If your dividend stocks aren't optimized to deliver income and stability, then you may need to reconsider your portfolio allocation. These stocks generally aren't meant to be high-growth opportunities. Instead, the companies focus on generating predictable profits and redistributing those earnings to shareholders. That's why they are so popular among retirees.
The very best dividend stocks have high and sustainable yields, wide economic moats, businesses that aren't going to be disrupted too quickly by innovation, healthy balance sheets, and an opportunity for modest share-price appreciation.
These three stocks aren't perfect for every portfolio, but they have safe dividends that are likely to be paid out for decades to come.
It's important to keep your savings safe. Image source: Getty Images.
1. 3M
3M (MMM 0.86%) is a multinational conglomerate that produces over 60,000 products sold all over the globe. Its portfolio spans industrial, healthcare, electronics & energy, safety & graphics, and consumer products. This broad range of products and 3M's strong brands (which include Ace, Scotch, Post-it, and Nexcare) create a serious competitive advantage. The company's enormous scale allows it to lead a number of fairly commoditized markets that aren't particularly attractive to disruptive newcomers. 3M also dedicates more than 6% of its enormous budget to R&D, further entrenching a leadership position.
That's exactly where its wide economic moat comes from, which is a key factor in 3M's ability to sustain dividend growth and remain among the list of dividend aristocrats. The company produces items that are important for all sorts of consumer, industrial, and commercial activities, and it's hard to see any way that 3M's position is quickly torn down.
Shareholders also enjoy a healthy 3.02% dividend yield. That's a great income source, and a reasonable 63% payout ratio would suggest that 3M won't struggle to pay and grow those distributions in the future.
Investors who are averse to debt-laden stocks might be wary of 3M's 1.54 debt-to-equity ratio. No doubt, the company's capital structure exhibits significant leverage, but that isn't a financial health risk as long as operations remain steady. 3M's interest coverage ratio is well above 10, and the quick ratio is a comfortable 1.24. Both of those indicate limited risk that the company will fail to meet its obligations, and more than $6.6 billion in free cash flow in 2020 further underlines that safety.
2. Home Depot
Home Depot (HD 0.74%) is the largest home improvement retailer, and it also operates a substantial contractor supply business. With nearly 2,300 locations and a growing online sales channel, the company's scale creates a serious barrier to entry. Smaller competitors would struggle to match Home Depot's advantages in vendor relationships and logistics, which help keep retail prices manageable.
Amazon (AMZN -2.56%) is famously capable of overcoming those issues, and Home Depot is certainly experiencing hotter competition as e-commerce continues to grow. However, Home Depot's physical footprint and strong brand are helpful for its hold on this particular target market. Stores remain a destination for contractors and do-it-yourself (DIY) consumers, so they are an asset that creates a competitive moat. The company has also benefited from expanding its online and curbside pickup operations, which are driving great performance in an evolving retail landscape.
Investors should recognize that Home Depot operates a highly cyclical business. When home building activity and big-ticket retail sales slow down during recessions, the company's results suffer. Cyclicality is fine for long-term investors as long as you are emotionally prepared for volatile results, and your stocks are resilient enough to weather storms. Home Depot adeptly navigated a severe homebuilding crisis a decade ago, and it produces free cash flow well in excess of its financial obligations.
With a 2.3% dividend yield and 50% payout ratio, this is a great stock to deliver stable income along with some growth.
3. Costco
If you don't need a high dividend yield today, but future growth is more important to you, then you should consider Costco (COST -0.24%). The company operates a network of more than 800 big-box retail stores where only members are eligible to shop.
In addition to enviable scale and a broad offering, shareholders love Costco's loyal customer base and recession-resistant business model. When household budgets tighten in economic downturns, consumers see the value in Costco's low prices. The $60 annual membership fee has not dissuaded customers, with retention rates exceeding 90% in the most recent recession. The company is also addressing the evolving retail world as its e-commerce channel continues to gain steam.
Costco differs from the above stocks in two key ways: It only pays a 0.88% dividend yield, so it's not as great a source of income today. However, the company is averaging nearly 10% compounding annual growth in both sales and earnings. When you consider this alongside its low 28.6% payout ratio, it's entirely plausible that Cosco could double those distributions to shareholders when the company decides to shift its focus from growth. If you are thinking in terms of decades, that's a great outlook to have.
