Investors often ignore blue-chip dividend stocks during bull markets, since growth stocks tend to generate much bigger gains. But when the bear bites, dividend stocks become attractive defensive investments.

Therefore, investors should always hold a few dependable dividend stocks and reinvest the dividends to generate compound returns. But the market is also filled with high-yielding stocks with decaying businesses -- and their tumbling stock prices could easily wipe out any dividend gains.

The best dividend stocks are often hidden in plain sight. One such stock is Procter & Gamble (PG -0.50%), a 183-year-old consumer staples giant and a component of both the Dow Jones Industrial Average and the S&P 500. Let's see why P&G is still a dividend investor's dream stock.

A smiling person holds cash while being showered with confetti.

Image source: Getty Images.

Long live the Dividend King

Members of the S&P 500 that have raised their dividends annually for at least 25 straight years become Dividend Aristocrats. If they maintain that streak for at least 50 years, they become Dividend Kings.

P&G, which has raised its dividend for 64 straight years, is one of the oldest members of that elite group. The only consumer staples company that comes close to P&G's streak is Colgate-Palmolive (CL -0.12%), which has increased its payout annually for 58 straight years.

P&G currently pays a forward dividend yield of 2.6%, which is higher than Colgate-Palmolive's 2.1% yield and the 10-year Treasury's 1.6% yield.

A well-diversified, evergreen business

P&G products are available for sale to over 5 billion consumers across 180 countries with 65 brands, including Tide, Mr. Clean, Pampers, Tampax, Charmin, Bounty, Gillette, Oral-B, Head & Shoulders, Pantene, Olay, and SK-II.

Over the years, P&G has acquired some new brands and divested weaker ones. Its organic sales have remained stable, and it's continually optimized its costs and repurchased its shares to boost its earnings per share.

Between 2010 and 2020, P&G's core yearly EPS, which reflects its growth from continuing operations and the exclusion of one-time expenses, rose from $3.67 to $5.12. Analysts expect its core earnings to continue rising at an average annual rate of nearly 9% over the next five years.

Stable free cash flow

P&G spent just 50% of its free cash flow (FCF) on its dividend over the past 12 months. That low cash dividend payout ratio indicates P&G has plenty of room for future dividend hikes.

P&G's adjusted FCF temporarily dipped in fiscal 2017 after it sold its specialty beauty business to Coty (COTY 0.46%). However, P&G's adjusted FCF has consistently risen since that big divestment.


FY 2016

FY 2017

FY 2018

FY 2019

FY 2020

Adjusted FCF

$12.12 billion

$9.78 billion

$11.15 billion

$12.13 billion

$14.87 billion

Growth (YOY)






Data source: P&G annual reports. YOY = Year over year.

In the first nine months of fiscal 2021, P&G's adjusted FCF rose another 19% year-over-year to $12.4 billion.

Shareholder-friendly strategies

At the end of fiscal 2020, which ended last June, P&G predicted it would spend about 90% of its adjusted FCF on buybacks and dividends in fiscal 2021. Earlier this year, it boosted that adjusted FCF productivity target to "over 100%."

Simply put, P&G will keep returning its excess cash to its investors. It's reduced its share count by more than 11% over the past decade, and that gradual reduction should continue to support its EPS growth.

Market-beating total returns (over the long term)

P&G has generated a total return of 185% after factoring in reinvested dividends over the past decade. However, the S&P 500 generated a total return of more than 300% during that period.

That comparison might convince some investors to stick with an S&P 500 index fund. That's a sound choice, but P&G's strengths become clearer if we pull back the chart to cover the past 30 years.

PG Total Return Price Chart

Source: YCharts

As you can see, the magic of compound returns paid off for long-term investors. There's no guarantee that P&G will still stay ahead of the S&P 500 over the next three decades, but I believe investors who buy the stock today, enroll it in a dividend reinvestment plan (DRIP), and simply forget about it will be pleasantly surprised in the distant future. That's what makes P&G a "dream" stock -- investors won't lose any sleep over it regardless of the macro headwinds rocking the broader market.