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3 Dividend Stocks You Can Buy and Hold Forever

By Courtney Carlsen – Dec 7, 2021 at 8:18AM

Key Points

  • Dividend stocks are a great source of income for retirees.
  • Dividend stocks often outperform the broader market because they require companies to have consistent cash flow and good risk management.

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Dividend stocks have a history of outperforming companies that don't pay a dividend.

Dividend stocks can be a great source of income for investors, especially retirees. That's because dividend stocks pay out cash distributions regularly, usually once per quarter.

While dividend stocks can be a great source of income, they can also be an excellent way to grow your wealth over time. That's because those companies that consistently pay out dividends must show strong discipline in managing their cash to ensure they can make regular dividend payments to investors. Not only that, but dividend-paying companies tend to outperform the broader market. According to Royal Bank of Canada's Global Asset Management division, from 1986 through 2016, dividend-paying companies returned investors an average of 9.9%, outperforming the 6.6% return in the broader market.

Three companies with solid dividend yields that you can invest in forever include Morgan Stanley (MS 1.96%), U.S. Bancorp (USB 1.69%), and Cincinnati Financial (CINF 1.56%).

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1. Morgan Stanley

Morgan Stanley is a financial services firm with businesses across investment banking, wealth management, and securities trading. The company is a good dividend stock because it has diversified its revenue streams. Before 2020, the company relied primarily on investment banking and trading to generate revenue.

Seeing how volatile the business's earnings were, CEO James Gorman looked to diversify the company's revenue so it could perform well in all kinds of markets. The bank made a splash last year, making not one but two major acquisitions. The bank acquired E*TRADE and Eaton Vance, spending roughly $20 billion to improve its profitability in all kinds of market conditions.  

E*TRADE gives the firm a consistent revenue stream from trading commissions and fees. This revenue stream can perform quite well when market volatility is high and investors engage in a lot of trading activity. Eaton Vance gives it a revenue stream that can do well in all market conditions. Wealth management will collect fees on total assets under management (AUM) and can provide it with revenue.  

This consistent revenue stream should help the company maintain and even grow its dividend for the years to come. The bank doubled its dividend payout after the Federal Reserve lifted dividend restrictions on banking sector stocks earlier this year, and the stock currently yields investors a healthy dividend of 2.1% annually.  

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2. U.S. Bancorp

U.S. Bancorp is a well-run bank that focuses on risk management and strong credit quality. Its focus on high-quality loans and conservative loss provisions are one reason why it is known as one of the best-run super-regional banks in the U.S. U.S. Bancorp is also one of Berkshire Hathaway's top 10 largest holdings.  

What makes U.S. Bancorp a solid dividend stock is its consistent earnings over the past decade. The stock currently trades at a price to tangible book value (equity minus intangible assets and goodwill) of 2.4, putting it at a more expensive valuation than other banking competitors.  

However, it trades at a premium for a good reason. The bank has maintained stellar profitability ratios compared to its peers. Over the past 10 years, U.S. Bancorp has maintained an average return on equity (ROE) of 15.2% and an average return on assets (ROA) of 1.4% -- beating out other major banking competitors, including JPMorgan Chase, Bank of America, and Wells Fargo.  

U.S. Bancorp has displayed excellent risk management and credit quality. Additionally, it has also built up a strong payments business, which should drive strong future growth for the bank. The bank currently gives investors an attractive yield of 3.1%.  

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Image source: Getty Images.

3. Cincinnati Financial

Insurance companies can be a great source of income because of their consistent cash flow generation. That's a big reason why Warren Buffett has described insurance as one of his favorite industries to invest in.

Cincinnati Financial is an insurer focused on writing property and casualty insurance policies. The company mainly makes money from commercial insurance policies or those policies for businesses. It also underwrites personal lines of policies like auto insurance and homeowners insurance.  

It has done a great job of writing profitable policies for decades now, and that is why it has been able to increase its dividend payout so consistently. From 2012 through 2020, the company has grown cash flow from its property-casualty policies at an 11.5% compound annual growth rate.  

The company has invested heavily in its technology and AI to underwrite better policies and handle claims quickly and efficiently. These investments help it stay ahead of its competition, which has seen younger insurance companies looking to leverage AI and big data to disrupt the entire industry.  

Cincinnati Financial has shown an impressive history of consistently increasing its dividends. The company is a part of the exclusive Dividend Kings club -- stocks that have increased dividend payouts for at least 50 years straight. The company has increased its dividend 61 years consecutively, a feat that only eight other companies have achieved. It also sports a solid dividend yield of 2.1%.  

Bank of America is an advertising partner of The Ascent, a Motley Fool company. Wells Fargo is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen owns shares of Morgan Stanley. The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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