Finding dividend stocks that will last for the long term can be difficult in a market where companies are in and out of favor at the drop of a hat. But some companies have built businesses that are not only made to last, but have the cash flow to hand out reliable dividends for years to come.
We put together our top stocks that are dependable enough to pay a dividend well into the future. At the top of the list are Starbucks Corporation (NASDAQ:SBUX), Sherwin-Williams (NYSE:SHW), and Apple (NASDAQ:AAPL).
A pick-me-up for your portfolio
Jeremy Bowman (Starbucks): If you're looking for a combination of growth and dividends, it's hard to beat Starbucks Corporation. The coffee king started paying dividends in 2010, and has given investors a robust increase each year since, lifting the payout by more than 20% per year. That means it now pays investors five times more in dividends than it did just seven years ago.
Starbucks' dividend yield of 1.7% may not turn any heads today, but the company is primed to be a top dividend stock in the years ahead. Not only has it shown a commitment to steady dividend raises, but it also has a promising growth path ahead of it with key opportunities in China, digital initiatives like mobile ordering and rewards, and through the new Reserve Roasteries and cafes. The company expects to open more than 2,000 stores a year for the next five years, and looks primed to eventually become the biggest restaurant chain in the world by location count. It projects earnings-per-share growth of 15%-20% over the next five years as well.
Not only that but its dividend payout ratio is still less than 50%, meaning it can afford to keep raising its dividend by 20% or so, even if earnings do not grow as fast.
Long-term investors know that dividend growth matters more than the current dividend yield. Starbucks has the track record and growth opportunities to deliver for dividend investors over the next 10 years.
More exciting than watching paint dry
Demitri Kalogeropoulos (Sherwin-Williams): Sherwin-Williams shareholders received a weak dividend boost this year when the paint specialist raised its payout by just 1% to $0.85 per share. That was a big departure from the 20% (or higher) increases that investors received in each of the prior two fiscal years.
Sherwin-Williams has good reasons to be conservative right now, as it is concluding its $11 billion purchase of Valspar. This acquisition has been in the works for over a year and promises to double the company's sales footprint while pushing profit margins further into record territory.
It's not as if Sherwin-Williams' core business needs much help, though. In fact, sales jumped 7.5% last quarter thanks to a 12% spike in the paint store segment. At the same time, higher prices supercharged earnings growth and lifted segment margins to 16.8% of sales from 15.7% a year ago.
The Valspar acquisition should reduce earnings by about $0.40 per share this year following an $0.86-per-share hit to 2016's results. The merger is also adding a hefty chunk of debt to Sherwin-Williams' books.
Yet management aims to use its significant earnings and free cash flow generation to pay that leverage down while maintaining its dividend growth streak. The company has, after all, raised its payout for 38 consecutive years. Considering its improving operating trends and strong track record at integrating acquired businesses, I'm expecting this Dividend Aristocrat to quickly return to a pace of robust dividend gains following 2017's near-pause in income growth.
Travis Hoium (Apple): Every dividend needs to have a company that generates consistent cash flow behind it. And no company generates cash like Apple.
Over the last five-and-a-half years, Apple has returned $211.2 billion to shareholders through dividends and share buybacks, and it has nearly $90 billion left in the program. On top of what's being returned to shareholders, it had $257 billion in cash on the balance sheet at the end of the fiscal second quarter and is generating over $50 billion in free cash flow each year.
You can see that Apple's cash generation has trended higher, spiking with the release of the iPhone 6. The power of its business model is that customers get locked into the ecosystem once they start purchasing apps and media content, making switching costs high when it's time to upgrade their phone or computer. And it's using that position to expand into adjacent markets with the HomePod, AirPods, and the Apple Watch.
Apple is a solid dividend today but with just a 1.75% dividend yield, there's plenty of room for the dividend to move higher. That's why this is a stock that I think is great to own for tomorrow.
Demitrios Kalogeropoulos owns shares of Apple, Sherwin-Williams, and Starbucks. Jeremy Bowman owns shares of Apple and Starbucks. Travis Hoium owns shares of Apple. The Motley Fool owns shares of and recommends Apple and Starbucks. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.