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 BlackRock, the world’s largest asset management firm. BlackRock raised its dividend rate by an impressive 18% for its first payout of 2022, and it has increased its dividend at an annualized rate of 12.5% over the past five years. But the biggest contributor to BlackRock’s increase in yield over the past year is the decline in its share price: A year ago, the stock yielded around 2.0% at a share price of more than $800. With the share price now closer to $600, the stock yields more than 3%. Morningstar analysts expect BlackRock to increase its dividend at a mid- to high-single-digit rate for the next five years, which would keep the firm’s payout ratio in the 50% range.
Next up is Verizon. Verizon raised its dividend rate for its November 1st payout and the company can now point to a 16-year streak of annual dividend increases. However, these increases have generally been modest – the most recent one was 2% and the company’s five-year annualized dividend growth rate is just 2.1%. That’s because Verizon is still trying to reduce its leverage after taking on a hefty amount of incremental debt in 2014 to buy out Vodafone’s stake in a joint venture and Morningstar analysts expect it will take several years for the company to reach its leverage goal. Despite modest dividend growth, the stock currently provides a forward yield in the 7% range, up from just under 5% a year ago. The increase is due mostly to the drop in Verizon’s stock price during that time. However, Morningstar analysts believe the market is “overly focused on Verizon’s struggle to add postpaid consumer wireless customers in recent quarters” and they believe its shares are attractive at the current price.
Finally, Digital Realty, which owns and operates data centers, is structured as a real estate investment trust and must pay at least 90% of its REIT taxable income to its shareholders. For the past five years, Digital Realty has provided a dividend yield around 3%, with 5.7% annualized dividend growth. But a large year-to-date share price decline has pushed Digital Realty’s yield to the 5% range. While Morningstar analysts point out that the company’s leverage ratio is higher than that of its main peer, they believe its property ownership and long-term customer contracts allow for this. They also note that Digital Realty “has a stable business that shouldn’t be materially weaker in a recession or even a global shutdown like the one that arose from COVID-19.”
I’m David Harrell with Morningstar Investment Management. Thanks for watching and see you next month.
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