Investors looking for income often pay closer attention to the size of a company's dividend than to the quality of the business. Unfortunately, those dividends aren't guaranteed. Over time, the problems of a struggling business will always overtake a juicy yield. For instance, Altria (MO 0.10%) has had very modest revenue growth of about 2% over the past decade. That lack of growth has squeezed management into a corner. They now have to send much of the company's earnings right back out the door as dividends. That doesn't leave much left to invest back into the business. With little investment, earnings can't grow and the payouts can't be increased without borrowing money.
That's why finding companies that have both respectable dividends and a great business is essential for investors focused on the long term. Canadian National Railway (CNI -0.47%), Accenture (ACN -0.10%), and Novo Nordisk (NVO 0.09%) each pay a dividend between 1.3% and 2.2% and have long histories of both share price and dividend increases with plenty of room to boost payouts in the future. It's that combination that should keep them on dividend investors' radar.
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1. Canadian National Railway
Canadian National operates what it calls its three-coast network of railroads stretching across Canada, around the Great Lakes, and down the Mississippi River to New Orleans. The company managed to improve cash flow through the pandemic despite year-over-year revenue declines in the first three quarters of 2020. Full-year sales were 7% lower than 2019, but the $3.2 billion in cash flow was a new record. The performance illustrates management's relentless focus on productivity.
By finding ways to ship cargo with less fuel, fewer people, and innovations like autonomous track inspection cars, the company has a long history of squeezing every drop of profit out of its modest growth. All that focus provides a lot of safety for the 1.7% dividend yield. This year will mark the company's 26th as a public company, and the 25th it has raised the payout to shareholders. Earnings have grown, too, by 56% over the past decade. The $1.74 it will pay out in 2021 is 7% more than last year, and still less than half of earnings. Investors searching for quality businesses paying sustainable dividends should be happy adding Canadian National Railway to their list of potential buys.
CNI Dividends Paid (TTM) data by YCharts
2. Accenture
Accenture provides consulting and business services outsourcing services to its clients across the globe. It brings in almost $47 billion per year in revenue. Business has picked up since the company closed the books on its fiscal 2020 in August with only 2.6% sales growth. The 8.5% growth for the quarter ending in February is closer to what shareholders came to expect before the pandemic. Management expects growth for fiscal 2021 to come in between 6.5% and 8.5%.
Accenture has virtually no debt and consistently generates more free cash flow than net income, meaning there is always more cash available to shareholders than gets reported as income. That means the company's payout ratio, which compares the dividend to net income, is actually overstated. The dividend is a modest $0.88 per share, or 1.3%. That payout actually represents a remarkably low 39% of earnings. That leaves plenty of room for years of increases, like the 10% bump shareholders most recently received, even if earnings stall. But that's not likely to be a concern, as earnings have grown by 163% over the past decade. Investors looking for a stock with a decent yield and the financial performance that indicates a long road of dividend increases ahead should take a closer look at Accenture.
ACN Dividends Paid (TTM) data by YCharts
3. Novo Nordisk
Novo Nordisk is the world's largest producer of insulin. The company has set a bold agenda over the next few years to drive innovation in diabetes care and to strengthen treatment options for obesity. The opportunity is large; a 2018 estimate put the percent of Americans with diabetes at 10.5%, or about 34 million people, more than 20% of them undiagnosed. It's also a lucrative market, with global spending on insulin set to approach $28 billion by 2026.
Treating diabetes has helped propel Novo Nordisk's shareholder returns for decades. Since it first entered the markets in 1981, the company's U.S.-listed stock has returned nearly 22,000%. Forty years later, shareholders can expect to continue being rewarded.
Growth has slowed slightly every year over the past decade, with revenue up about 4% last year to $19.5 billion, and earnings per share up about 8%. That still gives management plenty of room to pay the dividend, something it does twice every year. Over time, the trend is up. Last year's 9% jump to $1.30 per share marked the 25th consecutive year of increases. 2021 will be no different. The distribution the company just handed out was 22% higher than last year. That means over the past year, the company has rewarded shareholders with a 2.2% yield.
NVO Dividends Paid (TTM) data by YCharts
Novo Nordisk continues to bolster its position as the leader in treating diabetes. In the fourth quarter, it filed for regulatory approval for its oral insulin-producing drug, Semaglutide, and purchased a longtime partner whose technology is responsible for the medication. Those seeking safe and growing dividends should consider Novo Nordisk. A growing global population of diabetes patients should support the market leader in treating the disease through a growing yield and continued stock gains over time.
