Stocks with strong dividend yields are fun to buy. But income investors should look beyond today. If that yield isn't sustainable or isn't likely to grow at least as much as inflation does, that pick isn't going to be a great long-term holding. Investors should be looking for reliable dividends and steady payout growth that can last for years, if not decades.
To that end, Citigroup (C 0.22%), Colgate-Palmolive (CL 0.92%), and Verizon Communications (VZ 0.51%) deserve a closer look from investors on the hunt for a lifetime kind of income position. Let's find out more about why these three dividend stocks have what it takes to maintain their payouts.
1. Citigroup is more than a retail bank
Dividend yield: 4%
Admittedly, financial names are highly subject to economic cycles. Low interest rates crimp profit margins on lending activity, and all too often, low interest rates coincide with a weak economy that prevents people from seeking a loan anyway.
Big institutions like Citigroup aren't quite as subject to this dynamic as dedicated banking names are, however.
Out of last year's operating income of $19.5 billion, only $5.7 billion of it came from consumer banking. The other $12.9 billion was driven by Citigroup's institutional clients group. Its institutional business includes things like investment banking, trading commissions, and administrative service revenue, and that revenue is rather well distributed across all of these businesses. Its consumer banking arm isn't just traditional brick-and-mortar-oriented, either. Credit cards are part of this arm, which is a more profitable business than retail banking. Credit card usage is also affected by economic ebbs and flows, but not dramatically. Total credit balances in the U.S. only fell about 20% from peak to trough following the 2008-09 recession, continuing to rack up interest charges the whole time.
This highly diversified revenue is a key reason Citigroup's been able to increase its dividend payout every year since 2015. That hardly qualifies it as a so-called Dividend Aristocrat yet. But the company's persistent capital return plans in recent years suggest -- aside from adjustments made for its response to the COVID-19 crisis -- that it's aiming to earn that title.
2. Colgate-Palmolive: outpacing P&G's payout growth
Dividend yield: 2.3%
A much bigger Procter & Gamble (PG 0.06%) is usually the consumer staples name recommended to dividend investors, and for good reason. Aside from its sheer size, P&G has a track record of 64 consecutive years of increased payouts. This is a case, however, where a smaller Colgate-Palmolive may be the better dividend pick for newcomers.
A superior yield isn't the reason. Both stocks currently dish out about 2.3% of their value as dividends, on an annualized basis. Rather, the rationale is dividend growth. Colgate's current quarterly payout of $0.44 per share is 22% higher than it was five years ago and 66% better than it was a decade ago. Procter & Gamble's present payout of $0.791 per share is 19% higher than 2015's quarterly dividend and 64% stronger than its 2010 dividend rate. At least on the basis of recent history, Colgate-Palmolive's dividend growth is doing a slightly better job of outpacing inflation than Procter & Gamble's is.
And lest you think toothpaste and dish soap isn't a diverse enough product base to ensure continued dividend growth into the future, Colgate-Palmolive isn't just Colgate and Palmolive. The company is parent to products like Irish Spring soap, Protex skincare products, Hill's pet food, Speed Stick deodorant, Murphy's oil soap, and more. The company's got plenty of ways to plug into new consumerism trends as they arise.
By the way, P&G's long history of dividend growth is impressive, but Colgate's 57 consecutive years of raising payouts isn't too shabby either.
3. Verizon's focus is its strong point
Dividend yield: 4.1%
Finally, rather than a more diversified AT&T (T 0.22%) and its currently higher dividend yield, income investors looking to make a move right now may be better served by stepping into a position in rival company Verizon. It's increased its payout every year for the past 14 years, matching the general cadence of consumers' rising phone bills.
It seems a bit counteractive on the surface. Diversification is generally a good thing, and AT&T is more than just a phone service. It also owns satellite cable company DirecTV, and acquired Warner Media in 2018. It recently leveraged Warner to create subscription-based streaming platform HBO Max, and has big plans for it. Verizon, on the other hand, remains mostly focused on telecom.
In this particular case, though, steering clear of major media investments and focusing on what the company knows it can do well -- telecom -- has proven brilliant for Verizon.
DirecTV is caught on the wrong side of a cord-cutting movement, with around 900,000 premium television customers saying goodbye to AT&T last quarter alone. That brings the two-year tally of defectors to roughly 6 million, and the pace of their exits seems to be picking up speed. Things are so bad that rumors are regularly circulating that the company is considering the sale of DirecTV -- if it can find a willing buyer. In the meantime, HBO Max superficially seems like an early success. Many of its subscribers, however, aren't actually paying for it. They qualify for free access because they're HBO subscribers via their cable TV service, or because they're premium wireless subscribers.
Conversely, Verizon has opted to keep its options open by not committing to a major acquisition, and has instead punted this risk and expense to media providers. For instance, it co-offers Walt Disney's streaming services to Verizon Wireless customers and gives consumers the option of subscribing to Alphabet's YouTube TV instead of plugging into Verizon's own cable platform.
Verizon's current yield of 4.1% may lag AT&T's yield of nearly 7%, but at least the company doesn't run the risk of struggling to pay it.