3 Dividend Stocks for January 2023

David Harrell: Hi. I’m David Harrell with Morningstar Investment Management. In this monthly video series, we take a look at the dividend prospects of three stocks that are popular with income investors.

First up this month is Magellan Midstream Partners. As a master limited partnership, Magellan trades in units, not shares, and its distributions are treated as a return of capital as opposed to income, which can provide certain tax advantages. However, Magellan may not be appropriate for tax-deferred accounts. The stock’s current yield is quite attractive, at approximately 8%, and Morningstar analysts believe that the current distribution is well covered. Magellan had a long consecutive streak of quarterly increases in its distribution, but that ended in 2020. Since then, the partnership has made two annual increases, both were well below the 4.9% annualized growth rate we’ve seen over the past five years. It appears that the partnership has settled on maintaining annual increases, as opposed to quarterly ones. While management noted the importance of distribution growth to investors during its most recent earnings call, they also noted the attractiveness of the current yield. Therefore, it might take a large increase in unit price, which would push the yield rate down, to motivate management to focus on larger distribution increases.

Next up is Omnicom, the world’s second-largest ad holding company, and a firm that Morningstar analysts believe is well positioned to benefit from the continuing growth of digital advertising. The stock currently yields around 3.5%. After holding its dividend rate flat during 2019 and 2020, Omnicom provided a 7.7% dividend increase for its first payout of 2021, though it has paid the same $0.70 rate for eight consecutive quarters now. Historically, Omnicom hasn’t emphasized annual dividend increases, as it has often maintained a dividend rate for five quarters or more. While the firm has grown its dividend at an annualized rate of 5.4% over the past five years, Morningstar analysts are forecasting more modest growth—2% a year—over the next five years.

Finally, Medtronic is one of the world’s largest medical-device companies and is currently yielding around 3.5%, well above its average yield over the past five years. Medtronic has raised its dividend nearly 8% a year on an annualized basis over the past five years, and it can point to a 45-year streak of annual dividend increases. When assessing the company’s financial strength, Morningstar analysts note that Medtronic aims to return a minimum of 50% of its annual free cash flow to shareholders but that has been in the 60%–70% range in recent years, primarily through the dividend, as well as opportunistic share repurchases. Medtronic’s management reiterated this 50% minimum payout goal in its Nov. 22 earnings call.

I’m David Harrell with Morningstar Investment Management. Thanks for watching and see you next month.

Learn more about these stocks.

Magellan Midstream Partners (MMP) https://www.morningstar.com/stocks/xn…

Omnicom (OMC) https://www.morningstar.com/stocks/xn…

Medtronic (MDT) https://www.morningstar.com/stocks/xn…

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