Image source. Getty Images.
Owning a stock that can appreciate in value over time is nice, but a stock that can both appreciate in value and pay you is even better. Imagine a stock that, like clockwork, paid out cash to shareholders every quarter. Even better, what if these cash payments increased every single year for decades?
These wonderful investment vehicles really do exist. They're called dividend stocks.
Here are two stocks in two different industries that have seen both their share prices and dividends increase during the past five years: Johnson & Johnson (JNJ +0.21%) and McDonald's (MCD 1.03%).
Johnson & Johnson
|
Company |
Share Price |
Annual Dividend Payments |
Dividend Yield |
5-Year Compound Average Dividend Growth |
|---|---|---|---|---|
|
Johnson & Johnson |
$121 |
$3.20 |
2.6% |
2.8% |
Data for chart retrieved from Reuters and Morningstar. Chart source: Author.
Johnson & Johnson's dividend has increased at a moderate rate of 2.8% annually during the past five years, in line with the company's revenue and EPS growth during this period, which has increased at about the same rate. But while the dividend growth is slow compared to some dividend stocks, Johnson & Johnson investors can benefit from a meaningful dividend yield of 2.6% and the likelihood of more dividend growth ahead.
Importantly, Johnson and Johnson still has room for significant dividend growth in the coming years since the company's payout ratio, or its dividend payments as a percentage of its earnings, is just 55%. Indeed, dividend growth is picking up recently. In April, the company announced a 6.7% increase to its dividend.
Finally, when it comes to offering consistency to dividend investors, Johnson & Johnson is a standard setter. The company has increased its dividend for 54 years straight.
McDonald's
|
Company |
Share Price |
Annual Dividend Payments |
Dividend Yield |
5-Year Compound Average Dividend Growth |
|---|---|---|---|---|
|
McDonald's |
$120 |
$3.56 |
3% |
8.8% |
Data for chart retrieved from Reuters and Morningstar. Chart source: Author.
McDonald's 1.1% and 0.9% compound average growth in revenue and EPS during the past five years, respectively, may make Johnson & Johnson's growth for these same metrics look fast, but McDonald's still has Johnson & Johnson beat when it comes to dividend growth. McDonald's dividend has increased by an average of almost 9% annually during the past five years.
It's worth mentioning, however, that McDonald's dividend hikes have slowed recently. In November, the company boosted its dividend by a more moderate 5%. The slower dividend growth is likely due to the fact that McDonald's payout ratio has increased from around 50% five years ago to above 70% today, as dividends have grown faster than revenue and earnings. A higher payout ratio gives McDonald's less wiggle room for further increases if the company faces any challenges in the future that could hamper earnings.
But, like Johnson & Johnson McDonald's crushes it when it comes to consistency. McDonald's has increased its dividend every single year since it was first initiated 1976, rewarding dividend investors handsomely.
While past performance certainly doesn't guarantee future results, investors should take note of the consistency of these two companies' dividend increases over the years. As leaders in their respective markets, both Johnson & Johnson and McDonald's have the staying power required to continue paying out dividends for years to come.
For investors looking for both meaningful dividend yields, reliable streams of quarterly dividend payments, and the potential for both share price and dividend growth over the long haul, Johnson & Johnson and McDonald's are worth a closer look.
