Whether you're young and just getting started investing, or have put it off for years, dividend stocks can be a fantastic way to build your portfolio. Whether they are the focus of your investing, or simply part of a bigger strategy, dividend stocks can make a huge difference in how well -- or how poorly -- your portfolio returns will be.
With that in mind, we reached out to three of our contributors who know a few things about dividend stocks and asked them to suggest a company that's perfect for beginning investors looking for dividends. They came up with healthcare giant Johnson & Johnson (JNJ -0.56%), athletic footwear and apparel maker Nike Inc (NKE -1.12%), and credit card and lending stalwart American Express Company (AXP 3.31%).
Surprisingly enough, none of these stocks are high yielders, but they all have a surprising characteristic in common -- dividend growth -- which makes them ideal for new investors. Keep reading to learn how these dividend stocks can help you get ahead and stay there.
The bluest blue chip of them all
Brian Feroldi (Johnson & Johnson): Investors who are new to dividend-paying stocks should probably start out by owning a few industry giants that have a long history of increasing their payouts. If that sounds like a winning strategy to you, then I'd suggest starting with healthcare conglomerate Johnson & Johnson (J&J).
Johnson & Johnson might be best known for its consumer brands like Band-Aid, Tylenol, and Johnson's Baby, but those products are just the tip of the iceberg. J&J actually counts more than 250 operating companies in its empire that sell tens of thousands of products across the globe. When combined, these businesses produced more than $71 billion in total revenue last year.
To help investors wrap their heads around the company's vast empire, J&J's management team divides its business into three main operating units: consumer products, medical devices, and pharmaceuticals. While all three of these segments remain highly profitable, the division that interests me the most is its pharmaceutical segment.
The company currently counts five drugs that are growing fast and are already producing more than $1 billion in annual revenue. What's more, the company expects to have at least 10 more blockbuster drugs on the market by 2021. That should keep the company's top and bottom lines growing from here.
Given J&J's healthy growth prospects, I think it's highly likely that the company's 54-year-long streak of higher dividend payments will continue from here. When adding in J&J's above-average dividend yield of 2.5%, you perhaps will understand why I think this is such a great stock for newbies to consider.
Dividends, growth, and industry leadership
Steve Symington (Nike): Beginning investors can most often appreciate global industry leaders, dividend payers, and easy-to-understand businesses with a long runway for growth. I think we can safely check -- or swoosh, if you prefer -- all those boxes with athletic apparel and footwear juggernaut Nike.
Nike's revenue last quarter alone climbed a solid 5%, to $8.432 billion, and would have increased 7% had it not been for foreign-currency exchange. And its bottom line is growing much faster: Net income rose 19.1%, to $1.141 billion, and earnings per share climbed 23.6%, to $0.68. The latter was bolstered by share repurchases made under Nike's ambitious four-year, $12 billion buyback authorization, approved in late 2015.
Over the longer term, Nike maintains a goal of increasing annual revenue to $50 billion by the end of fiscal 2020 -- up from estimates for just over $34 billion this fiscal year -- and for maintaining growth in earnings per share in the mid-teens percent range over the same period.
Shares are currently trading at a reasonable (given its bottom-line growth) 20.8 times this year's expected earnings. For investors willing to buy now and reinvest Nike's dividend, which yields 1.4% at today's prices, Nike stock is poised to continue delivering market-beating returns for years to come.
Putting your best asset to work in this long-term trend
Jason Hall (American Express Company): New investors can do incredibly well by focusing on dividend growth, and not necessarily high yield. The fact is, time in the market is the new investor's most powerful asset, and one of the best dividend growth stocks of the past 30 years -- American Express -- is in a great position to be one of the best dividend growth stocks over the next 30 years, too.
In 1986, AmEx paid out about $0.23 per split-adjusted share in dividends. This year, it will pay out $1.28 per share, a 454% increase in the dividend.
Here's how powerful that is in terms of building wealth. In 1987, AmEx shares traded for around $11 and paid a 2% yield. But over the years, the steady growth in the dividend means that investors who held on to their shares now get an amazing 12% yield on that original investment today. That's set to keep going up as AmEx's dividend continues to grow.
Looking forward, American Express is in a solid long-term position. The world's middle class is getting bigger and wealthier, and electronic payments are becoming mainstream in the developing world. There will be more competition, but with its potential immense growth opportunity, AmEx could reward new investors going forward the same way it has rewarded investors over the past few decades.