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3 Good Dividend Stocks for a Rock-Solid Portfolio

By Dan Caplinger, Tyler Crowe, and Jason Hall – Oct 12, 2016 at 2:02PM

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These stocks have what it takes to make income investors happy.

Image source: McDonald's.

Income investors look to dividend stocks not just for their regular cash payouts but also for their growth potential. The best dividend stocks provide stability to a portfolio while also retaining the opportunity to offer share-price appreciation as well. Below, we'll look at three dividend stocks that offer a combination of attractive traits that any investors can appreciate.

Dividend growth that keeps chugging along

Tyler Crowe: The movement of goods may wax and wane over time, but one thing that hasn't changed is the most efficient way to move goods is via rail. The average revenue per ton-mile -- the most cost comparative metric for moving goods -- for rail is less than one-sixth the cost via trucks and a tiny fraction of air freight costs. Until we build some sort of Star Trek-esque transporter, rail will continue to be the most cost-effective means to move goods and will be around for decades to come. That bodes very well for Canadian National Railway (CNI 0.66%) and its 20,000 route miles of track that touches ports on all three major coastlines in North America.

Image source: Canadian National Railway.

While those competitive advantages work well for the business, Canadian National works well for shareholders by focusing on operational deficiencies such as minimized downtime in rail yards and optimized horsepower use. These sorts of things all lead to better bottom-line results that Canadian National has transformed into a strong platform for paying an ever-increasing dividend. While today's dividend yield of 1.7% isn't going to have investors jumping for joy, it has grown its dividend at a 17.7% annual rate for the past decade. If you are looking for a solid dividend with room to grow, then Canadian National should be on your list.

This stock has been recession-proof for investors

Dan Caplinger: Many investors are worried about how much longer the bull market in stocks can continue, and in the past, certain dividend stocks have stood out from the crowd in providing protection against market downturns. McDonald's (MCD 0.20%) is one of the best examples, because it was one of the few stocks that actually managed to gain ground during the terrible market year in 2008, when the S&P 500 fell by 37%. At the time, the fact that the economy had gone into recession was arguably good news for the fast-food giant, because consumers wanted to trade down from higher-priced casual-dining restaurants, and McDonald's emphasis on value meals and other low-priced options appealed to families who were tightening their purse strings.

From a dividend perspective, McDonald's has one of the best track records in the stock market. The company has boosted its dividend payout every single year for more than four decades, and its current yield of 3.3% puts it in the upper echelon of stocks in the Dow Jones Industrials. It's true that competition in the fast-food space is fierce, and McDonald's initiatives to emphasis hot beverages have pushed it into direct conflict with coffee specialists. Nevertheless, McDonald's has shown in the past that it can withstand tough times, and the stock could make a good foundation for a rock-solid dividend portfolio.

Don't throw the divvy out with the bathwater

Jason Hall: I have to admit I'm disgusted by what has happened with Wells Fargo & Co. (WFC -1.59%), and I agree wholeheartedly with my colleague and banking expert John Maxfield, that the bank needs a change of leadership at the very top. But at the same time, I'm not selling my shares, and I don't think selling now makes sense.

To the contrary, now seems like the time to buy Wells Fargo. Here's why this contrarian move makes sense to me right now:

Yes, the actions that Wells Fargo bank employees have undertaken over the past decade or so -- opening millions of unauthorized accounts in order to generate higher revenues for the bank -- is abhorrent. But the bank is moving forward to fix these mistakes, and will refund millions of dollars to customers who were charged fees related to these accounts. Furthermore, from a financial standpoint, the fallout of this huge mistake isn't likely to be much more than a blip on the radar for the company's earnings, and largely because these accounts weren't generating a lot of revenue for the bank to begin with.

At the same time, the aspect of Wells that I have admired for years is largely unaffected: its rock-solid, conservative lending practices that have allowed it to consistently ride out economic downturns in fine form, while many of its peers lost billions from bad loans. And this consistency of responsible lending is why Wells is yielding over 3% at recent prices, and one of the few big banks paying a bigger dividend today than it was before the Great Recession. 

There will surely be more repercussions from the unauthorized account scandal. But its loan business remains strong and conservative, and dividend investors would do well to consider Wells Fargo today.

Dan Caplinger has no position in any stocks mentioned. Jason Hall owns shares of Wells Fargo. Tyler Crowe has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Canadian National Railway and Wells Fargo. The Motley Fool has the following options: short October 2016 $50 calls on Wells Fargo. 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.

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