Please ensure Javascript is enabled for purposes of website accessibility

3 Dividend Stocks You'll Wish You'd Bought 10 Years From Now

By Brian Stoffel, Tyler Crowe, and Timothy Green - Updated Oct 23, 2017 at 8:14PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You won't believe the difference dividends make if you give them time to compound. Here's what we mean.

We chronically underestimate the astonishing power of compounding dividend reinvestment. From 2000 to today, for instance, shares of cigarette king Altria have returned a respectable 1,080%. When we factor in the dividends the company has paid out during that time, though, the story changes considerably.

Here's what it looks like:

MO Chart

MO data by YCharts

The takeaway is simple: investing in companies that provide safe, stable and -- hopefully -- growing dividends can make a world of difference for your retirement portfolio. Below, three of our Foolish investors tell you why General Motors (GM -3.03%)Magellan Midstream Partners (MMP 0.59%), and Lowe's (LOW 0.25%).

An electric car company

Tim Green (General Motors): The market is finally starting to give General Motors some credit for its strong results. The stock has soared about 24% in the past three months, pushing it up to a post-financial crisis high. Not only is GM's business continuing to thrive, but the company's recently announced plan to launch 20 new all-electric vehicles by 2023 is changing the narrative.

The auto industry is cyclical, so GM is not a company that will post earnings growth each and every year. The good news for dividend investors is that GM's dividend is sustainable under a wide range of scenarios. A downturn similar to the financial crisis would certainly threaten the dividend, but a less severe downturn probably won't.

A car being electrically charged

Image source: Getty Images

GM stock currently yields about 3.4%, but the best part of the dividend story is the payout ratio. GM expects to produce adjusted earnings between $6.00 and $6.50 per share this year. The current quarterly dividend is just $0.38, or $1.52 over the course of a year. At the low end of guidance, just about 25% of earnings will go toward the dividend. Even a steep decline in earnings will leave the dividend unscathed.

The auto industry will likely change dramatically over the next decade. But I think buying GM today, especially if you're looking for a solid, sustainable dividend, is a great idea.

Incredible stable business + superior capital allocation

Tyler Crowe (Magellan Midstream Partners): Over the past decade, refined petroleum product pipeline company Magellan Midstream Partners has been an incredible wealth builder for its investors. Despite the simple business of moving gasoline and diesel from refineries to terminals across the middle of the country, it has soundly thumped the S&P 500 on a total return basis. Based on the company's business model and its management team, it's highly likely it will continue this pace for the next decade. 

MMP Total Return Price Chart

MMP Total Return Price data by YCharts

One critical aspect of Magellan's business is that a vast majority of its revenue -- about 85% -- comes from fixed-fee contracts. This takes a lot of the commodity price volatility out of the business and ensures a steady recurring revenue stream that grows at a predictable rate. In fact, much of its pipeline network is treated like a regulated utility because it is the only way to move gasoline and diesel to some parts of the country. 

Magellan's business is so simple that an idiot could run it -- a Peter Lynch favorite. Fortunately, though, the company's management team is much better than that. For years, they have done a splendid job of allocating a lot of capital -- about $5 billion over the past decade -- to high-rate-of-return projects; all while keeping debt levels low and not issuing equity that dilutes shareholders. All of these factors are how the company has been able to raise its payout 12% annually since its IPO.

With that recurring revenue stream in place and another $1.6 billion in new assets slated to come online in the next couple of years, Magellan and its 5.2% distribution yield look like the kind of stock that you will be glad you bought several years down the road.

Betting on a growing dividend

Brian Stoffel (Lowe's): On the surface, Lowe's dividend isn't anywhere near as exciting as the previous two. Currently yielding just 2%, there are a lot of heavier hitters out there. But there's more than meets the eye here.

Crucially, I consider Lowe's to be in a relatively "Amazon-proof" industry, as customers like to see, touch, and hold the home furnishings and tools that they bring back from a home improvement store. With a powerful brand and the runner-up spot in terms of market share in America, there's a modest moat surrounding the company.

More importantly -- for the purposes of this article -- the company's dividend is very strong. Over the past year, only one-quarter of free cash flow was used on the payout. And this was no anomaly.

Lowe's Dividend & FCF

There's tons of room for continued growth in Lowe's dividend. In fact, that's already happened. Over the past five years, the payout has grown at a compounded rate of 20% per year.Even if we assume that it grows at a slower 15% per year over the next ten years, that leaves us with a dividend in 2027 of $5.10 per share. That's a 6.3% yield based on today's price. 

While I don't own shares myself -- I tend more toward growth stocks as a younger investor -- potential like that can't be ignored!

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Lowe's Companies, Inc. Stock Quote
Lowe's Companies, Inc.
$175.16 (0.25%) $0.43
Altria Group, Inc. Stock Quote
Altria Group, Inc.
$42.10 (-2.52%) $-1.09
General Motors Company Stock Quote
General Motors Company
$32.96 (-3.03%) $-1.03
Magellan Midstream Partners, L.P. Stock Quote
Magellan Midstream Partners, L.P.
$48.88 (0.59%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 06/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.