The only thing more attractive to an income investor than a generous dividend is a generous dividend that will stick around and keep growing over the long run. So we asked a panel of the Fool's top contributors to share their best ideas for dividend stocks with serious staying power.
Read on to see why they picked household names PepsiCo (PEP -2.49%), International Business Machines (IBM 0.52%), and Starbucks (SBUX -0.23%).
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More than pop
Keith Noonan (PepsiCo): With a 45-year history of annual payout increases, a dividend that's yielding 2.8%, and a great business to boot, PepsiCo has one of the best returned-income profiles in the consumer-goods sector.
The company's stellar brand portfolio and distribution advantages give it a significant moat, but it's still worth considering some risk factors. The biggest threat to Pepsi's dividend is the possibility that demand for its fizzy beverages will decline to the extent that it puts significant pressure on the company's cash flows. While that's an outcome that deserves at least some consideration, it also seems to be an unlikely one. PepsiCo is quite diversified, and its strength across geographic and product segments should help ensure that it continues to be in a position to return cash to shareholders.
Last quarter saw 48% of North American sales come from its Frito and Quaker segments, and a greater portion of its beverage sales are also coming from healthier offerings such as its Naked Juice and Tropicana brands. While the food and beverage giant still generates most of its sales domestically, 29% of revenue came from international markets last quarter, and there's still significant growth potential outside North America despite a recent slowdown.
The company is also making significant progress on creating a more efficient business, and it has the opportunity for continued supply-chain and automation improvements that will benefit earnings and cash flow. So even with shares trading near lifetime highs, PepsiCo looks like a dividend stock that's worth buying and holding for a lifetime.
A caffeinated dividend
Jordan Wathen (Starbucks): It may be one of the most impressive restaurants in the world, if you can call it a restaurant.
Few companies can match Starbucks' ability to sell a high-margin product to customers eager to pay full price, and then some, for a quick snack or beverage. In testament to its ability to get into its customers' wallets, Starbucks is testing upsells such as ice made of coffee rather than water (just $0.80!) and is taking more shelf space in the grocery store thanks to a partnership with Pepsi.
Last year, the company detailed a five-year plan to build out as many as 12,000 new stores, roughly boosting its store count by half. China, its largest market outside the U.S., is expected to lead its growth plans, as the company noted that it could open as many as 5,000 locations there over the next five years.
Its high-return model allows it to reward shareholders while investing in new locations. A targeted payout ratio of 40% to 50% of annual earnings should bode well for shareholders, who have enjoyed dividend increases of at least 25% per year since 2013, making up for today's relatively low yield of 1.7%.
Investors will have to be comfortable paying up for a cheery consensus, as shares trade for more than 30 times earnings. But store growth and margin expansion should pave the way for double-digit earnings growth for years to come, which should fuel its dividend growth and water down its high valuation.
These Big Blue dividends aren't going away
Anders Bylund (IBM): If you want staying power, IBM has you covered. The computing giant has been around for over a century, wading through various market upheavals and world wars to deliver shareholder value for the very long run.
Even better, Big Blue has been paying quarterly dividends without interruption since 1913. The payout rate may have held steady at the same level for a few years every now and then, and even fallen when IBM needed that cash for other purposes, but the checks have been coming for 104 years now.
But wait -- there's more.
IBM has redoubled its commitment to a strong dividend policy in recent decades. The company has gone as far as raising new debt to finance continued dividend growth in a few spots. Here's the result:
IBM Dividend data by YCharts
Coupled with Big Blue's consistently huge share buybacks, IBM sent a cool $10 billion of cash right back to investors in the past four quarters. The dividends and buybacks were powered by $11.5 billion of free cash flow. And that's nothing special -- just par for the course.
Saving the best for last, IBM shares are trading at a generous discount these days. You can pick up shares for less than 13 times trailing earnings or 10 times enterprise value to EBITDA profit. Many analysts and investors worry that IBM might be unprepared for the current shift toward cloud computing, so share prices stay low. But dividends keep growing, so you can lock in dividend yields at historic highs these days.
Yes, you have to bet that Wall Street is wrong about the company's future -- but what else is new? This dividend is fully funded by torrential cash flows, Big Blue itself has staying power for the ages, and the stock probably belongs in your portfolio.
