If you're looking to buy a dividend stock for the long haul, a decades-long track record of dividend payments is a must. A company that has paid a dividend for decades, and ideally raised it each year, is likely to maintain that streak far into the future.
We asked three of our contributors to discuss dividend stocks that you should feel comfortable holding for the rest of your days. Here's why Sherwin-Williams (SHW -0.45%), 3M Company (MMM 0.39%), and Lowe's (LOW 0.03%) are unlikely to disappoint.
Boring is beautiful
Brian Stoffel (Sherwin-Williams): If you want to buy a dividend-paying stock that's a lock to pay you for life, there are three traits to look for: an industry that's not ripe for disruption, a company with a huge moat, and tons of free cash flow to continue that payout.
In Sherwin-Williams, I believe investors have all three. While I could certainly be proven wrong, paint doesn't seem to be a field that's easy to disrupt via technology. People have been using it for centuries and there's little reason to believe that will change anytime soon.
Furthermore, with the pending acquisition of Valspar (VAL), Sherwin-Williams will have dominant market share globally. According to Paint & Coatings Industry, the combined entity will be the second largest globally, behind only PPG Industries (PPG -0.58%). The combination of the two will allow Sherwin to realize increased margins because of distribution synergies while also passing on incremental increases in prices.
On the dividend front, it's hard to find a better player than Sherwin-Williams. The current yield of 1% might seem puny now, but it's very strong. Payouts have increased every year since 1979; over the past five years, the dividend has climbed by over 17% per year. And perhaps most importantly, management only used 23% of free cash flow to pay the dividend over the past 12 months -- meaning there's tons of room for growth, perhaps for the rest of your life.
Not going anywhere
Tim Green (3M Company): If a company has paid dividends uninterrupted for the past 100 years, there's a pretty good chance those dividend payments will continue decades into the future. 3M, which makes a vast array of products ranging from Scotch tape to drug delivery systems, has not only paid a dividend for the past century, but it's also increased its dividend for 59 consecutive years.
3M is not a cheap stock, trading for 24 times earnings, and its dividend yield of 2.4% isn't the highest in the world. But the company's profitability is impressive and consistent. Gross margin typically hovers around 50%, and the company managed an operating margin of 24% in 2016. Many of its products are consumable and have strong brands, meaning that customers come back again and again.
There are no guarantees in this world, and 3M could certainly make major mistakes down the road that threaten its ability to pay a dividend. The company does have a decent amount of debt, $10.7 billion at the end of 2016, a number that has been growing over the past few years as it spent billions on share buybacks. Investors should keep an eye on the balance sheet.
3M stock probably won't set the world on fire, given its valuation. But for those looking for a dividend that will likely stand the test of time, 3M is a good choice.
Building wealth with building supplies
Cory Renauer (Lowe's Companies, Inc.): This stock has ridden the housing recovery wave to heights unimaginable in the depths of the Great Recession. Despite a recent pullback, shares have risen about 213% over the past five years, and its legendary dividend has more than doubled over the same period.
While explosive growth has made Lowe's one of the best dividend stocks among big-box retailers in recent years, it's also a stock you can reasonably expect to keep paying you throughout your retirement years. Unlike many unfortunate retailers, this business appears to be Amazon-proof. The thought of someone else selecting the lumber I'll be working with is a non-starter, and it looks like I'm not alone. Lumber and building materials generate more revenue for the company than any other product category.
Sure, the next recession will probably result in another temporary stock price beatdown, but you should be able to rely on steadily rising dividend payments no matter what the global economy throws at Lowe's. It's been 54 years since it went more than a year without boosting its payout, and there's plenty of room for more increases in the years ahead. In spite of raising the dividend about 119% over the past five years, making payments is still a doddle for the company. Over the past year, the company has used just 36.5% of profits to meet its dividend obligations.
At recent prices, Lowe's offers a paltry 1.8% yield, but the pace of increases has been awfully swift. Maintaining such a pace could bring the yield on your original investment to an acceptable level in a few short years, which isn't bad for a stock you intend to hold for the rest of your life.