3 Top Dividend Stocks to Buy in October and Hold for Decades to Come

With S&P 500 and Nasdaq Composite up more than 20% year to date, investors may feel the stock market is overvalued. And while certain pockets of the market are more expensive than in years past, that doesn’t mean there aren’t opportunities if you know where to look. In fact, now is the perfect time to filter out the noise, zoom out, and focus on the companies you’d be comfortable holding for decades to come.

Here’s why Visa (V -0.05%), Kinder Morgan (KMI 1.79%)and PPG Iindustrially (PPG -2.17%) stand out as dividend stocks worth buying in October.

Image source: Getty Images.

The recent selloff in Visa stock is a buying opportunity

Daniel Foelber (visa): After reaching an all-time high in mid-September, Visa came under pressure from the US Department of Justice for monopolizing debit markets. The DOJ filed a civil antitrust lawsuit against Visa, citing that “more than 60% of debit transactions in the United States are conducted on Visa’s debit network, allowing it to collect more than $7 billion in fees each year for processing these transactions”.

While civil lawsuits aren’t something to completely eliminate, it’s worth understanding that they don’t always have a significant impact on a company’s value. In March, the DOJ sued Apple and the stock continued to suffer a 4.8% decline, the most in seven months at the time. Since then, Apple is up about 40%, hit a new all-time high, and is now — again — the most valuable company in the world.

Visa’s fee structure for credit and debit cards is based on transaction volume and amount per transaction. This business model has allowed Visa to grow its business steadily, even during difficult times such as high inflation and pressure on consumer spending.

If there’s one metric that explains why Visa has grown to become one of the most valuable financial companies in the world (with a market cap of over $535 billion), it’s the company’s operating margin. Visa has an astounding 67% operating margin, meaning that two-thirds of every dollar earned in sales is converted into operating income. The following chart shows Visa’s incredible profitability — the company turning 55% of every dollar in sales into net income.

Data V Revenue (TTM) by YCharts

Visa’s global push has pressured merchants to accept their cards, even if it means putting less money on the transaction. The company’s network effects have allowed its expansion to be virtually unstoppable. However, Visa’s profitability depends heavily on its fee structure.

Visa’s margins are so high that they could fall and the stock would still be a great value. Visa has a forward price-to-earnings ratio of just 27.7 — which is reasonable for a reliable dividend growth stock. Over the past five years, it has increased its dividend by 73.3% and reduced its number of shares outstanding by 11.1% thanks to share buybacks. Even after returning capital to shareholders through dividends and buybacks, Visa still has plenty of dry powder to reinvest in the business.

Visa may yield just 0.8%, but the low yield is more due to its outpaced share price than a lack of dividend increases. Add it all up and Visa is a great buy right now, even if its margins are falling.

Kinder Morgan’s robust balance suggests the company has plenty of growth ahead

Scott Levine (Kinder Morgan): Kinder Morgan, one of the top stocks in the pipeline, has demonstrated a sincere commitment to returning capital to its investors, and the company will likely continue to do so for years to come. Add to that the fact that the company has a robust pipeline of projects to support future distribution growth, and it’s clear that Kinder Morgan — along with its 5.6% forward dividend yield — is an excellent opportunity for investors to get today

If you’re in the US and you use natural gas, there’s a pretty good chance it’s Kinder Morgan to thank. The company claims that about 40 percent of the natural gas produced in the U.S. makes its way through its pipelines. In addition, it operates 139 terminals where renewable fuels, oil and other products are stored. With these assets, the company often enters into long-term contracts with customers. This gives management an excellent forecast of future cash flows, giving them clarity on how to plan capital expenditures such as dividends and growth projects. For example, Kinder Morgan has a project backlog valued at $5.2 billion.

While the company is generous in returning capital to shareholders, management is not simultaneously jeopardizing its financial health. For example, over the past five years, Kinder Morgan has generated ample free cash flow to cover the dividend.

KMI Free Cash Flow Per Share (Annual) from YCharts.

Kinder Morgan stock might not seem like a flashy buy. It is valued at 8.9 times operating cash flow, which represents a premium to its five-year average cash flow multiple of 7.4. But for those planning to hold the stock for decades to come, its slightly rich valuation should be less of a concern.

PPG has plenty of potential to improve its dividend in the coming years

Lee Samaha (PPG Industries): Investing in the paint industry may seem as exciting as watching paint dry, but investors shouldn’t be too quick to dismiss it. It is an industry characterized by a relatively high return on equity (RoE). PPG’s average RoE was 22.7% over the past decade. As the chart below demonstrates, PPG has an excellent track record of generating the free cash flow per share needed to easily cover its dividend payments.

PPG data per share (yearly) by YCharts

In addition, there is reason to believe that PPG can significantly improve its earnings, cash flow and dividends in the coming years. For example, it has strong exposure to interest rate-sensitive sectors such as architectural paints and automotive (original equipment manufacturing). These should improve in a lower interest rate environment. In addition, PPG is the leading player in the aerospace coatings market and will benefit from a multiannual ramp in aircraft production and increased commercial air traffic.

PPG’s market position is strong as the second largest global paints and coatings company operating in a consolidating industry. As long as there is a need for physical products, there will be a need for coatings. As such, PPG is an excellent option for dividend investors.