When you are contemplating whether or not to add a new dividend stock to your portfolio, there are several important qualities to look for. For example, identifying companies with strong cash flow generation, long-term growth potential, and low debt levels is a great start. You should also check the sector that the stock is in and how it looks respective to the overall market. While dividend investing is one of the best ways to build wealth over time and take advantage of compounding, the last thing you want to do is buy a stock that decreases in value substantially or even cuts its dividend payouts after you buy.
One dividend stock in the industrial sector looks like a solid buy at this time. Dow Inc (NYSE:DOW) is a global chemical company with a nice dividend yield that investors might want to consider adding. Not to be confused with the Dow Jones Industrial Average, this stock has a diversified business model and could reward shareholders with solid returns over the long-term. Let’s take a look at why Dow Inc is a great dividend stock.
Diversified Chemicals Company
Dow Inc. is a company that is the product of a spin-off from DowDupont back in April 2019. One of the big reasons why dividend investors should be interested in the stock has to do with its diversified business model. The materials science company produces industrial chemicals that play a vital role in things like manufacturing, electronics, construction, healthcare, and more. It generated $43 billion in sales in 2019 and has a strong presence in all key geographic markets. Most of the chemicals that the company produces had very strong demand prior to the pandemic and the fact that Dow’s products are used in so many different industries around the world could make it a reliable choice for long-term buyers.
Although Dow’s sales figures have been negatively impacted by the pandemic as demand for auto manufacturing and construction materials decreased significantly during the first half of the year, the company has other products that helped to offset the downturn. Since Dow’s chemicals are also used to create cleaning and disinfecting products, food packaging, and paints and coatings, demand increased for some of its products to help offset losses in other segments. Dow was able to maintain its dividend and even beat analyst expectations on EPS and Revenue during a tough Q2 for the company. When the demand for Dow’s other products returns as the economy rebounds, the share price could appreciate nicely.
Newer dividend investors are typically attracted to high-yield stocks. They want to get as much cash flow as possible from their investments, but oftentimes don’t understand that a high-dividend yield can potentially be a red flag. That is not the case with Dow, a company that offers investors a 5.6% dividend yield with a strong balance sheet. Dow was able to improve its cash flow in Q2 by roughly 40% year-over-year, which is very impressive during a difficult time for the business.
Financial Strength and DJIA Component
When it comes down to it, buying a company like Dow Inc makes sense because of its financial strength. Dow is in a good position to continue paying dividends even as it faces some short-term issues related to the pandemic. Before the pandemic, Dow was focused on significantly reducing its debt and paid down $3 billion in debt in 2019. As of Q2, Dow had $3.7 billion in cash and cash equivalents on its balance sheet and also paid down $600 million in debt during the quarter. It appears that maintaining the company’s $0.70 quarterly payouts is a priority for Dow Inc at this time, which is reassuring in an uncertain economy.
There’s also the fact that Dow Inc is a component of the Dow Jones Industrial Average. As 1 of 30 companies that make up the DJIA, investors should have added confidence in the quality of a dividend stock like Dow Inc. The DJIA has been lagging the overall market and we have already started to see some rotation into industrials over the last week which could be a positive sign for the stock going forward. In fact, the DJIA could end up performing quite well for the second half of the year. Dow Inc is also a member of the S&P 500, which is another good sign that tells investors it is truly a quality company.
Although sales could continue to be impacted by the pandemic for Dow Inc in the near-term, the fact that it has been holding up well during the recent market selloff tells us that it is a strong company to own. There are risks related to the duration of the pandemic and lower crude oil prices which hurts the company’s competitive advantage, but many dividend payers face similar issues at this time while providing lower yields. If you are an investor that is looking to add a high-yield stock with a strong financial position and room to grow, this company is absolutely worth a look for your portfolio.
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