Buying solid dividend stocks and holding them over the long term is arguably the best way patient investors can predictably generate wealth over the long term. But the task of identifying the market's best dividend stocks is easier said than done. More often than not, we find ourselves peering at past returns, wondering how much more impressive our portfolios would look had we purchased those stocks years before.
To spare you that regret in the future, we asked three top Motley Fool investors to each discuss a dividend stock that they believe investors will wish they'd purchased a decade from now. Read on to learn why they think NVIDIA (NVDA 3.65%), Tile Shop Holdings (TTSH 4.23%), and Prudential (PRU 0.52%) fit the bill.
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Don't ignore NVIDIA's past, but focus on its future
Steve Symington (NVIDIA): With shares of NVIDIA having more than tripled over the past year as of this writing, I wouldn't blame you for either wanting to take profits now or resisting the idea of buying shares of the graphics chip specialist today. However, I think we're still early in NVIDIA's long-term story.
For one, NVIDIA has invested tens of billions of dollars in recent years into bolstering its technological leadership, and the power of its chips continue to grow at exponential rates. NVIDIA only just initiated volume shipments of its new Volta GPU -- which offers a 100-fold improvement in performance for deep learning applications over its best chip just four years ago, according to CEO Jensen Huang -- to leading artificial intelligence (AI) customers last quarter.
"This is the era of AI, and the NVIDIA GPU has become its brain," Huang stated. "We have incredible opportunities ahead of us."
NVIDIA also has a knack for aggressively returning capital to shareholders; the company is on track to return $1.25 billion to shareholders through a combination of dividends and share repurchases this year alone. The company has also boosted its dividend (which yields a modest 0.3% after the recent rise) four times since it initiated the payout less than five years ago.
In the end, assuming NVIDIA continues to foster its innovative roots and maintains its leadership as deep learning and AI applications take hold, I think we'll be talking about a significantly larger company a decade from now.
A turnaround story that's set for big growth
Jason Hall (Tile Shop Holdings, Inc.): A few years back, Tile Shop was struggling. The home-improvement industry was experiencing a slowdown in sales, and this is hitting Tile Shop at a bad time. The company was dealing with scandal (an employee -- the founder and then-CEO's former brother in-law -- was found to have a hidden financial interest in a Chinese supplier), short-sellers attacking its business model, and the balance sheet was becoming bloated after years of accelerated growth faster than cash flows could pay for.
But since Chris Homeister took over as CEO in 2015, the company has paid off a significant amount of debt, earnings and margins have rebounded, and cash flows have improved:
TTS Total Long-Term Debt (Quarterly) data by YCharts.
This new conservative approach to running the business allowed for a small dividend to be implemented, yielding 1.3% at recent prices. Yet even after returning cash to investors, the company is set to accelerate store expansion at the same time. On the most recent earnings call, Homeister pointed to the nearly 30% reduction in store construction and opening costs as a key reason why. With only 130 stores, there's potentially decades of growth ahead for the company in a highly fragmented industry.
Ten years ago, Tile Shop wasn't even a public company and had only a handful of stores. Under Homeister's leadership, Tile Shop is in a great position for many years of profitable growth.
A "rock-solid" insurance titan
Chuck Saletta (Prudential Financial): Insurance and financial services titan Prudential Financial traces its roots back some 140 years. Its long time use of the Rock of Gibraltar as its corporate symbol reflects Prudential Financial's pride in its strong financial position. Despite that history and strength, it only initiated a dividend in 2002 after demutualizing near the end of 2001.
While Prudential Financial has generally increased its dividend about once a year since initiating that payment, it did cut that payment during the financial crisis to protect its strong financial position. A hallmark of a strong company interested in rewarding its owners is a commitment to a dividend that is supported by the underlying business' operations. As painful as a dividend cut can be, a cut to protect the business can be in the long-term best interests of the shareholders.
Sure enough, Prudential's dividend today has soared past where it was before that cut. Still, with a payout ratio of only around one-third of earnings, it still has room to handle the unexpected claims that are the hallmark of insurance coverage from time to time. It also has room to potentially continue to increase its dividend, which, if history is a guide, it will only do if it seems legitimately prudent to do so.
What makes Prudential likely to be a dividend stock you'd like to look back 10 years from now and be glad you own is a combination of that dividend, its solid balance sheet, and its reasonable valuation. Trading at about nine times expected forward earnings and with a debt-to-equity ratio of around 0.7, Prudential remains a company designed around a solid foundation that still looks capable of growth.
