Dividend stocks are an underrated wealth-building tool. It's easy to dismiss an investment that pays you 2% to 4% each year, but these little building blocks of passive income can be powerful over time. You might not have known that reinvested dividends and compounding have contributed 84% of the S&P 500's total returns since 1960.
Thankfully, building a diverse portfolio of quality dividend stocks doesn't need to cost an arm and a leg. Here are four fantastic dividend payers to start with that you can buy with just a $400 investment.
Connect to this 6% yield
Verizon Communications (VZ 0.60%) is the leading wireless carrier in the U.S. and among a small group of companies that control the industry. Smartphones and the internet are vital parts of modern life, which makes a consumer's phone bill almost as crucial as utilities like water and electricity.
The company's dividend offers investors a 6.2% yield at the current share price. Consider Verizon a high-income stock; the payout itself has grown by an average of just 2% annually over the past five years. Verizon spends only half its profits on the payout, so investors can feel confident in its ability to afford the dividend.
The stock trades at a price-to-earnings ratio (P/E) of eight, which is well below its median P/E of 13 over the past decade. Investors looking for a safe high-yield stock can buy Verizon at a discount today.
A smoky 5% dividend you can count on
Philip Morris International (PM -1.53%) is the world's largest publicly traded tobacco company. Sister company Altria spun out its international operations in 2008 as Philip Morris International (PMI). The company sells the renowned Marlboro brand of cigarettes in non-U.S. markets worldwide, and it also developed and sells IQOS, a heated tobacco device that it claims is a less toxic alternative to cigarettes.
Tobacco stocks are famously flush with cash, and PMI is no exception. Today, the company's dividend yields 5.3%. Management hikes the dividend between 3% and 4% in a given year, enough to keep pace with historical inflation rates. The company's dividend payout ratio is very affordable at 66% of the company's cash profits.
The stock trades at a P/E of 16, slightly below its decade median of 17. However, Philip Morris could have a bright future ahead. The company's IQOS brand is steadily expanding across global markets and has the potential to support the company as cigarette use declines over the coming decades.
A healthcare giant yielding almost 3%
Johnson & Johnson (JNJ -0.79%) is a healthcare conglomerate that touches virtually every part of the industry. It sells over-the-counter products like Tylenol and Band-Aids, medical devices, and pharmaceutical drugs globally.
The most prolific dividend stock on this list, Johnson & Johnson is a Dividend King, having raised its payout annually for 60 consecutive years. Investors get a little bit of everything with this stock. It yields 2.8% and has averaged 5% to 6% dividend growth annually over the past decade. The payout ratio is under control at 56%, and the company's credit is AAA rated, one of only three public companies rated as such. That's quite a safety net for an already reliable business.
The stock trades at a P/E of 23, higher than its long-term norm of around 21. However, the company is spinning off its consumer products business by the end of next year, giving investors shares of both companies. The market could value the separate businesses more highly on their own than as part of a conglomerate, which would benefit shareholders.
A new Dividend Aristocrat that yields 1%
Church & Dwight (CHD 0.45%) has built a conglomerate of household and personal products. The Arm & Hammer baking soda brand was born in the mid-1800s, and today Church & Dwight owns several specialized product brands like Oxi Clean, Trojan, and more.
Investors aren't getting much income from the stock -- the dividend yield is just 1.2%, easily the lowest of these four stocks. But what the stock lacks in yield, it makes up for with a long runway for growth. The payout ratio is just 30%, and the dividend has averaged 7% growth over the past five years. Church & Dwight is a newly anointed Dividend Aristocrat, having raised its dividend for 26 years.
The stock's current P/E of 27 is on par with its long-term median, and the high valuation shows the market's appreciation for Church & Dwight's steady growth and quality business model. Management has a long track record of growing through strategic acquisitions, which helps explain why it doesn't put all its cash profits into the payout. The stock has trounced the S&P 500 over its lifetime, so if investors want a mix of passive income and capital gains, Church & Dwight is a winner.