Some stocks need to be reassessed often. But shares of high-quality companies, especially those with long histories of paying dividends, can be largely bought and ignored. Here's why Waste Management (NYSE:WM), McDonald's (NYSE:MCD), and Coca-Cola (NYSE:KO) are three dividend stocks that investors don't need to babysit.
There's gold in garbage
Beth McKenna (Waste Management): Some dividend investors might overlook Waste Management because its dividend is yielding 2.3% -- which is more than the approximately 2% the S&P 500 yields but falls short of the yield some might like to see. For those investors, however, whose main concern is total capital appreciation (stock-price appreciation plus dividends) and dividend growth potential, Waste Management makes a great dividend stock that doesn't need babysitting.
Waste Management is North America's largest waste-management company, providing the full range of services from collection to disposal for residential, commercial, industrial, and municipal customers. The company provides critical services that will always be needed no matter the economic environment, and its leadership position in an industry with high barriers to entry helps insulate it from price competition.
"One man's trash is another man's treasure" is an appropriate saying when it comes to Waste Management. The stock has been a treasure to investors, returning 203% over the 10-year period through Feb. 23 -- double the S&P 500's 101% return. Investors can probably look forward to more golden times, as analysts estimate that Waste Management will grow earnings per share at an average annual rate of 10.6% over the next five years.
Moreover, there's plenty of room for dividend growth, as the company's cash dividend payout ratio (dividends paid divided by free cash flow) is 44.8% for the 12-month period through the end of 2016. A ratio of about 60% to 65% or less generally suggests that a company can comfortably afford its dividend, and investors can probably look forward to continued dividend increases.
Burgers and fries
Tim Green (McDonald's): While fast-food giant McDonald's is facing intense competition, particularly from chains such as Chipotle Mexican Grill that promise higher-quality meals, the company has shown it's capable of adapting. McDonald's announced sweeping changes in August, including the removal of artificial preservatives from many of its menu items, new buns without high-fructose corn syrup, and a commitment to move to antibiotic-free chicken.
McDonald's is never going to be a leader when it comes to food quality, but the company is doing what's necessary to maintain its status as the world's leading fast-food company. Beyond food quality, initiatives such as all-day breakfast have been helping to improve sales. McDonald's is also testing various concepts, including self-order kiosks and table service, in an effort to reinvent itself for an era where fast, cheap food isn't a big enough draw on its own.
McDonald's has been paying a dividend since 1976, raising that dividend every single year. It's been able to do that by adapting when necessary. But McDonald's is not a stock that must be reanalyzed every quarter. An occasional checkup should suffice for this solid dividend stock.
Drink in the greatness
Rich Duprey (Coca-Cola): There's a reason investing legends such as Warren Buffett have invested in Coca-Cola over the years: It's nearly the perfect investment. Oh, sure, its stock will rise and fall over time, and even now with soda consumption on the decline, it may at times appear woozy, but year in and year out the beverage giant is a consistent performer. The Motley Fool's co-founders, David and Tom Gardner, even once referred to it as the First Federal Bank of Coca-Cola because of its strength, stability, and steadfastness.
That applies to its dividend payments, too. Through good times and lean ones, Coca-Cola has consistently paid its dividend, and for 55 years straight it has increased the payout to shareholders. It just did that again two weeks ago, raising the quarterly dividend 6% from $0.35 to $0.37 per share, building on its record of returning $6 billion to shareowners last year through dividend payments and bringing to $35 billion the total amount given back through dividends since 2010.
Why investors needn't worry about this Dividend Aristocrat is that it knows how to make a good situation out of a bad one. For example, despite a sharp decline in soda consumption, it has remained very profitable in the business by changing its packaging to push smaller container sizes. Volumes may decline, but profits are higher.
It's also successfully diversified into other beverages, such as bottled water, tea, and juice, as well as promoting options with reduced sugar, such as its Coca-Cola Zero Sugar that it says grew unit case volume by double-digit rates in Western Europe in the fourth quarter.
No stock could (or should) be a "set it and forget it" investment, but if there is one company that comes closest to be the ideal of not having to babysit and worry over, Coca-Cola would be it.
Beth McKenna has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Chipotle Mexican Grill. The Motley Fool owns shares of Waste Management. The Motley Fool recommends Coca-Cola. The Motley Fool has a disclosure policy.