3 stocks to buy now that are on track to be crowned dividend kings by 2045 (or sooner)

Dividend Kings are elite companies that have paid and increased their dividends for at least 50 consecutive years. As of May 21, 2024, there were only 53 qualified dividend kings. But that list could grow considerably by 2040 as companies that have raised their dividends consistently since the 1980s and early 1990s look to continue their streak.

Caterpillar (CAT 0.33%), Chevron (CVX 1.65%)and ExxonMobil (XOM 2.31%) are three industry-leading giants that reward their shareholders with a mix of dividends, buybacks and earnings growth. Here’s why all three dividend stocks are worth buying now.

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Caterpillar’s earnings will fluctuate, but its dividend looks poised for continued growth

Lee Samaha (Caterpillar): The construction, mining and transportation equipment company has a proud history of paying dividends to its investors since 1933 and has increased its dividend over the past 30 years. Moreover, much evidence suggests that it may continue to do so for many years to come. For example, at the 2022 investor day presentation, management set a free cash flow (FCF) target of $4 billion to $8 billion over the cycle, only to raise it to $5 billion to $10 billion at early 2024.

Caterpillar management offers these ranges in recognition of its cyclical business. Its core end markets such as construction and transportation fluctuate with the broader economy, and its mining machinery end market depends on capital spending conditions in the mining sector, which in turn is driven by commodity prices .

While Caterpillar’s revenue, earnings, and cash flow are volatile, it’s important to note that the low end of the FCF range, $5 billion, easily covers its current dividend payout of about $2.6 billion.

In addition, Caterpillar continues to expand its less cyclical, higher-margin services revenue — on track to grow from $14 billion in 2016 to $28 billion in 2026. This is one reason for that its margins are expanding and the company is also doing an excellent job. to deliver high-value products that hold pricing power, even in weak end markets.

Dividend coverage and service growth are two things. However, Caterpillar has long-term growth prospects from its machines’ role in helping develop infrastructure and mine metals critical to the energy transition, including copper and lithium. As such, it looks like Caterpillar will join the elite group of Dividend Kings over time.

Set your calendars for Chevron’s coronation to take place in 2037

Scott Levine (Chevron): In line with lower energy prices — a common phenomenon for oil and gas stocks — Chevron shares have not fared well in 2024. While the price of benchmark West Texas Intermediate crude has fallen 1.1% in 2024 , Chevron stock moved almost identically. , with 1.2%.

As disconcerting as it may seem, enduring stock declines that happen in lockstep with sliding energy prices is the table stakes to consider yourself an energy investor. With shares now trading at 7.3 times operating cash flow, a discount to the 8.3 multiple of its five-year average cash flow, now is a great time for patient investors to take advantage of Chevron’s stock and its high-yield dividend of 4.4%.

For 37 consecutive years, Chevron stock has increased its dividend, illustrating just one reason why it’s one of the top energy stocks for those seeking prodigious passive income. The company’s dividend increases are far from nominal. Over the past 10 years, Chevron has increased its dividend at a compound annual growth rate of 4.1%.

And it’s not as if management has put enormous financial pressure on the company to appease shareholders. Over the past decade, Chevron has generated ample operating cash flow from which it has been able to fuel its dividend payments.

CVX Data Dividends per Share (Annual) by YCharts.

Operating solid assets across all links in the energy value chain, Chevron is well positioned to continue to generate strong free cash flow in the coming years — especially as it acquires Hess is completed.

In light of Chevron’s five-year average operating cash flow of 8.3, the fact that it’s changing hands today at 7.3 times operating cash flow makes the oil major’s stock look particularly attractive.

ExxonMobil’s plan to support future dividend increases

Daniel Foelber (ExxonMobil): After raising its dividend at the end of 2023, ExxonMobil is on track for its 42nd consecutive year of higher dividends by the end of 2024. If this continues, ExxonMobil will become the Dividend King by 2032 – – an impressive achievement given the volatility of oil. and the gas industry.

Between 2013 and 2023, ExxonMobil increased its dividend by just 36.3%, compared to a 132.1% increase from 2003 to 2013 — so the pace of increases has slowed considerably. However, ExxonMobil is taking steps to ensure it can grow its business even in a low-carbon future.

According to its corporate plan, the company aims to increase annual earnings and cash flow by $14 billion from the end of 2023 to 2027, thanks to structural cost savings, reinvestment in the core business and low carbon efforts. Higher cash flow supports dividend growth. But the face of those cash flows is changing, as ExxonMobil expects its Low Carbon Solutions division to generate 15% returns from a portfolio of lithium, hydrogen, biofuels and carbon capture and storage projects.

As for its oil and gas portfolio, ExxonMobil continues to bet big on the Permian Basin in western Texas and eastern New Mexico. Its acquisition of Pioneer Natural Resources, which was completed in May, boosted its production in the shale area. ExxonMobil’s upstream production was 3.78 million barrels per day (bpd) in the first quarter of 2024 and then increased to 4.36 million barrels per day by the second quarter of 2024 following the acquisition . However, its corporate plan calls for only 4.2 million bpd of production by 2027.

Investors should watch to see how ExxonMobil manages its production and whether it chooses to sell less attractive assets to make room for further offshore development in Guyana and the Permian. Ideally, ExxonMobil could grow free cash flow from a variety of oil and gas and low-carbon assets. Further innovation in carbon capture and storage could help justify production increases and offset emissions so ExxonMobil remains on track to meet its sustainability goals.

ExxonMobil’s payout ratio is just 45.7% — indicating that it can easily afford its dividend based on trailing earnings. Earnings could fall if oil prices continue to fall. But overall, ExxonMobil stands out as a balanced energy stock that can fuel a passive income portfolio with its 3.3% yield.