When the market hits a tumultuous stretch, investors often flock to dividend stocks. Companies in this category will actually pay you to own their shares, and stocks that pay dividends have historically outperformed those that do not by a wide margin.
Returning cash to shareholders across a long stretch of time is typically a strong indicator of a sturdy business. If a company can reliably return cash to shareholders, chances are good that its balance sheet is solid and the business is consistently generating strong earnings and free cash flow.
A business having a long streak of increasing the amount of cash it returns to shareholders annually can be an even better indicator. Read on for a closer look at a selection of income-generating stocks you should consider adding to your portfolio.
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Dividend growth, yield, and your portfolio
Because they offer dependable cash returns and typically have sturdy businesses, dividend-paying stocks can provide a buffer against volatility, and they are often favored when market conditions are tough. With turbulence roiling the market lately, now could be a good time to consider fortifying your portfolio with some top income-generating stocks.
The chart below takes a look at five dividend stocks, their dividend yields, and the number of consecutive years they have increased payments to shareholders.
| Company | Industry | Dividend Yield | Years of Consecutive Payout Growth |
|---|---|---|---|
| Lam Research (LRCX -2.56%) | Semiconductor equipment | 1.2% | 8 |
| Walmart (WMT -0.65%) | Retail | 1.5% | 49 |
| PepsiCo (PEP 1.65%) | Food & beverage | 2.7% | 49 |
| ExxonMobil (XOM -0.09%) | Oil & gas | 3.9% | 39 |
| Verizon Communications (VZ 0.88%) | Telecommunications | 5.4% | 15 |
Data source: Lam Research, Walmart, PepsiCo, ExxonMobil, and Verizon Communications. Chart by author.
Companies with high yields or long histories of payout growth often have mature businesses and tend to increase their dividends at relatively slow rates. For example, take a look at Verizon's payout growth over the last five years.
VZ Dividend data by YCharts.
Roughly 11% growth over half a decade is better than nothing, but it's probably not the kind of momentum that would convince you to invest in the stock on its own. Thankfully, Verizon stock is already paying a fantastic 5.4% yield at current prices, and any increase on top of that is gravy.
Meanwhile, companies newer to paying dividends or having relatively small yields often increase their payouts at a much faster clip. Here's a look at Lam Research's payout growth across the same stretch.
LRCX Dividend data by YCharts.
Lam has been growing revenue and earnings at a much faster rate than Verizon, and the semiconductor equipment industry generally looks poised for much stronger growth than the telecommunications industry over the next decade. On the other hand, steadily increasing demand for internet and communications services looks like a pretty safe bet, and Verizon's strong brand and category-leading services should help it continue to serve up solid performance and return cash to shareholders.
There are exceptions to this kind of dynamic, but these are the kinds of trade-offs you can expect when choosing between dividend-growth and yield-oriented stocks.
Focus on backing strong businesses
When investing in dividend stocks, it pays to put your money behind companies that benefit from brand strength, sturdy competitive moats, and reliable demand. These advantages help companies keep cash flowing back to shareholders even when times are tough. Investing in dividend stocks that have these characteristics can be a great way to generate passive income and add defensive fortification to your portfolio.
