Dividend investors have always favored businesses with stable revenue and earnings, and the ability to weather tough economic periods. The reasoning is simple; companies that exhibit these qualities tend to be able to pay their dividends to shareholders irrespective of prevailing economic conditions. This is an extremely attractive trait for any investor, but in particular, one that is focused on generating predictable income.

This doesn’t just work for individuals, however; many institutions invest with the same principles and goals, including the Bill & Melinda Gates Foundation. One such stock that has been a terrific example of a company that can weather any economic conditions and continue to raise its dividend is Waste Management (WM). In this article, we’ll take a look at Waste Management’s stock and determine if it is a good choice for income-focused investors.

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Is Waste Management a good choice for dividend investors?

Waste Management is a giant in its industry. The company is North America’s leading provider of a suite of environmental solutions, centered around its core waste collection business. In addition, it offers transfer and recycling services to residential, municipal, and commercial customers, and operates landfill gas-to-energy facilities that create renewable energy from methane that is produced as landfill contents decay.

Waste Management counts more than 21 million customers, a total that is growing constantly thanks to the company’s relentless focus on acquisitions, as well as organic growth. The company should produce more than $15 billion of revenue in 2020, and it trades with a market capitalization of nearly $49 billion.

Owning waste disposal stocks is nothing new for dividend investors because they exhibit many of the same qualities as a traditional utility. The company’s revenues are quite stable and predictable, and in Waste Management’s case, they grow nearly all the time due to acquisitions. In addition, waste disposal offers very strong margins, particularly when operating leverage is allowed to work from higher revenue leveraging down fixed costs. This has been Waste Management’s formula for decades and it has worked very nicely for shareholders.

Earnings stability is critical for a dividend stock because if earnings are fluctuating year-to-year, it can prove very difficult for management to be able to afford to pay a stable dividend, let alone a growing one. Waste Management provides shareholders with excellent earnings visibility and low earnings volatility, making it ideal for income investors.

In addition, Waste Management’s payout ratio has been very manageable for many years, meaning it isn’t overspending on the dividend. Indeed, the payout ratio has spent the past decade under 70%, but in recent years, it has been closer to 50%, including our estimate of 55% for this year.

This is a low dividend payout ratio for a business with such stable earnings, and it allows Waste Management to not only comfortably pay the dividend irrespective of economic conditions, but to continue to raise it as well. It raised its dividend through the Great Recession when many dividends were cut or eliminated altogether.

The low dividend payout ratio also means that Waste Management can continue to make the acquisitions that have helped it grow so well over the years, as it isn’t spending all of its earnings on payments to shareholders. We see Waste Management as operating in a very nice balance between retaining cash flows and returning them to shareholders.

The yield is about equal with the broader market at 1.9%, which is the product of Waste Management’s shares more than doubling in the past five years, which outpaced the growth in the dividend. The company raised its payout on December 14^th to a new annualized dividend of $2.30 per share, marking the 18^th consecutive year of dividend increases. We see the payout ratio at ~50% for next year on the newly-raised dividend, so Waste Management is continuing where it left off in terms of safe, reliable dividend growth.

Final Thoughts

Dividend stocks ideally give investors access to predictable and growing earnings, which allows companies to reliably make dividend payments to investors. Waste Management has many of the characteristics of a utility business and has proven to be a lucrative dividend investment over the years. With its 18^th consecutive annual dividend raise having just been announced, we see Waste Management as being an attractive dividend stock for many years to come.

It combines a manageable payout ratio, a proven growth strategy, and a management team that is wiling and able to return cash to shareholders in ever-larger amounts year after year. Given this, we see Waste Management as a strong choice for investors seeking safe and growing income over time.