You might say that a dividend that is paid and raised is the best kind of dividend. There aren't many better feelings for an investor than to know your stocks are putting money in your pocket while you sleep, and giving you a raise each year!
How do we find these reliable companies that let us sleep well at night holding them? Let's break down the anatomy of a dividend stock and highlight three of the best there are.
The ingredients for a dividend masterpiece
There are thousands of dividend-paying stocks to choose from, but when you zoom out and go back decades, it's a much smaller list of companies that can continually pay and increase a dividend year in and year out. Just over 100 companies have been able to increase their dividend for the past 25 years or longer.
Image source: Getty Images
Why is it so difficult? The corporate world is ruthlessly competitive. It's hard for a business to stay on top of the mountain for decades at a time. The world is changing, and the economy cycles back and forth between recessions and growth.
So for a company to be able to pay a dividend every year and give shareholders an annual raise, these businesses need to have:
- A durable business model that thrives in any economy.
- A strong brand that can keep competition at bay.
- Excellent financials and substantial profits to afford these dividends.
Sometimes the answer to a challenging question is simple. If we look in our own homes, we will probably find the products of these three dividend stocks. All three check the boxes on this list, and I think they have the chops to pay you each year for the rest of your life.
1. Procter & Gamble: 2.5% dividend yield
If you check your bathroom or laundry room, you will likely encounter one of Procter & Gamble's (PG -0.03%) thousands of products from its 65 individual brands. The company is a conglomerate that sells its household goods to families all over the world.
Its brands include Pampers, Tampax, Puffs, Bounty, Gillette, Crest, NyQuil, Suave, Olay, Head & Shoulders, Old Spice, Tide, and more. These are items that you likely buy at the store every month, often without the thought even crossing your mind.
During hardship, you will probably continue brushing your teeth and washing your clothes; it will likely be other things in the budget that get cut first. As a result, Procter & Gamble has been remarkably stable, and has increased its dividend every year for the past 65 years! It's generated more than $15 billion in free cash flow over the past 12 months and spends just half of it on its dividend, so investors should expect payments to continue for years to come.
2. Johnson & Johnson: 2.6% dividend yield
Healthcare is one of the largest and most important industries in the world. Our health comes first in the budget, and conglomerate Johnson & Johnson (JNJ -1.15%) touches a lot of that.
It is one of the world's largest pharmaceutical companies, with 13 drugs that do $1 billion or more in annual sales. It's a medical device company with products for applications including surgery, vision care, wound care, and more. If you go to the drugstore, you will see the company's products, including Tylenol, Motrin, Benadryl, Band-Aids, and Listerine. Johnson & Johnson is virtually everywhere in healthcare.
Having such a wide presence within that sector has enabled it to continually put money in the pockets of investors, raising its dividend for the past 59 years and running. The company has produced more than $22 billion in free cash flow over the past 12 months and spends just under half on its dividend, lining up investors for years of more dividends.
3. Clorox: 2.8% dividend yield
Back into the home, we look at Clorox (CLX -0.19%), a conglomerate of household products, including brands like Clorox, Pine-Sol, Glad, Fresh Step, Kingsford Charcoal, and Hidden Valley Ranch.
Similar to Procter & Gamble, these are products that we buy faithfully out of both habit and necessity, and the brands are strong enough that they continue to sell well despite competition from generic brands.
Clorox is the smallest of the three companies mentioned here, with a market cap of just $20 billion. However, it's been an outstanding dividend stock, increasing its payout for the past 44 years. The company generated $945 million in free cash flow over the past 12 months, and its dividend payout ratio of 59% leaves plenty of room for growth.
