Would you like to know which investors buy solid dividend-paying stocks? Just wait for the next market crash. They'll be the ones looking relaxed while everybody else is frantically checking the latest price of their growth stocks.
Even a mediocre stock can pay you to own it during good times, but what happens when times get tough? Lowe's Companies, Inc. (LOW 2.14%), CVS Health Corp. (CVS 3.39%), and Texas Instruments Incorporated (TXN 1.71%) kept paying their shareholders through the latest financial crisis.
Image source: Getty Images.
In fact, these three stocks didn't even need to stop boosting their payouts each year. Here's why they should be able to keep it going for years to come.
| Company | Dividend Yield | Payout Ratio | 5-Year Dividend Growth Rate | Consecutive Annual Increases |
|---|---|---|---|---|
| Lowe's Companies, Inc. | 2.1% | 40% | 20.3% | 55 |
| CVS Health Corp. | 2.8% | 40% | 23.6% | 14 |
| Texas Instruments Incorporated | 2.6% | 55% | 24% | 14 |
Data sources: YCharts and company SEC filings.
1. Lowe's Companies, Inc.: A longtime favorite
It's been 55 years since this Dividend Aristocrat went 12 months without treating its shareholders to a payout bump. You might think Lowe's would begin showing signs of fatigue after all these years, but a booming home-improvement market has helped profits, and dividend payments, rise at a hair-raising pace.
At recent prices, Lowe's stock offers a 2.1% yield, which is slightly above average for stocks in the benchmark S&P 500 index. The payout might not be exciting now, but it's been growing so fast that investors buying the shares at recent prices would begin earning a 10% yield on their original investment in 2025.
Past performance doesn't guarantee future results, but there's a good chance Lowe's can keep it up for the long run. When the company reported second-quarter results, management lowered its earnings growth target for the year slightly to adjust for higher spending on staffing. Even at the lower end of the revised target, earnings are expected to rise 21% this year to $4.20 per share.
The distribution also appears well funded. Over the past 12 months, Lowe's used just 40% of earnings to make dividend payments, which gives it plenty of room to boost the payout further in the years to come.
Image source: Getty Images.
2. CVS Health Corp.: Expert shopper
You're probably familiar with this company's massive chain of retail pharmacies, but did you know that's not how CVS Health makes most of its money? For years this company has used profits from its retail operations to position itself at the center of billions of prescription-drug transactions.
The pharmacy benefits management business it bought in 2007 is now the country's largest, and in 2015 it purchased a leading provider of prescription-drug services to America's growing population of elderly patients in long-term-care facilities. Combined revenue from these businesses dwarfs the haul from retail operations and were a big reason the company has been able to raise its dividend payout at a 23.6% annual rate over the past five years.
Buying CVS Health stock at recent prices would provide a nice 2.8% yield now, and continued raises at a 23.6% growth rate would lead to an 8.1% yield on your original investment in 2022. There are no guarantees the company will be able to continue raising profits fast enough to support five more years of raises at this pace, but a relatively low payout ratio of around 40% gives management some wiggle room if earnings growth stumbles in the near term.
3. Texas Instruments Incorporated: Converting real-world data into cash
If you learn only one thing about the semiconductor industry, know this: Digital chips generate ulcers, but analog chips pull in steady profits. That's because converting real-world signals -- think of your phone's touchscreen or Alexa's microphone -- into discrete packets of ones and zeros is at the core of practically every electronic device sold today, and they're fiendishly difficult to replace.
Texas Instruments' chips generally comprise a tiny sliver of its customers' total manufacturing costs, which makes switching to competing chips to save a few pennies rarely worth the effort. This is a big reason the company has an incredibly wide 39.6% operating profit margin. It's also a big reason its dividend payments have grown at an average annual rate of 24% over the past five years.
At recent prices, the stock offers a 2.6% yield, and rising demand for its products in the age of autonomous vehicles and the Internet of Things could allow it to continue raising the payout at a blazing pace. Over the past year, Texas Instruments used just 55% of earnings to make its rapidly rising dividend payments, which gives the company some room to continue making big payout bumps even if earnings growth stumbles unexpectedly.
Looking ahead
There's nothing wrong with companies that reinvest every penny they earn, but you should know that dividend-paying stocks tend to outperform those of the growth variety. There are plenty of theories that explain the phenomenon, but I think paying, and raising, dividends forces management teams to allocate capital more carefully than they might otherwise.
Over time, some well-placed investments into stocks that pay you to own them can create a significant stream of income, especially if they consistently raise their payouts. Any one of these three fits the bill and should provide heaps of dividend income you can use to buy more shares, pay your bills, or bail out a friend whose growth stocks just tanked.
