"Do you know the only thing that gives me pleasure? It's to see my dividends coming in."
-- John D. Rockefeller
There's a reason one of the world's wealthiest men loved dividend stocks so much. Aside from the extra income, dividends, when reinvested, can grow quickly over the years thanks to the power of compounding, bringing you rich returns.
Great dividend stocks, though, go beyond high yields -- they're also stable and growing. That's why you simply can't ignore Sherwin-Williams (SHW 0.18%), Illinois Tool Works (ITW -0.71%), NextEra Energy (NEE 0.25%), and the PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD -0.68%). Here's why.
Paint can color your dividend portfolio, too
The last time you got your home or workplace repainted, did you consider making money off those paint cans? You can if you invest in paint manufacturers. Specifically, you can invest in paint and coatings specialist Sherwin-Williams.
I know a dividend yield of 1% isn't really attractive, but it's hard to ignore Sherwin-Williams when you realize that it has not just paid but also increased its dividends every year since 1979, more than doubling it in the past six years or so. What matters even more is that Sherwin-Williams increased its dividend even during times of crisis like the housing bubble. There can be no greater evidence of how reliable this dividend stock is.
Sherwin-Williams' steady profitability and dividend streak can largely be credited to its brand power. Sherwin-Williams, Dutch Boy, and Pratt & Lambert are just some of its brands that have become household names. The company's strategy of setting up its own stores to read the consumer's pulse instead of relying on chain stores for sales has clearly paid off. Just recently, Sherwin-Williams reported 7.5% year-over-year growth in same-store paint sales for is first quarter, continuing its winning streak from fiscal 2016, when its same-store sales grew 5%.
With Sherwin-Williams upgrading its full-year earnings guidance, sitting on free cash flows worth more than $1.3 billion, and being on track to acquire Valspar to become the world's largest paints and coatings company, this is one heck of a stock no dividend lover can afford to ignore.
You won't regret owning this dividend dynamo
As boring as Illinois Tool Works' business might be, you simply can't help getting excited about the stock's dividend record and potential. Illinois Tool Works is a megaconglomerate that makes a wide range of equipment and components serving several industries, including automotive, food equipment, oil and gas, healthcare, construction, packaging, and electronics. Managing such a diverse portfolio is surely no cakewalk, but Illinois Tool Works has found strength in its 80/20 business strategy: Each of its business segments focuses on the key 20% of its customers or products that generate 80% of its sales.
This intent focus and diversity has proved to be a win-win -- Illinois Tool Works has generated steady profit and cash flow over the years. It's rewarded shareholders with annual dividend increases for more than 50 years now, with dividends growing at a compounded average clip of 14% since 2012.
Again, don't let Illinois Tool Works' small dividend yield of 1.9% deter you, because its dividends possess tremendous growth potential. And I don't say that based on just its dividend history. Illinois Tool Works recently delivered strong Q1 numbers, raised its full-year EPS guidance, and expects to convert 100% of its net profits to free cash flow this year. Considering that it ended fiscal 2016 with nearly $2 billion in FCF and paid out just about $821 million in dividends, there's a lot of legroom for higher dividends for several years to come.
Dividends from renewable energy, anyone?
NextEra's appeal as a dividend stock lies in its business structure. As a yieldco, NextEra buys and operates distressed, high-return assets and passes on a big chunk of its profits to shareholders in the form of dividends. The company has grown its dividend at an annual compounded clip of 9% since 2005.
I believe NextEra's growth potential lies in its focus on clean energy. Mind you, NextEra isn't just any other company in the clean-energy space. Together with its affiliates, NextEra is the world's largest solar and wind energy provider and is also among the largest nuclear power operators, with a total generating capacity of roughly 45,900 megawatts. Its subsidiary, NextEra Energy Resources, added a record 2,500 MW of wind and solar projects in 2016.
Management expects to grow its adjusted earnings per share by 6%-8% through 2020. The company has historically grown its dividends at the same rate as adjusted earnings, so that should give income investors a fair idea about what to expect going forward.
With NextEra offering a nice 2.9% yield and trading well below the industry and its own five-year average valuation at 16 times trailing earnings, it's a great time to consider this dividend growth stock.
A basket of incredible dividend stocks
We've discussed some great dividend stocks so far, but what if you could buy a basket of diversified high-yield dividend stocks at one go? Sounds like a deal, right? My next pick is just that -- the exchange-traded fund known as Invesco's PowerShares S&P 500 High Dividend Low Volatility Portfolio.
This ETF is unique in that it invests in high-yield dividend stocks that are less volatile. It does so by tracking the S&P 500 Low Volatility-High Dividend Index, which comprises the 50 "least-volatile high-dividend-yielding" stocks in the S&P 500, based on the standard deviation of daily prices during the trailing 252 trading days. Simply put, the highest-yielding stocks that were also the least volatile make it to the final 50. For any income investor, high yield and low volatility is a winning combination. Check the ETF's total returns versus the S&P 500 in the past three years:
What I also like about the PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF is that it gives exposure to nearly every sector, the largest being utilities, real estate, and consumer staples. Among stocks, Iron Mountain and Welltower Inc. are its two top holdings currently. With an SEC-defined yield of 3.79% and its inherent low volatility, this ETF is as good as it can get for dividend lovers.