3 Dividend Stocks With Attractively Low Payout Ratios

When it comes to investing in dividend stocks, there are many routes one can take.

Investors can focus on a high current yield, dividend payment safety, longevity, or growth potential. It is the latter that we’ll focus on here, as we’ll discuss three stocks with very low dividend payout ratios.

Low payout ratios imply not only a highly sustainable dividend payment — as the dividend is covered several times over by earnings — but also provides the management team with a high level of dividend growth potential. In other words, the lower the current payout ratio, the further the dividend can be raised in the years to come.

A Dividend Discovery 

Our first stock is Discover Financial Services (DFS) , a bank holding company that provides digital banking products and services, as well as payment services, in the U.S. Discover offers branded credit cards to individuals, as well as student and personal loans, home loans, savings accounts, certificates of deposit, and more.

Discover was founded in 1960, generates about $13.3 billion in annual revenue, and trades with a market cap of $26 billion.

Discover’s current payout ratio is about 15% of earnings, exceptionally low by any measure. That means the bank could experience a huge decline in earnings and still quite comfortably cover the dividend, which is key for dividend safety should a recession strike, for instance. Banks are obviously notoriously susceptible to recessions, but Discover shareholders likely need not fear a downturn from a dividend safety perspective given where the payout ratio is today.

Discover has a respectable dividend increase streak of 10 years, having begun raising its dividend coming out of the financial crisis. Not only is the streak 10 years, but the bank has averaged a nearly-20% annual increase in the payout over that period. The dividend started at a relatively low level, to be fair, but that’s still an outstanding record of dividend growth.

The current yield is 2.5%, so the stock is also fairly strong on an income basis, outperforming the S&P 500 by almost a full percentage point on that measure. Stocks with rapid dividend growth tend to have somewhat lower yields, but Discover scores well there.

Looking ahead, we expect the bank to grow earnings at a rate of about 4% annually, which should provide ever more capital to return to shareholders over time. This, combined with the bank’s strong dividend growth rate and very low payout ratio mean Discover is a stock with strong dividend safety, and robust dividend growth prospects.

Transport Your Portfolio to Steady Income

Our next stock is Ryder System (R) , a logistics and transportation company that operates globally. The company operates through three segments: Fleet Management Solutions, Supply Chain Solutions, and Dedicated Transportation Solutions. Through these segments, Ryder offers a wide variety of logistics-related services, including the leasing and renting of commercial vehicles, access to administrative services, fueling, scheduling, routing, and more.

The company was founded in 1933, produces about $12 billion in annual revenue, and trades with a market cap of $4.2 billion.

Ryder’s payout ratio is just 16% of this year’s earnings, which is very low by Ryder’s own historical standards. However, we note that earnings are quite volatile for Ryder, given logistics and transportation services revenue tends to ebb and flow with economic activity. Logistics as an industry has been extremely strong since the beginning of the pandemic, and Ryder continues to enjoy bumper earnings as a result.

As such, we expect Ryder’s earnings growth rate going forward to be -4%, as we don’t believe the current level of earnings is sustainable. However, the company has managed to raise its payout for 18 consecutive years despite its inherent earnings volatility, and we do not see any reason that won’t continue.

Indeed, the company has raised its dividend for an impressive 18 consecutive years, which is very strong given the recession risks inherent in a logistics company. In addition, over the past decade the average dividend increase is nearly 8%, so the company is meaningfully raising payments to shareholders.

The yield is robust at 3%, nearly double that of the S&P 500, making Ryder not only a strong stock from a dividend growth potential perspective, but also on a pure income stock basis.

Planting the Seeds for a Higher Payout

Our third stock is Bunge Ltd. (BG) , an agribusiness and food company that operates worldwide. The company operates a highly diversified business through four segments: Agribusiness, Refined and Specialty Oils, Milling, and Sugar and Bioenergy. Through these segments the company offers a huge variety of seeds, oils, feeds, biofuels, flour, milling products, and a long list of related products.

The company was founded in 1818, produces about $69 billion in annual revenue, and trades with a market cap of just over $14 billion.

Bunge has a payout ratio of just 17% for this year, as it, too, has produced enormous earnings since the pandemic began. That has shrunk the payout ratio considerably for the past three years, and has led to the company raising its dividend for the first time in a while. Indeed, after three consecutive years of earnings not covering the dividend fully, the company paused its dividend increases, but importantly, did not cut the payout. Bunge currently has a two-year streak of dividend increases after having raised its payout from $2.00 per share annually in 2020 to the current rate of $2.30.

Bunge’s yield is about 1% better than the S&P 500 at 2.6%, and we expect years of dividend increases to resume now that the company’s earnings are extremely strong. We see earnings contracting at 2.2% annually in the years ahead given the massive spike in the past couple of years, but there should be plenty of capital to continue raising the payout.

Final Thoughts

Depending upon one’s stage in life, selecting the right kind of dividend stocks is key. For those looking for strong dividend growth candidates, stocks with low payout ratios and histories of returning higher amounts of capital to shareholders are ideal.

Discover, Ryder, and Bunge all have very strong earnings and as a result, low payout ratios. However, all three also offer strong yields, and two of them have double-digit dividend increase streaks. Given these factors, we like all three for dividend security, even in the face of a recession, as well as their dividend growth potential in the years to come.