Investing in top consumer brands when they offer high dividend yields can be a rewarding investment strategy. But a high yield will sometimes reflect something wrong with the business that investors should make certain is temporary before committing to buying shares.
Dollar General (DG 2.28%) and The Hershey Company (HSY 0.88%) are both offering high dividend yields after their stocks fell over the last year on weak financial results amid sluggish consumer spending. Here's why investors can count on these companies to navigate near-term headwinds and continue paying generous dividends for years to come.
1. Dollar General
Dollar General is one of the leading discount retail stores. Weak traffic trends have sent its stock well off its highs over the past few years, as customers struggled with higher prices for groceries. However, the business has seen many economic cycles come and go since its founding in 1939. It serves a high percentage of the population, with more than 20,000 stores across the U.S. and Mexico.
NYSE: DG
Key Data Points
Overall, Dollar General's sales performance is holding up just fine. Same-store sales grew 1.4% in fiscal 2024 and 1.2% year over year in the fourth quarter. The problem is that its customer base lives in rural areas, which were hit the hardest from high inflation over the past few years. This led to a slight decline in store traffic last quarter. Weak traffic trends and higher costs led the company's full-year earnings per share to fall 32% year over year.
Still, investors shouldn't expect this performance to be the norm. The company has a long history of delivering profitable growth. Management has options to improve margins over the next few years, including improvements to the supply chain, better inventory efficiency, and implementing the use of automation to speed up deliveries to stores. Management believes it can increase operating margin to at least 6% by 2028, which should translate to growing earnings.
Importantly, the company is profitable enough already to support its quarterly dividend of $0.59. Over the last four quarters, this payout amounted to 46% of trailing earnings. That brings the forward yield to 2.96% -- more than double the S&P 500 index average.
The value that Dollar General brings to consumers in small towns gives it a competitive advantage that Wall Street is undervaluing. This is also reflected in the stock's low forward price-to-earnings multiple of 14.
2. Hershey
Hershey is a dominant confectionery conglomerate with several strong brands in its arsenal. Record-high cocoa prices -- a key cost component for the company -- created a lot of uncertainty about Hershey's profitability. This has driven the stock down to a deep discount, while sending its dividend yield to its highest level since 2009.
NYSE: HSY
Key Data Points
The company still reported a slight sales increase of 0.3% in 2024, while adjusted earnings fell 2.3%. For 2025, management expects high cocoa prices to send adjusted earnings down about 35%, but sales are expected to grow 2% or more.
A near-term dip in earnings from higher cocoa prices should be temporary. Hershey's management is focusing on more efficiently managing costs to improve margins. Moreover, commodity prices are historically cyclical, so investors shouldn't expect the price of cocoa to remain at these levels.
Indeed, cocoa prices recently pulled back from recent highs and further declines would likely send the stock higher. Hershey's sales were up 9% year over year in the fourth quarter, driven by strong retail sales of Reese's, Kisses, and Brookside. The salty snacks business also performed well, led by strong sales of SkinnyPop and Dot's Pretzels.
From a long-term perspective, investing in a top chocolate stock is a good bet. Hershey is showing strength in international markets, where Reese's posted double-digit growth in the quarter. Management sees significant growth potential ahead in Europe, Australia, and the Middle East.
Hershey's quarterly dividend currently stands at $1.37. Over four quarters, this totaled close to half of last year's earnings, and even with earnings expected to decline this year, Hershey should be able to sustain its payout. The current payment brings the forward yield to 3.20%. The stock has rebounded 15% since cocoa prices peaked, and there could be more gains if commodity prices continue to fall in 2025.
