Whether you realize it or not, dividend stocks are often the cornerstone of any great investment portfolio. Dividend-paying stocks may not offer the thrill of "next-big-thing investments," but they do offer consistency and historical long-term outperformance, at least when compared with publicly traded companies that don't pay a dividend.
Aside from just long-term outperformance, dividend stocks offer three primary advantages.
Dividend stocks are often the foundation of successful portfolios
First, companies that pay a dividend often have time-tested business models and are almost always profitable. Businesses are unlikely to continue sharing a percentage of their earnings with shareholders if they don't foresee continued profitability and growth for years to come. This makes dividends akin to a beacon that lures income seekers to generally safe and profitable businesses.
Second, the payouts received by income investors can be used to calm nerves and help offset inevitable declines in the stock market. Since 1950, the S&P 500 has undergone 37 corrections totaling at least 10%, not including rounding. Regular dividend payouts can help calm jittery investors and partially hedge this downside.
Lastly, the payouts investors receive can be reinvesting back into more shares of dividend-paying stock via a dividend reinvestment plan (Drip), leading to successively larger payouts and more shares owned, in a compounding pattern. Drips are used by some of the most prominent and successful money managers in the world to compound the wealth of their clients.
The big question, as always, is which income stocks to buy? Or in the case of parent or grandparents, which dividend stocks to buy with the intent of passing them along to their children or grandchildren?
Though there are hundreds of dividend-paying stocks to choose from, the following three income stocks look to be surefire bets.
Johnson & Johnson
There may not be a safer dividend stock on the planet than healthcare conglomerate Johnson & Johnson (NYSE:JNJ). This is one of only two publicly traded companies to bear a higher credit rating (AAA) than the U.S. government, and it marked its 35th consecutive year of adjusted operational earnings growth in 2018. To boot, Johnson & Johnson has also increased its dividend in 57 straight years, which is one of the longest active streaks among publicly traded companies.
The secret to Johnson & Johnson's success is that all three of its business segments bring something unique and important to the table. Consumer health products, while being J&J's smallest revenue contributor and slowest grower, generates very predictable cash flow. Meanwhile, medical devices offers a long-tail growth opportunity that should be realized as the global population ages and access to medical care improves. Finally, pharmaceuticals, which makes up about half of J&J's sales, delivers the bulk of the company's margins and pricing power.
J&J and its 2.9% yield aren't going anywhere, and it's the perfect company to continue delivering for your kids or grandkids.
Generally speaking, utilities are often an excellent source of dividend income given the inelastic demand associated with electricity and natural gas. In other words, if you own or rent a home, condo, or apartment, you're going to need electricity or gas, and are unlikely to change your consumption habits much, regardless of how well the U.S. economy is performing.
However, NextEra Energy (NYSE:NEE) isn't your typical utility stock. No other utility provider in the world has devoted more capacity to wind and solar energy than NextEra. While these investments haven't been cheap, they've given NextEra a leg up on the competition by pushing costs down. NextEra has plans to invest $40 billion in its infrastructure through 2020, with the 30-by-30 project targeting the installation of 30 million solar panels by 2030 in Florida. In effect, NextEra Energy is the utility company to lead the sector into the future.
Also, the company's non-renewable operations are regulated. Though this means NextEra can't pass along price hikes at will, it also means the company isn't exposed to potentially wild fluctuations in wholesale pricing.
Suffice it to say, NextEra's 2.3% yield and stock have plenty of room to grow.
Another multigenerational dividend stock that parents and grandparents should have no worries about passing to their children or grandchildren is Walt Disney (NYSE:DIS). The House of Mouse has moved far beyond simply being a go-to theme park destination, with an expansive portfolio of intellectual property and enticing streaming options.
At a time when investors are worried about cord-cutting from cable companies -- Disney owns the ESPN, ABC, and FX brands -- Disney presents with incredible growth from its streaming options. Hulu is currently the fastest-growing video service in the United States, with Disney noting an increase in engagement and user hours spent on the platform with each successive year. Meanwhile, the Disney+ streaming service will soon give consumers access to top-tier movies and brands that cross generational gaps in terms of their popularity.
Disney has also been a monster at the box office -- although it helps when you own the Star Wars, Marvel, Pixar, and Disney franchises. Box office sales for Disney have neared $8 billion through the first nine months of the current fiscal year, with organic growth of core brands and the addition of Twenty-First Century Fox playing a key role.
Though a 1.3% yield might be pedestrian, there's plenty of room for share price appreciation and income growth with Disney.