3 Dividend Stocks for June

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.

3 Dividend Stocks for June

1. Exxon Mobil XOM
2. Pfizer PFE
3. International Business Machines IBM

First up this month is Exxon Mobil. With a market cap of more than $400 billion, Exxon is the largest U.S. energy company and it receives a narrow moat rating from Morningstar analysts. Full disclosure: This is a stock I own in my personal accounts.

While Exxon’s five-year annualized dividend-growth rate of 3.0% is modest, it could be worse, as the company turned to its balance sheet to avoid a dividend reduction or suspension in 2020. Exxon then provided a modest raise of 1.1% in 2021 and a 3.4% dividend increase in 2022. During the April 28 earnings call, management noted the number of retail investors—about 40% of shareholders―who rely on the dividend, and stated that “we know it’s important to ensure that dividend is competitive and growing.”

Though Morningstar analysts note that Exxon’s dividend growth has been modest, they also point to the company’s sharp reduction in debt and improving cash flow profile, and they expect dividend growth to accelerate. They also believe the current dividend would be secure even if oil prices drop given the flexibility in the company’s spending plan. However, Exxon’s current yield of around 3.5% is less than what we see with some energy firms as the stock has tripled since its lowest point in 2020, pushing the yield below its five-year average.

Next up is Pfizer, one of the world’s largest pharmaceutical firms, which receives a wide moat rating from Morningstar analysts. Pfizer currently yields around 4.4%, with 4.6% annualized dividend growth over the past five years. During the company’s May 2 earnings call, the CFO reiterated the company’s three pillars for capital allocation as “reinvesting in our business, growing and paying dividends, and repurchasing our shares.” The upcoming $43 billion Seagen acquisition dwarfs the amount of spending on dividends and repurchases, but following its close, the CFO expects Pfizer to return to a more balanced capital allocation mix among these three pillars. However, Morningstar analysts note that Pfizer generally targets a 50% payout ratio, and the current dividend rate represents 49% of consensus earnings for 2023. So, I believe near-term dividend growth will be modest.

Finally, narrow-moat IBM currently provides a forward yield of more than 5%, which is relatively high for its sector, as many tech stocks don’t pay a dividend, and those that do often provide a fairly modest yield. However, I think potential investors shouldn’t expect much future dividend growth. IBM has provided smaller dividend increases in recent years, including a 0.6% hike declared last month, with 2.2% annualized dividend growth over the past five years. Morningstar analysts forecast a similarly modest dividend-growth rate for the next five years.

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

Watch “3 Dividend Stocks for May 2023″ for more from David Harrell.