Like a lot of investors, I'm a big fan of dividend-paying stocks for more reasons than one. I'm a busy guy, so receiving regular cash payments for doing nothing more than holding a stock appeals to me.
Getting paid to do nothing is great, but there's an even better reason to love dividend stocks. They tend to outperform the rest of the market.
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During the 50-year period that ended last year, dividend-paying stocks in the S&P 500 index generated a 10.24% average annual return. That's enough to turn a modest initial investment into a retirement nest egg. Over the same time frame, stocks that didn't pay dividends fell by 0.6% on average, according to Hartford Funds and Ned Davis Research.
All of these stocks have a history of making good on their dividend commitments and raising their payouts at least once a year. There's also a good chance that they can keep up their streak and deliver heaps of income over the long run.
CVS Health: A 3.5% yield
Practically every American reading this knows where they can find a CVS Health (CVS -0.22%) pharmacy, but most don't realize that retail is just a tiny portion of this healthcare conglomerate's overall business.
CVS Health has been able to raise its dividend by 169% over the past decade thanks to a pharmacy benefits-management business that is America's largest. Also, in 2018 it acquired Aetna, a large health insurance benefit-management business for $78 billion.
Aetna receives monthly premiums from around 37 million Americans. With walk-in clinics at 1,100 of its pharmacies, CVS Health can already provide many of the benefits it's paid to manage, and it's bringing a lot more providers on board. This March, CVS completed its acquisition of Signify Health, a network of more than 10,000 clinicians who perform millions of in-home health assessments annually.
CVS Health paused payout raises for a few years to pay down some debt it took on to buy Aetna. It's raised the payout by 21% over the past two years, and more big raises could be on the way. This strongly profitable company used up just 17% of the free cash flow its operation generated over the past year to meet its dividend commitment.
Ally Financial: A 4.4% yield
Ally Financial (ALLY 0.41%) is a consumer-focused digital bank, but it isn't a risky fintech start-up. Ally was founded by General Motors over a century ago, but it's been trading as a separate entity since 2014.
Ally Financial has increased its payout by 100% over the past five years. Despite rapidly raising the payout, the bank needed just 14% of the free cash flow it generated over the past 12 months to meet its dividend commitment.
Ally Financial has a lot of auto loans on its books, and it's quickly accumulating more. The company processed 3.3 million applications in the first quarter and originated $9.5 billion in auto loans.
Ally's retail auto loan portfolio yielded 7.66% in Q1, while interest paid to savers worked out to 3.16% of their deposits on average. With a healthy overall net-interest margin of about 3.5% at the moment, meeting and raising its dividend obligation should be a breeze.
Johnson & Johnson: A 2.9% yield
If you haven't kept an eye on Johnson & Johnson (JNJ -0.46%), or J&J, you may be surprised to learn that it no longer sells the consumer health products that carry its name. Earlier this year, it spun off its consumer health segment into a new company called Kenvue.
There aren't many dividend programs more reliable than J&J's. The company has been meeting its dividend commitment for over a century, and it's raised its payout for 61 consecutive years. The payout has risen 32% over the past five years. Now that the company's focused on pharmaceuticals and medical technology, investors can reasonably look forward to larger payout raises than in years past.
Soaring sales of a blood cancer treatment called Darzalex pushed Q1 pharmaceutical-segment revenue 7.3% higher year over year after adjusting for a stronger dollar. Last December, J&J acquired a heart pump manufacturer called Abiomed, and the acquisition helped medical technology segment revenue rise 11% year over year after adjusting for currency exchange rates.
Over the past 12 months, J&J used 73% of the free cash flow its operations generated to meet its dividend commitment. This ratio means the company can continue raising its payout in line with earnings growth but not any faster. What it lacks in speed, though, it more than makes up for with decades of consistency. Adding some shares to a portfolio now looks like a great idea for investors who want reliably growing payments.
