Dividends can play a big role in the returns of stocks over many years. Since 1960, 84% of the returns from the S&P 500 index resulted from the compounding returns of reinvested dividends, according to a study by Hartford Funds.
If I were structuring my investments to produce dependable dividend income for retirement, I would consider adding shares of Procter & Gamble (PG 0.23%), Coca-Cola (KO 0.49%), and Apple (AAPL 2.48%) to my holdings. These companies are highly profitable and provide products people use every day, which goes a long way toward paying out rising dividend payments over time. Here's what makes these companies great investments.
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1. Procter & Gamble
Procter & Gamble is one of the best income stocks you can own, simply because of its strong consumer brands and impressive streak of paying dividends to shareholders. P&G has increased its dividend for 65 consecutive years. Perhaps more impressive is that the company has paid annual dividends for 131 years.
Through high-volume sales of recognizable brands like Tide, Mr. Clean, Gillette, and Crest toothpaste, among others, P&G pumps out plenty of profits and free cash flow to fund growing dividends. Through the first half of fiscal 2022, the company has returned $11.9 billion to shareholders through a combination of dividends and share repurchases. That's approximately 3.4% of P&G's current market capitalization (total shares outstanding times stock price).
P&G competes on innovation and product superiority. The company keeps a close relationship with retailers that sell its products, which in turn can inform its product and marketing initiatives. Innovation allows P&G to hold a leading market share position even though it may not be the cheapest product on the shelves against other brands. This drives a high-margin business, where P&G's operating margin has hovered above 20%.
People will always need to do the laundry, clean house, and shave, no matter the state of the economy. The stock currently offers an above-average dividend yield of 2.4%, supported by the company's cash payout ratio of 57% relative to its free cash flow. That gives P&G plenty of wiggle room to keep raising the dividend even if free cash flow growth flattens out temporarily. For these reasons, P&G is a great starter dividend stock to buy today.
2. Coca-Cola
Coca-Cola is more than just Coke. The beverage titan now owns more than 200 brands sold in more than 200 countries. It is the largest nonalcoholic beverage company in the world, and it's another elite dividend stock worth considering. It has the brand power and growth opportunities to continue paying dividends for a long time.
There are billions of people in the world, but only a small percentage of them consume these beverages. "Even if we double the number of drinkers of our beverages over the next decade, there would still be plenty of headroom to grow for many years to come," CEO James Quincey said at the recent Consumer Analyst Group of New York.
The latest results lend credibility to Quincey's statement. Coke finished 2021 with global unit case volume up 8% and non-GAAP revenue up 16%, reflecting a strong rebound from the soft demand during the pandemic. Higher demand lifted its gross margin up one percentage point to 60.3%, driven in part by a shift in sales mix to restaurants, sporting events, concerts, and other away-from-home channels.
The recovery last year shows that Coca-Cola is still a preferred beverage when people are having fun. That's also why Coke's advertising often tries to associate consumption of its beverages with doing fun activities away from home.
The stock currently pays a tasty dividend yield of 2.9%, while only paying out 64% of its annual free cash flow in dividends. All this makes Coca-Cola worth holding for retirement.
3. Apple
While investing in well-entrenched consumer goods companies that pay dividends can be very rewarding, it's also a good idea to think about growth. Keep in mind that the total return, including dividends, of Coke and P&G have trailed the return of the S&P 500 over the last decade. This is why you need to consider adding a dividend growth stock to the mix, like Apple.
The iPhone maker's brand is just as iconic as Coca-Cola and just as established in the mindset of consumers. Over the last three years, its installed base of active devices has climbed from 1.4 billion to over 1.8 billion. Apple's users keep credit cards on file, ready to purchase a subscription or app on their iPads or iPhones. This is driving steady double-digit growth in Apple's services business, which now makes up 16% of total revenue.
Apple's dividend yield is much smaller than Coke or P&G's, but it's growing much faster. Over the last five years, Apple has increased the dividend by 52%, compared to 27% for P&G and 18% for Coca-Cola. Its dividend yield is still relatively low at 0.56%, but Apple generates over $100 billion in annual free cash flow to continue increasing the dividend payout for a long time.
Indeed, Apple's free cash flow might be growing faster than management can dish it out to shareholders. The company paid out only 14% of its free cash flow in dividends last year, so it could double the payout and bring its dividend yield over 1% if it wanted to do so.
Apple is one of the great brands of our time, and investors might wish they had bought and held this stock 30 years from now.
