Simply stated: dividends add up.
Not only that but some companies consistently raise their dividends adding further potential for superior returns on your investment. Companies that do this for 25 consecutive years are known as "dividend aristocrats".
Food and meat company Hormel (NYSE:HRL) and apparel and footwear company VF Corp (NYSE:VFC) represent two of these companies. Let's take a look under the proverbial hood to see if these companies can grow revenue, net income, and free cash flow and retain some of that cash for reinvestment in the business. Cash represents the lifeblood of any business and the catalyst for any potential stock market returns.
Nourishment for your portfolio
Hormel sells meat and food products under names such as Hormel, Jennie-O, Skippy peanut butter, and Spam. Over the past 10 years Hormel grew its revenue, net income, and free cash flow 83%, 125%, and 180% respectively .
Looking at Hormel's balance sheet its cash and long-term debt to equity ratios clocked in at 19% and 7% respectively in the last quarter. The low long-term debt to equity ratio means less interest to choke out cash flow over the long-term. Investors should look for companies with long-term debt to equity ratios of 50% or less.
Looking at how much of a company's free cash flow gets paid out in dividends in a given full year represents the best way to gauge sustainability. Free cash flow isn't as susceptible to accounting manipulation. Last year, Hormel paid out 32% of its free cash flow in dividends. Currently the company pays its shareholders $0.80 per share per year translating into an annual yield of 1.6%
Over the past 10 years Hormel clocked in capital gains of 217%. Reinvesting dividends added another 64% to its return bringing the total to 281% and beating the S&P 500 total return of 110% during the same time.
A portfolio of brands
Over the past 10 years revenue, net income, and free cash flow grew 119%, 155%, and 83% respectively. Looking at V.F. Corp's balance sheet—the company clocked in cash and long-term debt to equity ratios of 6% and 25% respectively last quarter . Cash retention runs a little low. However, the company maintains low amounts of long-term debt. Last year, V.F. Corp paid out a frugal 34% of its free cash flow in dividends. Currently the company pays its shareholders $1.05 per share per year and yields 1.6% annually.
V.F. Corporation's capital gains registered at 426% over the past 10 years. Dividends added 157% to the company's stock market return bringing the total return to 582% and easily beating the 110% of the S&P 500 total return index.
Will the raises continue?
Hormel will likely expand its market presence in areas such as peanut butter and through innovation and acquisitions. For V.F. Corp, its popular outdoor and action sports segment and international expansion will fuel cash flow growth for the foreseeable future. These companies definitely deserve a long-term spot in your portfolio and merit closer inspection by Foolish investors looking for solid dividend-paying companies.
Even more great dividend picks
The smartest investors know that dividend stocks like Hormel and VF Corp simply crush their non-dividend paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.
William Bias has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.