There's a lot to love about dividend stocks. For starters, they can potentially provide two sources of profit: the income from the dividends themselves and the increase in the stock price. At the same time, you don't want to invest in a stock solely because it has a high yield. You should look closely when evaluating dividend stocks.
Here are three great stocks that could give you a combination of capital gains and income for years to come.
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Procter & Gamble
What better company to begin this list than Procter & Gamble (PG 1.66%). For 64 years, this consumer staples stock has raised its dividend. It yields a respectable 2.6% at the time of this writing.
The P&G of today is much leaner than the P&G of 10 years ago. Over the past six years, P&G has reduced its brand count in an effort to focus on growing organic sales for its top-performing brands. The strategy seems to be paying off, as P&G has achieved strong organic sales growth as of late thanks to increased volumes and prices. Its goal of growing organic sales 4% to 5% in fiscal year 2020 is much higher than the 2% sales growth it achieved in FY 2017 or the 1% sales growth in FY 2018. The company is scheduled to report FY 2020 results in late July. The table below lays out organic sales growth over the past several quarters.
| Metric |
Q1 FY19 |
Q2 FY19 |
Q3 FY19 |
Q4 FY19 |
Q1 FY20 |
Q2 FY20 |
Q3 FY20 |
|---|---|---|---|---|---|---|---|
|
Organic sales growth |
4% |
4% |
5% |
7% |
7% |
5% |
6% |
Data Source: Procter & Gamble.
Part of Procter & Gamble's sales growth success is thanks to Alex Keith, who took the helm of the company's beauty business in 2017. Large companies like P&G have access to ample funding and sophisticated supply chains but often lack the X-factor that many smaller companies with fresh ideas have. In many ways, it was Keith who brought that cool factor to P&G's beauty line. Under her leadership, P&G's beauty segment achieved 4% net sales growth in 2019, the second-highest growth segment behind healthcare's 5% and a vast improvement from the negative 9% net sales growth beauty had in 2016. The beauty segment, which brought in about 17% of total sales in the third quarter, makes this a stock to watch.
Caterpillar
Like P&G, Caterpillar (CAT +0.66%) is a Dividend Aristocrat, having raised its dividend for 26 consecutive years. It currently yields 3.2%.
When it comes to construction companies, Caterpillar is king. Its equipment, power systems, parts, and technology are heavily relied on throughout the world's construction sites, oilfields, mines, farms, waterways, cities, and more.
There are a few concerns surrounding Caterpillar at this time, so investors can pick up the stock for a relatively cheap price. Caterpillar's P/E ratio is just 13.5, which is less than the market average of 23.1.
The main concern is that Caterpillar won't be able to sell as much equipment or convince its customers to upgrade or add on new features when business slows down. It's a fair point, but Caterpillar's CFO, Andrew Bonfield, noted that the company has ample cash and credit lines to get through a slowdown.
Caterpillar has raised its dividend in far worse business environments than this one. Although it's a cyclical stock, now is a good time to pick up a few shares thanks to its inexpensive valuation and yield over 3%.
Chevron
Chevron (CVX 0.40%) is one of the largest oil and gas companies. With everything going on in oil and gas these days -- from low commodity prices to the transition from fossil fuels to renewables -- it may surprise you that Chevron has raised its dividend for 32 consecutive years and is one of the only oil stocks that is a Dividend Aristocrat. It yields 5.8% at the time of this writing.
Chevron has been the best-performing oil major for the past 10 years. Part of that is due to its superior balance sheet, which has protected the company from unexpected challenges. In fact, Chevron recently doubled its leverage, and yet it's still arguably the strongest oil major.
Before the COVID-19 pandemic, Chevron was sometimes criticized for having a lower yield or being less aggressive with its spending than its peers. Now, that prudence looks brilliant. In an effort to protect its balance sheet, Shell had to cut its dividend by two-thirds. During Exxon's 2020 investor day on March 5, CEO Darren Woods confidently noted the "advantages of leaning into this market while others have pulled back," an embarrassing statement in hindsight after oil prices dropped in April and Exxon cut its 2020 spending by 30% just one month later.
It's hard to find a good stock that yields close to 6% without taking on more risk. It's true that, in many ways, Chevron is riskier than a stock like P&G or even Caterpillar. Chevron is an oil stock, but it embodies the best of what an oil stock can be with its financial discipline and regimented growth strategy. Therefore, many investors who have their reservations about investing in oil and gas could still grow to love Chevron.
An attractive trio
P&G, Caterpillar, and Chevron each offer investors an effective way to accumulate dividends.
These Aristocrats have an average yield of close to 4%, which is double the average yield in the S&P 500. Investing in the trio is a good way to get a little extra income without taking unnecessary risk commonplace with high-yield dividend stocks.
