The word "sustainable" is relevant for dividend investors and for investors who are concerned about environmental and social issues, but with different meanings.
A dividend investor looks for companies with the financial strength to sustain--or grow--their payouts. Investors can also look for investments that are sustainable in the sense that they minimize their exposure to harmful environmental impacts, create a diverse and equitable workspace, and have strong corporate governance practices.
While sustainable investing concerns can play a role in a company's financial strength--a chemical company can be hit with multibillion dollar fines, or a beverage company can be vulnerable to the costs of using too much water--for this particular article, we weren't looking for an explicit connection between dividend strength and strong sustainability practices at a company. Instead we looked for stocks that screen well on both dividends and a strong sustainable corporate profile.
To do so, we started with the Morningstar US Sustainability Dividend Yield Focus Index, which is designed to track higher-yielding, qualified-dividend-paying companies that score well on environmental, social, and governance investment criteria. From there, we further screened the index's holdings for stocks with the lowest ESG and Carbon Risk Scores--the lower the scores, the more sustainable the company. We took the screened stocks with the best yields and cross-referenced them with Morningstar DividendInvestor's Dividend Select Portfolio managed by George Metrou.
Based on our screen, here are five solid-yielding, ESG-friendly stocks, along with commentary from DividendInvestor and Morningstar's equity research, and a summary of Sustainalytics data on each company's ESG risk profile.
Verizon Communications VZ
Fundamentals: "Verizon has held up well in the face of stiff competition from AT&T T and T-Mobile TMUS, a testament to the reputation for quality it has built over the past 15 years. The business has also proved essential during the COVID-19 pandemic. However, competitive pressure remains intense, limiting pricing power and growth. Efforts to expand and reaccelerate growth through next-generation 5G technology remain a wild card." --George Metrou, Morningstar DividendInvestor, June 2021
Sustainability: Verizon has medium exposure to its industry's material risks, with product governance, data privacy and security, and human capital as its notable material ESG issues. Data privacy and security issues stand out because the company's turn to data monetization strategies places its users' data under concern. However, Verizon has a strong rating when it comes to managing its exposure to these risks.
Fundamentals: "One of the oldest biotech firms around, Amgen has built a diverse stable of older products, new therapies, and pipeline candidates that should help offset top-line declines from the onslaught of biosimilar competition. With deep manufacturing capabilities, the firm should be a strong player in the biosimilar market as well. A strong balance sheet and low dividend payout relative to cash flow are also attractive." --George Metrou, Morningstar DividendInvestor, June 2021
Sustainability: Amgen's material ESG issues are business ethics, access to basic services, and product governance with medium exposure to its industry. Part of Amgen's ESG risk exposure is due to its collaboration with BeiGene and expansion in China. Although the partnership will help grow the company, it also increases its risk of bribery and corruption. The company's management of its risk exposure is strong. However, its executive compensation is not tied to sustainability performance. Despite having weak anticorruption policies, Sustainalytics analysts see the company as having strong anticorruption programs provided annually.
Texas Instruments TXN
Fundamentals: "Texas Instruments is the world's largest analog chipmaker and a key supplier of embedded chips for a wide range of applications. Given its concentration in analog chips and in-house manufacturing, Texas Instruments appears to be weathering the current bout of chip shortages better than others. With the company's relentless focus on higher-margin analog and embedded chips combined with smart operational moves on the manufacturing front, we foresee robust profitability and free cash flow generation in the years ahead." --Brian Collelo, technology sector director
Sustainability: Texas Instruments has medium exposure to its industry's ESG risk. With semiconductor manufacturing at the forefront of its business, the company requires highly skilled employees and large volumes of water. This places human capital and resource use as notable material ESG issues. Business ethics is another area of concern. However, the company is rated to have a strong management of these issues.
Home Depot HD
Fundamentals: "As the world's largest home improvement retailer, Home Depot captures significant efficiency gains through its large scale. During the COVID-19 pandemic, a surge in home investment led to a boom in financial results. Home Depot should continue to capture a significant portion of housing investment, which is expected to remain strong in the years ahead based on demographic and housing trends." --George Metrou, Morningstar DividendInvestor, June 2021
Sustainability: The company has low exposure to its industry's ESG risks. Human rights/supply chain, human capital, and data privacy and security are the company's primary material ESG issues. Management of these risks is rated as strong, as the company has a sustainability council that oversees the company's exposure to various ESG risks like responsible sourcing, human welfare, and climate change. Though the company is concurrently involved with health, safety, and labor relationship controversies, it has initiatives to address them.
Fundamentals: "Comcast holds a dominant position in the Internet access market and also owns solid media and entertainment assets. A strong balance sheet and low payout ratio should help fuel continued rapid dividend growth. COVID-19 has hurt the advertising business and left the company's theme parks closed. Cash flows from the Internet business should sustain the enterprise and its dividend until a broader recovery takes hold." --George Metrou, Morningstar DividendInvestor, June 2021
Sustainability: The company's overall exposure is low and similar to the subindustry average. Business ethics, data privacy and security, and product governance are notable material ESG issues. Comcast's expansion into mobile offerings and the provision of enterprise services signals operational risks related to privacy and data security. Comcast's management of these risks is rated as average. While the company releases an annual corporate social responsibility report, it is not aligned to any international standards or assured for data quality. The company also has limited ESG disclosure, such as in privacy management and security risk.
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