Passive income is a powerful wealth-building tool and something that investors should keep in mind as they begin 2022. Well-managed dividend stocks can provide that passive income year in and year out. The best ones can be a great investment strategy for their ability to both pay you and appreciate in value.
The best of the best have earned the title of Dividend Kings, a select group of 31 companies that have been managed to increase their dividend payouts annually for at least 50 consecutive years. This is fertile ground to find stocks that can form a strong foundation for any long-term portfolio.
Let's take a closer look at five of these Dividend Kings that might be worth buying into in 2022.
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1. Johnson & Johnson: dividend yields 2.5%
Healthcare is one of the largest, most important industries in the world. Healthcare conglomerate Johnson & Johnson (JNJ -0.54%) develops and sells a variety of products, including pharmaceutical drugs, medical devices, and some of the world's most recognized consumer products, like Tylenol and Band-Aids.
JNJ Free Cash Flow data by YCharts
Johnson & Johnson has produced more than $22 billion in free cash flow over the past year, and we can see that the company has steadily grown for decades, the secret behind its 59-year streak of dividend increases. Management is spinning off its consumer products business as a new company in the next 18 to 24 months, so investors will want to keep this in mind when considering the stock.
2. Hormel Foods: dividend yields 2.2%
Many of the market's strongest dividend stocks tend to make things that are popular at the grocery store, where consumers buy food and beverage products weekly. Hormel Foods (HRL 1.28%) is a prime example of this, expanding its legacy canned meat SPAM brand into a broad portfolio of meats, spreads, soups, nuts, and more.
HRL Free Cash Flow data by YCharts
The company's free cash flow isn't as stable as Johnson & Johnson's, mainly due to acquisitions and the impact that certain commodity costs can have on Hormel's pork and poultry businesses. However, free cash flow still grows over the long term, and disciplined management keeps very little debt on the balance sheet to stay flexible. Investors often overlook strong leadership in stocks, but Hormel's been able to raise its dividend 55 years in a row because of it.
3. Lancaster Colony: dividend yields 2%
Let's stay in the grocery store, where Lancaster Colony (LANC 0.94%) sells its portfolio of dressings, dips, and bread products. The company's playbook is similar to Hormel; its products are well-known with consumers, command premium shelf space, and are bought repeatedly by consumers and restaurants. It's one of the smaller companies in the Dividend King club, with a market cap of less than $5 billion.
LANC Free Cash Flow data by YCharts
We can see above how the business has volatile cash flows over time, resulting from numerous acquisitions that management has made over the years. Acquisitions can be tricky for management, which must pay the right price for assets but effectively integrate them into the business to succeed. Lancaster Colony appears to have done well, utilizing its balance sheet when needed to not only grow through these acquisitions but pay a dividend that has increased each of the past 59 years.
4. Altria Group: dividend yields 7.7%
Many investors shy away from tobacco stocks, which is perhaps why Altria Group's (MO 0.14%) stock pays the highest dividend yield on this list and one of the highest of any Dividend King. The tobacco company sells Marlboro, the most popular cigarette brand in the United States. Smoking is a slowly dying habit, and the company sells fewer cigarettes each year.
MO Free Cash Flow data by YCharts
However, the addictive nature of tobacco enables Altria to continually raise its prices and continue making more money each year. Free cash flow steadily grows over time, the significant drop coming in 2008 when it spun off its international operations as Philip Morris International.
Altria's payout has grown 52 years and counting. As long as the company can continue slowly raising its prices, investors can likely count on the dividends to keep increasing.
5. American States Water: dividend yields 1.4%
Everyone needs water to live, making it arguably the most important product a company can sell. American States Water (AWR 1.03%) is a water and electric utility that serves more than 1 million residents in nine states.
Utilities are a very stable business model because regulators keep competitors from crossing into each other's territories and authorize price increases to support the utility's business to invest capital to build and maintain infrastructures like pipes, power lines, and production facilities.
AWR Net Income (TTM) data by YCharts
Because these significant investments impact free cash flow, we can look at bottom-line profit, called net income, to understand how steady the business is. These steady price increases, combined with the company's vital importance to its residents, virtually guarantee that American States Water is always getting paid (and growing). Thus, its shareholders get paid those dividends that have increased for 67 years and still going.
