Buying and holding high-quality dividend stocks has been proved, time and again, to be one of the most effective strategies to growing your nest egg. However, as with all companies, businesses that pay dividends come in all varying degrees of quality.
But a growing body of academic literature shows that owning safe, high-quality stocks produces above-average risk-adjusted returns. With that in mind, let's look at three high-quality dividend stocks -- AT&T (NYSE:T), Procter & Gamble (NYSE:PG), and Crown Castle International (NYSE:CCI).
|Company Name||Recent Price Per Share||Market Capitalization||Dividend Yield|
|Procter & Gamble||$85.55||$221.3 billion||3.1%|
|Crown Castle International||$95.36||$34.9 billion||3.8%|
The highest-yielding dividend aristocrat -- the investing nickname for a company that has increased its annual dividends per share each year for more than 25 straight years -- telecom giant AT&T provides arguably the best mix of yield and dividend growth in corporate America. Its whopping 5% payout is 2.5 times greater than the 1.9% yield from the S&P 500, and the company is poised to continue to grow its prodigious payout in the years to come.
As a quick point of semantics, AT&T's current payout ratio might seem alarmingly high at 95%. However, it's important to remember that the telecom business generates significantly more cash flow than GAAP earnings -- AT&T's cash from operations is $40.6 billion, towering over its net income of $12.6 billion -- so AT&T is still in a perfectly sustainable situation from which it can further grow its payouts.
Part of AT&T's ability to do so lies in its pending acquisition of Time Warner (NYSE:TWX). The deal should help AT&T, alongside Comcast, to lead the transition to broadcasting cable services directly to mobile devices through wireless networks. Better still, AT&T and Comcast should enjoy a considerable first-mover advantage against telecom and cable distributors alike in bringing about this shift. The deal should also help AT&T increase its average revenue per user, a common industry stat, while possibly positioning the dividend titan to bring many new customers under its fold as well.
Procter & Gamble
The past several years have been challenging for consumer-goods leader Procter & Gamble, which has seen its shares trail the market over the past one, three, and five years -- before including the effect of dividends. However, it's as a dividend stock that P&G truly shines. The company remains one of the most vaunted dividend-growth stocks in corporate America, having increased its annual payouts for 60 years in a row.
P&G controls 22 brands that generate over $1 billion in annual sales and an additional 19 brands that produce $500 million or more. Given this brand consciousness and clout with retailers, pricing power isn't the issue facing the company. Rather, the company has been plagued by sluggish top-line growth; its five-year average annual revenue growth comes in at negative 4.2%.
Looking to the future, its multi-year cost-cutting initiatives appear poised to finally bear fruit; the company pledged to shed $10 billion in costs and sell off around half of its brand portfolio to double down on its most productive products. Analysts see EPS growth returning this year and sales growth reigniting next year.
As a mature company, P&G isn't going to produce consistent sales and earnings growth; rough patches will occur from time to time. It should be noted that P&G's current 74% payout ratio doesn't give the company a ton of wiggle room to raise payouts without growing its profits. Unlike AT&T, Procter & Gamble's cash flows from operations are not several times higher than its reported profits. However, its favorable economics, 3.1% current yield, and track record of dividend increases still make it one of the safer dividend stocks on the market today.
Crown Castle International
Lastly, cell-tower and fiber infrastructure REIT Crown Castle International enjoys some of the most favorable income-producing characteristics anywhere. The beauty of the company's business model lies in its low marginal cost structure, which is just a fancy way of saying that new customers that use its communications infrastructure cost the business nearly nothing and, thus, are almost entirely pure profit for the company.
Crown Castle International should see continued demand for its services as demand for wireless network capacity surges in the years to come (see AT&T as just one example). Beyond the demands that wireless cable should create, new entrants, especially tech companies, clearly harbor ambitions to disrupt the telecom industry.
Better still, its favorable economics make it strong bet to experience considerable dividend growth in the coming years. Since it converted into a REIT in 2014 -- a legal status that requires it to pay out at least 90% of earnings through dividends -- Crown Castle International has grown its quarterly per-share payouts from $0.35 to $0.95. With a 3.8% dividend yield today, Crown Castle is a compelling income investment for those seeking safe, steady dividend appreciation.
Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Crown Castle International. The Motley Fool recommends Time Warner. The Motley Fool has a disclosure policy.