Quality is one of the most overused words in investing. But what makes a stock a quality stock?
For Keith Buchanan, one clue is the dividend, and whether a company can keep paying it.
In the latest episode of Ticker Take, I spoke with Buchanan of GLOBALT Investments about how he uses that idea to find quality companies, which leads him to a number of opportunities beyond popular sectors like tech.
In Buchanan’s view, quality companies have steady, recurring revenue, pricing power, and enough cash to keep paying and raising dividends in good times and bad. Dividends, in his opinion, are a kind of receipt that the business model is working.
At the same time, Buchanan warns that high dividend yields can look like quality marks, when in fact they are the opposite. When a stock falls, its yield rises even if the company never pays an extra cent, so an unusually big yield can be the market warning you that the payout is in trouble.
For that reason, Buchanan would rather own a company that can grow a smaller dividend than one that looks generous right before it has to cut.
Here are six stocks he used to show how to assess quality companies. We have included some of the analyst recommendations, as measured by Bloomberg. As always, this is not financial advice.
Delta Air Lines (DAL)
Airlines have a rough history with investors: capital intensive, boom and bust, famous for adding too many seats at the wrong time. However, Buchanan says this cycle is different, with fewer and more global players showing real discipline. He says Delta in particular has been out front on a premium, loyalty-driven model, anchored by its American Express partnership. Delta cut its dividend during the pandemic, before bringing it back in 2023. He thinks the company can keep raising it. And he’s not alone in his bullishness. Nearly every analyst who covers the stock rates it a buy.
Waste Management (WM)
There is nothing glamorous about garbage, but trash leads to cash. Whether the economy grows or not, people and businesses keep producing waste, which gives Waste Management steady demand and real pricing power. Buchanan points to the recurring cash that has funded more than 20 straight years of dividend increases. About two-thirds of analysts rate it a buy.
JPMorgan Chase (JPM)
Wall Street is split on JPMorgan, with only about half of analysts calling it a buy, but that suits Buchanan just fine. He is willing to pay a premium for the biggest U.S. bank because of the cash the Chase franchise generates and the interest income he expects over the next few years. JPMorgan raised its dividend again this fall, and he says its commitment to that payout has held through every kind of cycle.
Devon Energy (DVN)
Energy is about as cyclical as it gets, and producers have little say over the prices they receive, so Buchanan focuses on the people running the company. He liked Devon’s merger with Coterra this year, which created a bigger producer with strong assets and a management team he trusts to ride out the swings and keep returning cash. Devon raised its dividend by roughly a third after the deal closed, and about nine out of every ten analysts rate it a buy.
Hasbro (HAS)
Hasbro’s dividend has been flat since 2022, so it would fail a strict dividend-growth screen, but Buchanan keeps it for where he thinks it is headed. The draw is the intellectual property, with franchises such as Magic: The Gathering offering better economics than traditional toys. Pair that with a solid balance sheet, he says, and Hasbro has the capacity to start growing its payout again. According to Bloomberg, more than 90 per cent of the street currently recommends the stock.
Automatic Data Processing (ADP)
ADP has raised its dividend for 50 years in a row, which is the longest streak on this list. While most analysts are not recommending the stock, it handles payroll for many leading businesses and throws off plenty of free cash flow. Buchanan notes it is not a direct AI winner, though it can use AI inside its own operations to widen margins.
The Ticker Take
Regardless of whether it’s an airline or a garbage business, Buchanan hunts for companies that generate cash and have the discipline to keep paying shareholders. That, to him, is the definition of quality.
Jon Erlichman is a BNN Bloomberg contributor and the host of Ticker Take on YouTube.
