When you're on the hunt for stocks, finding the right balance between income generation and business strength can be a challenge. Large dividend payments are often used to attract investors when prospects for the underlying company aren't enticing, but there are stocks that offer compelling combinations of income generation and growth potential -- and these securities can play a key role in powering your portfolio to market-beating returns.
With that in mind, we asked three Motley Fool investors to profile a stock whose yield is higher than the S&P 500 average of 1.8% and stands out as worth holding for the long haul. Read on to see why our panel selected Philip Morris International (NYSE:PM), Verizon (NYSE:VZ) PepsiCo (NASDAQ:PEP) as some of the top dividend-paying stocks on the market.
Enjoy smoking-hot dividend income
Dan Caplinger (Philip Morris International): Settling for market-average dividend yields isn't a very good way to get much income in the current market environment, but fortunately, there are some promising stocks that can deliver a lot more in dividends. Philip Morris International concentrates on selling its winning Marlboro brand to foreign markets across the globe, and it's been able to follow the successful business model of using its pricing power to keep revenue and profits from declining even in the face of falling numbers of smokers and shipment volumes of cigarettes. Its dividend yield weighs in at more than 4%, and it has a 10-year track record of giving investors regular annual dividend increases.
Philip Morris has had to go through some challenges recently, including the impact that the strength of the U.S. dollar has had on its financial results. Yet even for those who fear that the days of traditional tobacco products are numbered, Philip Morris' success with its iQOS heated tobacco product in Japan shows the power of reduced-risk platforms for future development. The company has barely tapped the potential of iQOS, and pending applications for approval before the U.S. Food and Drug Administration could point to explosive new growth opportunities. Between existing products and new ideas currently in development, Philip Morris has better prospects now than it has in years, and that could support higher dividends for years to come.
Connecting consumers and rewarding shareholders
Sean O'Reilly (Verizon): Dividends have historically been a significant portion of long-term investor returns. Now, eight years into a secular bull market, things like dividend yields have become all the more critical. One never knows when a market swoon may occur, and a decent yield can help cushion a portfolio.
Verizon is the current king of wireless carriers, with around 147 million subscriptions. Recent earnings growth has been lackluster, and EPS in Q3 remained flat year over year at $0.89, while revenue inched up just over 2%. But management, in response, is planning to cut $10 billion from expenses through the end of the decade.
The dividend yield, currently at 4.62%, is supported by a payout ratio of just 59.12%. This is worth noting, as Verizon is now about to make a significant leap in the race toward nationwide 5G coverage -- probably re-solidifying its telecom dominance in the process. It also recently announced plans to roll out 5G home broadband service over its cellular network by the end of next year. Leaping the next stage of wireless development will be a big blow to not only cable companies but also proves that Verizon remains the king of quality telecommunications.
For investors looking for yield, a strong business franchise, and the likelihood of growth, Verizon Communications is a fantastic choice.
A consumer-goods giant
Keith Noonan (PepsiCo): Snack and beverage giant PepsiCo has long been a favorite among income-focused investors, and it's not hard to see why. The company has raised its annual payout for 45 years running and consistently maneuvered its business to ensure that it was in good position to thrive and meet the rising challenges of its industry. A stable of powerful brands and a range of supply-chain advantages created by economies of scale have helped the company build a powerful moat, and it looks poised to continue delivering wins for shareholders.
Today, PepsiCo is in the process of updating its product lineup to better fit changing tastes among consumers. That means a shift toward a healthier, less soda-dependent business domestically, but there's still room for growth in fizzy beverages in international markets, and its leadership position in the snack-foods category should continue to provide a cushion as it adjusts its beverages strategy. The company should also be able to continue leverage pricing power, and automation advances and share buybacks will probably lend added momentum for long-term earnings growth.
Pepsi stock packs a solid 2.8% yield, and based on the company's history and the fact that the cost of distributing its dividend represents a reasonable 63% of trailing earnings, investors can feel confident that shares purchased today will have an even bigger yield down the line. With a sturdy a business and a fantastic brand portfolio, Pepsi looks to be a relatively low-risk, income-generating investment that can be safely held for the long term.
Dan Caplinger has no position in any of the stocks mentioned. Keith Noonan has no position in any of the stocks mentioned. Sean O'Reilly has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. The Motley Fool recommends PepsiCo. The Motley Fool has a disclosure policy.