annual dividend yield of 1%.
That yield obviously doesn’t look attractive when compared to other high-yielding stocks in the market. But analyzing stocks just based on their yields isn’t a good approach. The best dividend stocks are the ones whose payouts are raised regularly.
On this metric, Nike has done a great job. It has hiked its payout for 14 consecutive years, meaning Nike has the financial power to successfully ride through downturns and recessions, such as the one we saw in 2008 that forced many consumer cyclicals to suspend their payouts and seek government-sponsored bailouts.
Rising dividends is a good reason for income investors to hold onto Nike stock without worrying too much about quarterly performance. Those that did have been handsomely rewarded. Since the start of 2008, Nike stock has gained 461% in value, including re-invested dividends.
To balance the risk from interest-sensitive sectors, you should also hold stocks that tend to do well when rates rise and the economy is going strong. Nike is one of those low-risk stocks that have an impressive track record of performing well in many economic cycles. This is not a bad time to include this powerful brand in your income portfolio.
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