Every investor likes to collect a dividend as added income from a stock they own. Some make investments with dividend income as a priority. But having a high dividend yield shouldn't be the only factor to look at.
For any dividend stock that isn't strictly owned for the income, investors should care about the company's history of raising the payout, as well as the long-term overall returns on the invested capital. Success in those two areas has to come from a solid underlying business. The following three companies not only pay dividends, they have also consistently raised them, and each has an overall return much higher than the S&P 500 index over the last five years.
Image source: Getty Images.
Results you shouldn't ignore
Investors currently get a dividend yield of about 2% to over 4% from owning shares in Home Depot (HD 0.02%), industrial supplier Fastenal (FAST -1.43%), and renewable energy asset owner Atlantica Sustainable Infrastructure (AY 3.28%).
| Company | Recent dividend yield |
|---|---|
| Home Depot | 1.90% |
| Fastenal | 1.97% |
| Atlantica Sustainable Infrastructure | 4.35% |
| S&P 500 Index | 1.30% |
Source: Yahoo! Finance.
And a dividend yield exceeding that of the S&P 500 isn't the whole story. Two other important factors for dividend stocks are whether investors can expect that payout to grow in the future, and how the underlying stock performs. There's no advantage in collecting an above-average dividend while invested capital deteriorates from a declining stock price. But these three companies excel on both those counts.
Total Return Level data by YCharts.
Total returns, including dividends, have outpaced the S&P 500 handily over the past five years. And the companies have all generously increased their dividend rates along the way. That is thanks to the strength of the businesses themselves.
Setting itself up
Home Depot was undoubtedly one of the pandemic big winners in the business sense. But much of that success came from the company's strategy prior to the boost in home improvement spending during the pandemic. In 2017, the company announced its One Home Depot strategy. In a description of the program, the company says, "we have committed approximately $11 billion over a multi-year period to investments across our stores, associates, digital experience and supply chain."
That work put Home Depot in a position to benefit from the sharp growth in digital shopping during 2020, when revenue jumped about 20% over 2019. So far in 2021, sales growth has accelerated. In this year's first-quarter period ended May 2, sales soared 33% over the prior-year period. In a sign of confidence in the future, Home Depot announced a 10% dividend increase in May 2021, when it declared its 137th consecutive quarterly dividend. The company also authorized a new $20 billion share repurchase program.
In another sign that management remains proactive, the company quickly recognized the potential negative impacts from ongoing global supply chain issues and shipping delays. Home Depot actually contracted its own container ship to protect its interests. President and chief operating officer Ted Decker said that was a first for the company. In an interview reported by CNBC, he said, "We have a ship that's solely going to be ours and it's just going to go back and forth with 100% dedicated to Home Depot."
Image source: Getty Images.
Tailwinds that bode well
Fastenal and Atlantica have their own tailwinds right now. Fastenal provides industrial and construction businesses with needed supplies including fasteners, tools, and other items. The company has been focusing on growing sales through vending devices and onsite location initiatives to strengthen ties to customers. While the pandemic disrupted many customer operations, Fastenal's business remained steady as its sales of safety and cleaning equipment soared. Sales grew by 6% and net earnings by 8.6% for the full year 2020 over 2019.
Its customers' needs shifted once again moving into 2021. In its second-quarter earnings report, the company said its "reduced sales of [pandemic] surge-related product, but improved manufacturing and construction demand were mostly offsetting." Fastenal's business will be cyclical along with the industrial economy, but its commitment to dividends doesn't waver. It began paying dividends in 1991 and even paid shareholders a special dividend of $0.40 per share in 2020's fourth quarter.
Atlantica is in a position to gain from the broader movement of increasing renewable energy generation. The company owns renewable energy generation capacity, as well as other natural gas and electric transmission assets. About 75% of Atlantica's revenue came from its renewables sector in 2020, and that will continue to drive growth. Its cash available for distribution (CAFD) grew 12.9% in the first half of 2021. That solidly supports the company's expectation to grow CAFD by between 5% and 8% annually through 2024.
Underlying business strength, along with a history of solid returns and increasing dividends, make Home Depot, Fastenal, and Atlantica Sustainable Infrastructure great stocks for dividend lovers to own.
