Dividend investing isn't just for retirees or conservative investors looking for income and little upside. Blue-chip dividend stocks have what it takes to grow and provide solid total returns, making them a fit for just about any long-term strategy.
Finding high-quality businesses to invest in can be a key to building long-term wealth. Companies that dominate their industry and produce more profits each year tend to be high quality and that leads to more money in your pocket through either price appreciation, dividend payouts, or both.
Let's take a closer look at five high-quality businesses that also happen to be outstanding dividend stocks that could help you build a stronger investment portfolio in 2022.
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1. Starbucks
Dominant consumer brands can be powerful businesses, and coffee chain Starbucks (SBUX 1.09%) is one of the most recognizable brands out there. Starbucks sells its beverage products across the world in its 17,000 stores.
SBUX Free Cash Flow (% of Annual Revenues) data by YCharts.
Starbucks has steadily grown by adding new stores and incrementally increasing its prices to its loyal customer base. Meanwhile, coffee is a high-margin product, enabling the company to generate $0.15 in free cash flow from every sales dollar. The company's annual dividend of $1.06 a share yields 2% at current prices and the company has raised its dividend annually for 12 years in a row. The dividend payout ratio is about 55.2%, which is quite sustainable.
2. Visa
Payment networks are the glue that holds the economy together, connecting our banks to the stores and shops where we swipe our cards to pay for things. Visa (V -0.48%) is the most extensive network, providing the backbone for roughly half of the worldwide credit cards issued. Visa's business works as a toll booth; it collects a small percentage of each transaction that passes through its network.
V Free Cash Flow (% of Annual Revenues) data by YCharts.
Visa's payment network is already established and no longer requires a ton of investment. The company becomes increasingly profitable because revenue grows faster than Visa's costs. About $0.60 of free cash flow is created for each revenue dollar now, making Visa an excellent dividend stock. The company's annual dividend of $1.50 per share has been raised in each of the past 13 years, and the dividend yield is currently 0.7%. The low yield is partly a reflection of the strong stock price growth Visa has generated in the past few years. The dividend payout ratio is about 26.6%, leaving plenty of room for future dividend growth.
3. Lockheed Martin
The United States spends billions of dollars every year on building and maintaining its military, and defense and aerospace technology company Lockheed Martin (LMT 0.01%) plays a big part in that. About 74% of the company's total $65 billion in net sales in 2020 was from business with the U.S. government. Lockheed Martin makes a range of advanced equipment including weapons systems, fighter jets, helicopters, tanks, and more.
LMT Free Cash Flow (% of Annual Revenues) data by YCharts
The company turns nearly $0.10 of every revenue dollar into free cash flow, a pretty impressive feat considering the massive spending needed to design and build some of the most advanced military equipment in the world. But in a way, the United States is a great customer because the government has a strong track record of paying its bills. Lockheed's strong ties with the military have enabled 19 straight years of dividend raises. The annual dividend of $11.20 per share currently yields 3%. The payout ratio of 51.7% is steady and sustainable.
4. The Hershey Company
Nearly everybody loves chocolate, and that includes investors. The Hershey Company (HSY 1.32%) is the king of the chocolate industry in the United States; it owns three of the top four most popular brands and an estimated 43% overall market share.
HSY Free Cash Flow (% of Annual Revenues) data by YCharts.
Chocolate isn't a flashy business, but Hershey's strong brand power gives it the ability to keep slowly raising its prices over time. Chocolate is also a versatile food, and Hershey's used this to begin infusing it into salty snacks to make new products. The company's increased its annual dividend yearly over the past 12 years. The $3.604 per share paid out annually yields 1.8%. Its payout ratio of 52.3% is steady and sustainable.
5. Domino's Pizza
Pizza is big business; there are more than 61,000 pizzerias in the U.S. alone, found on nearly every corner in every town across America. Domino's Pizza (DPZ -0.08%) sells pizza worldwide through more than 18,000 locations. Its cheap and tasty pizza, combined with technology such as its smartphone app and quick delivery, has earned it an estimated 29% market share in the United States, a notable feat in such a competitive industry.
DPZ Free Cash Flow (% of Annual Revenues) data by YCharts.
Domino's Pizza is primarily a franchise business model, which means that store operators pay the company for the branding to open a location. The franchisee (store operator) is responsible for paying wages, etc., making Domino's a more profitable business. The company turns $0.12 of every revenue dollar into free cash flow as a result and has paid and raised its dividend annually for the past nine years. The annual dividend of $3.76 per share generates a yield of 0.8%. The low yield is partly a reflection of the strong stock price growth Domino's has seen over the past few years. Its payout ratio of 28.6% is quite sustainable and has plenty of room for future growth.
