I won't say that investing in dividend stocks is the only way to build wealth in the stock market, but it is a pretty good way to do it. For investors out there who have a very, very long investment time horizon, buying, holding, and letting dividends reinvest themselves can create significant gains.
If you are looking for some solid dividend investments that fit a buy-and-hold mentality, maybe you should check out Verizon Communications (VZ 0.83%), Terra Nitrogen Company LP (NYSE: TNH), and Boeing (BA -0.03%). Here's a quick rundown of each of these stocks and why it could make for a compelling long-term dividend investment.
Delivering data and dividends
Let's face it, data, and the need to access it at any given moment, has solidly entrenched itself into our lives. Between increased use of data on smartphones and other mobile devices, and cord-cutters relying more on their internet connections for entertainment than on traditional TV packages, there is still an immense opportunity for even the largest communications providers. When a company has the pricing power that Verizon Communications sports, it can make for an extremely compelling investment.
Despite the fact that some of Verizon's smaller wireless competitors are starting to offer incentives such as unlimited data plans, Verizon continues to have the lowest churn rate among all the major wireless carriers. This kind of sticky business model, combined with its even stickier wired FiOS business, has been a major factor in making Verizon a cash cow. Last quarter alone, the company generated $5.4 billion in cash from operations. It's not exactly cheap to remain the top communications provider in the U.S., however: The company has spent more than $7 billion in the first half of 2016 on capital expenditures.
Having the ability to spend that much on its network, though, is what makes Verizon a compelling investment for the years to come. It's extremely unlikely that data usage would go down, and a robust network infrastructure coupled with strong pricing power should give Verizon a major growth platform for several years to come and further support its dividend that yields 4.6% today.
If you only want a dividend
If you are interested in just dividends and aren't concerned with rapid dividend growth, then perhaps it's worth taking a look at Terra Nitrogen Company. It consists entirely of one nitrogen fertilizer manufacturing facility, so there isn't much growth baked into the investment thesis for this company. What makes it compelling, though, is its ability to generate lots of cash that it pays out to its unitholders.
There are two things that work in Terra Nitrogen's favor in this regard. One is that the company is one of the lowest-cost producers of nitrogen fertilizers. Even though fertilizer prices are at their lowest level in a decade, Terra Nitrogen is still generating a 56% gross margin on its combined ammonia and urea sales. This advantage should work in its favor as many more-expensive fertilizer producers get squeezed out of the market.
The other big advantage is the way the business is structured. It's a variable-rate master limited partnership, so it pays out all available cash at the end of each quarter. With no long-term debt on the books, all of the cash generated each quarter goes toward some small maintenance capital needs or into investors' pockets.
With such a high yield and little in terms of production growth in the future, all of the gains on an investment in Terra Nitrogen will come from those quarterly distributions. With a yield today of 9.1% and a good chance that prices of nitrogen-based fertilizers will rise over time, Terra Nitrogen looks to be a compelling dividend investment.
A payout that still has a chance to soar
Two big knocks on Boeing today are that total commercial aircraft orders may not be as robust as they have been over the past couple of years and that some of the aircraft maker's most profitable plans over the years -- most notably the 777 -- are in a decline that its expensive 787 Dreamliner will have to make up for. Based on these two points, you can see why some investors might be concerned. If you look beyond these factors, though, there are reasons to believe that this company still has plenty of opportunities to grow its bottom line and payout to shareholders.
Let's start with orders for new planes drying up. That is certainly true, especially in the case for older planes such as the 747. One look at the company's current backlog, though, and you can see that Boeing has plenty of work ahead of it over the years that it can handle a decline in orders for a while. Its backlog for the 737 alone is enough for the company to grow its production from 42 planes a month today to 57 planes a month in 2019 and still have plenty of work left over. It also helps that over this time frame, its 787 Dreamliner will increase production and start to recover the cash losses from its earlier deliveries. These two drivers should help to more than make up for the declines in its other planes and will even give the company a cushion until it starts delivering its 777 replacement, the 777X.
This gives the company a runway of more than half a decade. By then, it's not hard to imagine another wave of plane orders coming in. In the meantime, those fulfilled orders will generate loads of cash that will give Boeing the ability to grow its already impressive payout that yields 3.2% today.