With the market setting new all-time highs, it's getting harder to find quality, high-yielding dividend stocks. But that's no reason for income-seeking investors to start wading in riskier waters like junk bonds or micro-caps. After all, stretching too far for a meaty yield will likely saddle your portfolio with a dividend cut or serious capital losses.
The good news is that some of the biggest, most proven companies around still sport healthy dividend yields -- enough to provide solid income with little risk of stock price volatility or a nasty payout cut.
Procter & Gamble (NYSE: PG ) : Yield 3.1%
As far as dividend pedigree goes, it doesn't get much better than Procter & Gamble. The consumer goods giant has sent a portion of its earnings to investors each year since 1890. And a hike this past spring made 2014 the 58th consecutive year in which P&G has raised that payout.
Lately, the stock has gotten cheaper, though, relative to the market. Shares are up only 60% over the last five years, which is well below the S&P 500's 100% rise.
That underperformance is tied to some sluggish sales growth at P&G. Organic sales ticked higher by just 3% in the last fiscal year. And while that met the low end of management's goals, it still translates into very little progress in gaining market share from competitors. As CEO AG Lafley put it in a recent conference call with analysts, "We could have and should have done better."
P&G plans to get growth back on track through a renewed focus on its core brands. That's why it has been busy whittling its portfolio down to roughly 80 of its biggest, most promising product lines. Combined with an ambitious cost-cutting program that's already delivering results, P&G's business, and its dividend, could improve nicely in the years ahead.
McDonald's (NYSE: MCD ) : Yield 3.5%
Growth has been even harder to come by at McDonald's lately. The fast food giant's comparable-store sales fell by a brutal 1.5% in the United States last quarter. Mikey D's struggles can almost all be traced to declining customer traffic trends: guest count growth has been shrinking for years as customers flock to higher-end fast casual shops like Chipotle Mexican Grill (NYSE: CMG ) :
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Still, McDonald's has huge resources at its disposal, particularly in the form of billions of dollars in cash flow which it can use for capital investments, marketing, and menu innovations. The company is also planning to refranchise a significant portion of its company-owned locations, boosting profitability in the process. A similar move sparked Wendy's (NASDAQ: WEN ) run to become one of last year's top restaurant stocks, and it should at least help McDonald's fund a strong uptick in capital returns to shareholders.
Home Depot (NYSE: HD ) : Yield 2%
In contrast to P&G and McDonald's, Home Depot's business is clearly on the upswing. Comparable store sales grew by a scorching 6% last quarter, putting the company well above competitors like Lowe's, and among the fastest-growing retailers around. Home Depot's profits have been improving at an even better pace: per-share earnings were up 22% through the first six months of 2014.
All of that success has made the stock more expensive, which has pushed its yield down. Shares are up 200% over the last five years, or double the market's rise. Still, dividend investors that buy Home Depot now are betting on its capital returns spiking higher in the years ahead. After all, the company is on track to spend $7 billion repurchasing its own shares this year. Meanwhile, its improving profitability, with return on invested capital approaching 30%, points to the likelihood for a substantial dividend hike in the near future.
More great dividend picks
The smartest investors know that dividend stocks like these 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.