Investors have an insatiable appetite for dividend stocks. To decide which of the thousands of dividend-paying stocks belongs in your portfolio, though, you have to be picky.
Exactly how to be picky depends on your particular needs. As we'll see below, among the various options you have in finding the best dividend stocks for you, consistently big dividend increases give most investors the perfect mix of what they're seeking.
Dealing with dividend diversity
Just because you're a dividend investor doesn't mean that you have the same interest in a stock that everyone else does. Some income seekers focus on maximizing yield, even if it means taking on more risk. With many companies using leverage or other techniques to boost their yields, this approach isn't for the meek, but it can bring big rewards.
Other investors don't need the immediate gratification of a high yield right now, but they definitely want to see evidence that a business is healthy and capable of generating increased profits and cash flow over the years. For them, stocks like those on the Dividend Aristocrats list make a lot of sense; the Aristocrats have demonstrated a track record of at least 20 consecutive annual dividend increases.
The Aristocrats are useful, but they have a drawback: You can stay on the list no matter how little you happen to raise your payout in a given year. So in some cases, you'll see streaks punctuated by tiny half-cent or even quarter-cent increases, making it clear that the token raise was simply done for the purpose of extending the streak.
Focusing on big payers
I think streaks of rising dividends can be a valuable sign of a company's strength, but I'm not satisfied with token raises. So I set out to find five stocks that have boosted their payout by at least 10% in each of the past five years. Here are some of the companies I found.
IBM (NYSE: IBM )
Among dividend stocks, IBM often gets little attention because its yield is fairly low. At just 1.6%, IBM has fallen behind a number of long-time dividend holdouts in the tech sector that have boosted or even initiated dividends at higher yields.
But IBM deserves praise for having transformed its business strategy from low-margin hardware to high-margin services, and as it's firmly on track to meet its five-year plan, IBM has good prospects for the future. And with 10%-plus increases every year, IBM's five-year dividend growth of 19% shows that the company is on the right track for income-seeking investors as well.
Walgreen (NYSE: WAG )
Walgreen has also had a long string of success with its dominant chain of drugstores. Although the company raised controversy in a spat with Express Scripts earlier this year, Walgreen has resolved that dispute and is now seeking to regain ground lost to its competitors.
Walgreen sports a 3% dividend yield, well above the S&P 500's average. Its 24% average annual dividend growth over the past five years demonstrates its commitment to healthy dividends, as well as healthy customers.
Yum! Brands (NYSE: YUM )
Yum! is one example of a stock that offers both growth and income opportunities. With its ambitious march into emerging markets, Yum! has done one of the best jobs in bringing its U.S. store concepts to foreign markets.
Yum!'s stock has had an impressive run over the past five years, and the company has done a good job of making sure its dividend has kept the pace, raising its payout at a 20% average clip since 2007. Even better, the company added another 18% hike just yesterday, boosting its forward dividend yield to almost 2%.
Lockheed Martin (NYSE: LMT )
Under tough budget conditions, it's hard to believe a defense contractor could feel comfortable boosting dividends substantially. But Lockheed has done exactly that, with solid double-digit increases every year adding up to an average 23% annual increase since 2007.
Obviously, defense budgets remain a concern. But with its vital programs, Lockheed hopes to avoid the cuts and emerge stronger than ever.
Stryker (NYSE: SYK )
Medical devices have become increasingly important as the U.S. population ages, and with its orthopedic implants and other vital medical equipment, Stryker is poised to benefit from shifting demographics for decades to come.
Until recently, the company paid only an insignificant dividend. But with 30% average gains since 2007, Stryker's yield now stands at a respectable 1.5%.
Earn your payout
To choose the right dividend stocks, you have to make some tradeoffs. If you're willing to accept yields that aren't the best in the business in exchange for the possibility of much larger dividends down the road, these five stocks are worth a closer look.
They're not the only dividend stocks worth looking at, though. If you're looking for some other dividend ideas, consider nine names in a free report by The Motley Fool's expert analysts: "Secure Your Future With 9 Rock-Solid Dividends." Tens of thousands have requested access, and you can download the report today at no cost. To get instant access to the names of these nine high-yielders, simply click here -- it's free.