Income investors love dividend stocks because they combine both current income and growth prospects. However, you can't just buy any dividend stock. Instead, you need the stocks with the most potential for future gains. Below, you'll find out how McDonald's (NYSE:MCD), Target (NYSE:TGT), and Procter & Gamble (NYSE:PG) have not only managed to give investors yields of 3% or more but have also provided ongoing growth to longtime investors.
McDonald's stays golden
McDonald's has put together an impressive performance, both in terms of dividend growth and in total return. Over the past 45 years, the stock has produced average annual returns of more than 13%, and the fast-food giant has done so even in the midst of a transformation in the way that Americans eat. Despite the rise of fast-casual restaurants that have challenged the business model that McDonald's and its fast-food peers have followed for decades, the company known for its golden arches has taken steps to reach out to customers and meet their changing needs. Most recently, the move to offer all-day breakfast has led to renewed excitement about the company and the stock, and McDonald's hopes to keep moving forward with new momentum.
McDonald's currently yields 3.2%, which is above the average for stocks in the Dow Jones Industrials. In addition, McDonald's has raised its annual dividend every year for 41 straight years, giving income investors the stability they want to see. Given its recent success, McDonald's looks like it has plenty of room to keep growing in the future.
Aim for the Target
Target is a well-known big-box department store retailer that has done a good job of finding a balance within its industry. Rather than simply seeking to cut prices as far as possible, Target has sought to justify slightly higher price points by making smart partnerships with various well-known outside suppliers, especially in the fashion industry. To a greater extent than most other retail giants, Target has exploited the power of exclusive branding opportunities to drive traffic and build a more upscale atmosphere in its stores than some of its closest rivals. Target's long-term vision has helped produce average annual returns of nearly 15% over the past 35 years.
Target also carries a 3.2% yield, even after its recent run-up following an extremely strong earnings report. Moreover, Target's dividend history features 49 straight years of annual dividend increases, demonstrating its commitment to payout growth. Investors are hopeful that the holiday season will be good for Target, helping to add to its already impressive positive momentum.
P&G covers the world
Procter & Gamble is a consumer giant known the world over, with billion-dollar brands like Tide laundry detergent and Crest toothpaste. The company has given shareholders 12% average annual returns over the past 40 years, and the growth that P&G has forged in emerging markets has been a major driver of its long-term success. Even though rocky economic performance in some of its markets has eaten into its growth recently, Procter & Gamble is still poised to take advantage of longer-term trends toward a greater consumer presence across the globe.
For dividend investors, one of Procter & Gamble's most attractive qualities is its 3.2% yield. A nearly unparalleled track record of 60 years of annual dividend increases doesn't hurt, either. Given just how much of a household name Procter & Gamble is the world over, the consumer products giant will have every opportunity to keep on selling the products that generate such impressive cash flow and dividend payments for its shareholders.
If you look only at yield to the exclusion of all other factors, then you run the risk of buying stocks that don't have the growth prospects you want. Instead, the highest-quality dividend stocks will offer not only income but also share-price appreciation potential that can dramatically add to your total returns.
Dan Caplinger 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.