Finding big and growing dividend streams is a key element to successful income investing. It's the dividend growth, however, that allows you to hold onto a stock forever, since it means the purchasing power of your dividend income will continue to rise over time. Sometimes you're lucky and the dividend yield is big today, like the one offered up by Verizon Communications Inc. (VZ 0.98%). Other times the yield is smaller today (though perhaps large compared to the company's own yield history), but dividend growth over time could lead to a much bigger absolute yield based on purchase price -- which is exactly the case with NextEra Energy Partners LP (NEP -1.74%) and Hormel Foods Corporation (HRL -0.06%). If you are looking for high-yield stocks to hold forever, this diversified trio of dividend-growth-focused investments is worth a look today.
The telecom giant that's still on top
Chris Neiger (Verizon Communications): Verizon Communications is still the top dog in the highly competitive wireless industry, where the only way for a company to grow is to steal subscribers away from its peers. The company had 116.5 million total subscribers at the end of its second quarter, outpacing rival AT&T and easily beating the fast-growing T-Mobile.
Image source: Getty Images.
Rising competition has undoubtedly hurt Verizon, but the company still managed to grow its retail postpaid net subscribers by 531,000 in the most recent quarter. Part of Verizon's ongoing dominance comes from its vast and reliable network, which has led RootMetrics to rank the company's network No. 1 overall 10 consecutive times.
To maintain its leadership position in the industry, Verizon has been focusing its attention on the next iteration of wireless service, called 5G. This next step in the wireless industry will bring faster mobile speeds, enable more Internet of Things connections, and is expected to have a worldwide market size of $251 billion by 2025. Verizon is testing 5G in a handful of cities right now and says that it will begin rolling out mobile 5G services at the beginning of 2019. Verizon could use its 5G network to outpace its rivals, much like the company used 4G to stay ahead of its competitors for years.
Dividend investors will be pleased with Verizon's 4.48% forward yield and the company's 11-year history of consecutive annual dividend increases. Additionally, the telecom giant's payout ratio is just 31%, which means the company has plenty of room to continue increasing its dividend for many years to come.
An energy dividend that's here to stay
Travis Hoium (NextEra Energy Partners): Stocks investors hold for a long period of time should have staying power in the business they're in. I can't think of an industry that's more essential to everything we do than energy -- and particularly, electric energy. Electricity powers everything from our homes to the internet to cars. It isn't going anywhere, especially for companies that own next-generation assets like wind, solar, and energy storage, as NextEra Energy Partners does.
The company owns 3,300 megawatts (MW) of renewable energy assets with long-term contracts to sell electricity to utilities, businesses, and homeowners. The average contract has 17 years remaining, ensuring predictable long-term cash flows.
What really separates NextEra Energy Partners from competitors today is its flexibility in acquiring growth assets. It can use excess cash flows from the business, add debt to existing projects, or use its stock as currency in acquisitions. Its 3.7% dividend yield is low enough that it can fund accretive acquisitions without diluting shareholders, which isn't possible for yieldcos with higher dividend yields.
Management has enough confidence in the business to project 12% to 15% distribution growth from the end of 2017 thru the end of 2023. At that point, the dividend could be $3.75 per share, or a 7.9% yield on today's stock price. That's the kind of dividend growth I can get behind for very long-term investors.
A high dividend, relatively speaking
Reuben Gregg Brewer (Hormel Foods): Few people would consider Hormel's 2% yield high. But that's thinking about it on an absolute basis -- relative to the protein-focused food company's own history, 2% is toward the high end. It's such a great business that income-focused investors should stop and consider it even if 2% falls below their typical yield threshold.
HRL Dividend Per Share (Quarterly) data by YCharts.
The first reason is Hormel's impressive dividend growth rate. Over the past decade, the dividend has increased at a compound annual rate of 16%. That's more than five times the historical growth rate of inflation, and more than many of the food company's most respected competitors. Now add to that the fact that Hormel's dividend has been increased for an incredible 52 consecutive years.
Then there's the company's balance sheet. Even after a relatively large acquisition (Columbus Meats), long-term debt only makes up around 10% of Hormel's capital structure. And its current ratio is a robust 1.6. This is a company that's built to survive the test of time and keep paying shareholders along the way.
HRL Financial Debt to Equity (Quarterly) data by YCharts.
Yes, like every food company Hormel is dealing with shifting consumer tastes and rising costs. But those should be temporary issues, even though they've led short-term investors to push the price down and the yield up to a relatively high 2%. If you can get past that absolute figure and see the relative value here, you should be able to comfortably buy Hormel and hold it forever.
