Owning certain stocks can sometimes feel like a one-sided relationship. You own part of the business, and stay in touch with what's going on with it, but that's about it.
Other stocks, however, are like having a rich uncle who likes you so much that he sends you money every few months. These stocks, of course, are dividend stocks. They pay you to own them.
Three of the top dividend stocks on the market, in my view, are AT&T (T 0.89%), Chevron (CVX 0.47%), and Pfizer (PFE 1.04%). Here's how much you'll get paid to own these stocks -- and if they're likely to be even more generous to you in the future.
AT&T has a long history that traces its roots back to a company created by Alexander Graham Bell after he invented the telephone. Today, AT&T still provides landline telephone services, but it's bigger businesses are in providing wireless services to businesses and consumers and broadband television.
The telecom giant's dividend currently yields a hefty 5.37%. AT&T has raised its dividend for 34 consecutive years, with the most recent hike being announced in December 2017. This latest dividend increase will be paid out on Feb. 1, 2018, to shareholders on record as owning the stock as of Jan. 10, 2018.
What are the chances that AT&T will keep paying you more to own the stock in the future? Pretty good. The company's track record of dividend increases highlights the prioritization of the dividend by AT&T's management. Also, AT&T uses less than 73% of its free cash flow to fund the dividend program, giving it some flexibility for more dividend hikes down the road.
AT&T stock didn't perform well last year, with its share price falling nearly 9%. The situation for the telecom company could improve in 2018, though. AT&T hopes to close its pending acquisition of Time Warner, a deal that would make AT&T one of the world's top media companies. Investments in new 5G networks should help position AT&T as a major wireless player for years to come. And selling off some assets this year should help the company reduce its debt.
Chevron was founded in 1879 in California. The company has undergone multiple mergers, acquisitions, and divestitures through the years. Chevron now stands as one of the largest integrated energy companies in the world.
Its dividend has attracted investors to Chevron stock for quite a while. That's still the case, with the dividend presently yielding 3.29%. Like AT&T, Chevron is a member of the elite group of Dividend Aristocrats, and has increased its dividend for 29 consecutive years.
Chevron's high payout ratio of 126% could cause investors to be concerned about future dividend hikes, though. And the company's free cash flow over the last 12 months was well below the amount of dividends paid out during the period. However, Chevron's dividend is safer than those figures might appear. Higher oil prices would certainly help Chevron. And the completion of its liquefied natural gas projects in Australia should help boost free cash flow by lowering capital expenses and generating new sources of income.
Meanwhile, Chevron stock is on a roll. Although the energy company gained only 6% in 2017, over the last six months Chevron stock has soared 27%.
Pfizer is the oldest of these three companies, beginning operations in 1849. The pharmaceutical company has come a long way since its first product, a tastier form of a drug used to treat intestinal tapeworms, to claiming multiple blockbuster drugs. Pfizer currently ranks as the world's largest drugmaker in terms of prescription-drug sales.
Few big pharma companies boast a more attractive dividend than Pfizer. Its dividend yields 3.68%. Although Pfizer cut its dividend in 2009, the company has increased its dividend by nearly 80% since then.
There are several reasons to believe Pfizer's dividend will keep growing in the future. First, the company's CFO stated in November 2017 that paying dividends will continue to be Pfizer's top capital allocation priority. Second, Pfizer currently uses 57% of its free cash flow to fund the dividend program, indicating flexibility for dividend increases down the road. And third, the drugmaker's earnings should improve over the next few years.
Pfizer's head of research and development, Mikael Dolsten, said at the recent J.P. Morgan Healthcare Conference that the company hopes to win approval for up to 15 potential blockbusters in the next five years. By comparison, between 2011 and 2016, Pfizer launched five blockbusters -- and only two blockbusters in the five-year period before that. If Dolsten is right, Pfizer should easily be able to continue boosting its dividend payout well into the future.
Getting paid pays off
Don't underestimate just how much difference dividends can make. A few months ago, I looked at how much an investor who bought Pfizer stock would have made over 40 years. An initial $10,000 investment would have grown to close to $630,000 in 2017 (as of August, when I did the analysis). That's a nice return of nearly 6,200%.
But with dividends reinvested throughout that period, the investor's portfolio would have soared to more than $1.5 million. Instead of a return close to 6,200%, the return fueled by dividend reinvestments would have been over 15,660%.
Not every stock with dividends reinvested will show this great of a difference, of course. However, this example goes to show that buying stocks that pay you to own them can really pay off over the long run.