Dividend investors can often get caught up focusing too much attention on a stock's yield. Instead, the better approach is to concentrate on dividend growth. That's because dividend growers have delivered the best long-term performance.
With dividend growth in mind, we asked three of our Motley Fool contributors for companies with elite track records that they believe are excellent buys right now. Here's why they tapped 3M (MMM -0.66%), Consolidated Edison (ED 0.73%), and American States Water (AWR -0.64%) as the top options for investors looking to add a top-tier dividend stock to their portfolio.
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A focus on research and development
Reuben Gregg Brewer (3M): One of the most incredible things about 3M is its over six-decade-long streak of annual dividend increases, placing it in the rarified Dividend King category. The fact that the average annualized increase over the past decade was more than 10% is another impressive point, even though more recent increases have been below that figure.
On top of that, the stock's current dividend yield of roughly 3.2% is toward the high end of the company's historical yield range. That suggests that it's at least fairly priced, if not a little bit cheap today.
MMM Dividend Yield data by YCharts.
Industrial giant 3M is, without a doubt, an elite dividend stock and one worth looking at very closely. But to understand why, you need to look beyond the dividend.
A record like the one 3M has put up doesn't happen by accident. The company has a broad portfolio of products spanning across its safety and industrial, transportation and electronics, healthcare, and consumer segments. There are thousands of products under those four umbrellas serving a multitude of subsectors.
However, the key here is really innovation, as 3M spends heavily to develop new, proprietary technologies that it can use to enhance and differentiate products across its portfolio. Adhesives is a good example: They're used in products ranging from Post-it Notes to dental cements, and a whole lot in between.
In fact, you probably shouldn't look at 3M as a dividend stock. Think of it as an innovation powerhouse that's rewarding shareholders for its success with dividend growth.
Closing in on a crown
Matt DiLallo (Consolidated Edison): Consolidated Edison has been an outstanding dividend stock over the years. The utility has increased its payout for 47 consecutive years, which makes it dividend royalty as it easily qualifies as a Dividend Aristocrat. Meanwhile, it's only three years away from an even more elite class: Dividend Kings.
Consolidated Edison should be able to reach that crowning achievement, despite the pandemic's impact on its New York City-focused operations. While the company expects its dividend payout ratio to be above its 60% to 70% target range in 2021, due to the ongoing impact of the pandemic, it anticipates that its earnings will rebound as that region recovers. In addition, it should benefit from investments to expand the earnings-generating capacity of its utility operations and the accelerating adoption of clean energy.
Consolidated Edison is a leader in solar energy. It's the second-largest solar-power producer in the U.S. and the seventh biggest globally. With the costs of solar coming down and demand rising, Consolidated Edison should be able to earn even higher returns from this business in the future, while benefiting from a steady stream of development opportunities.
The utility also boasts a strong investment-grade balance sheet, giving it the financial flexibility needed to invest in expanding its portfolio while continuing to increase its dividend. With a 4.2% yield, Consolidated Edison offers an above-average payout in today's low-yield environment. Add that to the company's elite dividend growth history, and it stands out as an excellent dividend stock to buy right now.
A slow-yet-steady multibagger
Neha Chamaria (American States Water): Shares of American States Water have dropped quite a bit in the past week or so. Although the stock yields a small 1.7%, its dividend growth makes it the kind of stock you'd want to buy on any dip.
As a regulated water utility, American States Water enjoys steady cash flow that ensures the stock doesn't suffer much, even in a market crash. That's the biggest reason why American States Water has the longest streak of annual dividend increases among all S&P 500 stocks with a jaw-dropping record of 67 consecutive years of dividend increases. That dividend growth has gone a long way in making patient investors in the stock rich over the decades.
Don't think American States Water is resting on its laurels. The company has strong rate-base increases in the pipeline and is steadily generating greater revenue from its contracted-services segment, which serves military bases under 50-year, fixed-price contracts. This segment is where American States Water could really grow, while regular base-rate increases add to its top line.
With management aiming for at least 7% compound annual growth in dividends in the long run, you can rest assured this stock will save your back when the going gets tough -- which is why it's one of the best Dividend Kings you can buy and hold forever.
