The strength of its dividend is just one of the reasons why investors, including Mr. Warren Buffett, choose to hold Coca-Cola (KO 1.78%) stock. The blue chip's annual payout, now at $1.64 per share, yields investors about 3.4%. Moreover, Coca-Cola has increased its dividend for 57 years straight. We can easily call the company a dividend aristocrat -- a term used to describe a company that increase its dividend payouts for at least 25 years.
Buffett has benefited handsomely from this enviable dividend history. Berkshire Hathaway began purchasing Coca-Cola in 1988, and through subsequent purchases and four two-for-one stock splits, Buffet has built a collection that now totals 400 million shares. Consequently, the $1.3 billion investment yields $656 million annually in dividend income. These payments may be reason enough for Buffett to hold onto the stock.
The average investor cannot expect to earn millions in dividend income right off the bat. Moreover, new investors looking to mimic Buffett's success may want to avoid Coca-Cola altogether. Analysts expect the company's 2021 profits to ring in below its 2019 levels. Besides, there are many other dividend stocks that yield more than 3.4%. Names such as Cardinal Health (CAH 1.62%), Innovative Industrial Properties (IIPR 0.34%), and NetApp (NTAP -1.75%) come to mind as a few that could offer sizable returns to investors over time.
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1. Cardinal Health
Cardinal Health is a healthcare services and products company. Not only does it help healthcare entities streamline their supply chains, but it also offers medical products and pharmaceuticals that can improve patient well-being. Kangaroo feeding pumps, T.E.D. anti-embolism stockings, and flu vaccines are among their popular products.
Cardinal Health's current annual dividend of about $1.94 per share yields just under 3.7%, and the company's payout has risen every year since 2003. Cardinal Health can easily afford this payment schema. The dividend payout ratio, measuring the percentage of net income paid out in dividends, is nearly 36%.
Cardinal Health is more of a reliable dividend stock than an exciting growth company. Its stock price has only grown about 65% over the last 10 years. The company is dragging a little this year, with share price and financial performance suffering during the COVID-19 pandemic.
In Cardinal's fourth quarter, which ended June 30, revenue fell by about 2% from Q3. Non-GAAP earnings of $1.04 per share also declined by about 6% from year-ago levels. This probably occurred because of the deferrals of elective procedures and in-person visits to the doctors office. The total net negative impact of the coronavirus pandemic so far is $130 million.
However, the company believes that there was an uptick in both elective procedures and office visits in the fourth quarter. CEO Robert Kaufmann hopes that the trend will continue into fiscal 2021 as states look to relax stay-at-home orders and coronavirus vaccines come to market. The forecasted overall earnings growth over the next year is an optimistic 8%.
Although an increase in earnings will probably not stimulate massive stock price growth, it should provide enough funding for future dividend increases. The company enjoys a forward price-to-earnings (P/E) ratio of approximately 9.6, so investing today would mean buying into the company's future revenue stream at a reasonable price.
2. Innovative Industrial Properties
Over the last three years, investors saw previously massive gains in marijuana stocks evaporate as oversupply decimated cannabis companies. Innovative Industrial Properties, which is a diversified play within the marijuana space, managed to remain profitable.
The company's annual dividend of $4.24 per share yields about 3.5%. This payout has increased every year since the company began paying dividends in 2017.
At a forward P/E ratio approaching 37, it is not a cheap stock. However, the compound annual growth rate (CAGR) for the legal cannabis industry is a hefty 18.1% over the next seven years, according to experts at Grandview Research. Innovative Industrial boasts an expected earnings growth rate of about 60% this year. The company is poised to reap significant benefits in the quickly expanding cannabis industry, especially if legalization arrives in the U.S.
Innovative Industrial is a real estate investment trust (REIT), not a marijuana producer or distributer. Because it merely provides the facilities for marijuana growers, Innovative Industrial remains both profitable and free of the burdensome regulations faced by most cannabis companies in the U.S. The company also must distribute at least 90% of its taxable income in the form of dividends as a REIT. Between its REIT status and the massive growth rates expected for the cannabis industry and the company, Innovative Industrial could offer outsized gains for the foreseeable future.
3. NetApp
NetApp was started in 1992 as a data storage company. Recently, the company has shifted resources toward its cloud services products. Today's NetApp focuses on building the "data fabric" of an organization: NetApp simplifies data services across clouds in order to speed up an organization's digital transformation.
The company first began paying dividends in 2013, starting with an annual payout of $0.60 per share. The current payout comes to an annual rate of $1.92 per share. At the current share price, the yield is just under 4.6%. NetApp maintains a dividend payout ratio of approximately 59%, which means it pays well over half of its earnings to lucky shareholders.
Originally known as Network Appliance, NetApp was a high-flying tech stock during the late 1990s and early 2000s. Like most tech stocks, it fell hard after the dot-com bubble popped in 2000. Almost 20 years later, NetApp stock trades more than 70% below that 2000 high of $152.75 per share.
Investors should not expect to see the stock price anywhere near its all-time high given current growth rates. Analysts forecast an earnings increase of nearly 23% next year, but only after a 19% decline this year. NetApp also trades at a forward P/E ratio of just under 13. The low valuation probably results from the company's meager past growth.
NetApp faces serious competition in the cloud computing industry. Both Amazon (AMZN -2.60%) and Microsoft (MSFT -1.11%) already control more than 50% of the cloud market. Given their dominance and resources, NetApp is not likely to overthrow either of the two established giants in this space.
However, the forecasted CAGR for global cloud computing market is approximately 14.9% until 2027, according to Grandview Research. Although NetApp's total revenue fell this year, its annualized recurring revenue for cloud services rose by 113%. A high and broad demand for cloud services could still help ignite profit growth, which in turn could create stock and dividend gains over time.
