While the market has rallied in recent months, recession fears remain real. That has left many investors apprehensive about where to invest.
Historically, dividend growth stocks have been magnificent long-term investments. Over the past 50 years, dividend growers have significantly outperformed the broader market -- 10.2% versus 7.7%. Coca-Cola (KO), Johnson & Johnson (JNJ -0.46%), and Walgreens Boots Alliance (WBA 0.57%) are three of the best at growing their dividends. Those with around $500 or so to invest can buy them with confidence right now.
Dividend royalty
Coca-Cola is an elite dividend stock. The company currently offers a dividend yield of around 3%, nearly double that of the broader market (the S&P 500's dividend yield is around 1.6%). Meanwhile, Coca-Cola has an outstanding record of increasing its dividend. It gave investors a 4.6% raise earlier this year, its 61st straight year of dividend growth. That kept it in the elite class of Dividend Kings, companies with 50 or more years of growing their dividends.
The beverage giant is a cash flow machine. It produces about $9.5 billion of free cash flow each year after covering capital expenses, easily covering its $7.6 billion dividend outlay. That enables it to strengthen its already elite balance sheet. Coca-Cola ended the first quarter with $13.7 billion of cash, short-term investments, and marketable securities. That helped keep its net leverage ratio low at 1.8, supporting its "A" bond rating.
Coca-Cola's strong cash flow and balance sheet allow it to invest in supporting its growth. The company's long-term target is to grow its earnings per share by 7% to 9% per year, which should support rising free cash flow and continued dividend increases.
A very healthy dividend
Johnson & Johnson is as elite as Coca-Cola in paying dividends. It currently yields 2.9%. It increased its dividend by 5.3% earlier this year, matching Coca-Cola with 61 straight years of dividend growth.
Meanwhile, the healthcare giant backs its payout with an even stronger financial profile. It's one of only two companies with AAA-rated credit. It ended the first quarter with $33 billion in cash against $53 billion in debt following its $16.6 billion all-cash deal to acquire Abiomed last year. The company produced a prodigious $17 billion in free cash flow last year after funding $14.6 billion of R&D, easily covering its $11.7 billion dividend outlay. That gave it some excess cash to repurchase shares.
Johnson & Johnson's R&D investments and acquisitions should enable it to grow its earnings and free cash flow. That should support continued dividend growth.
On its way to dividend royalty
Walgreens Alliance Boots offers an even higher-yielding dividend of over 6%. The healthcare, pharmacy, and retail company has an exceptional dividend history. It has made dividend payments for over 89 years, including raising the payout for the past 47 straight years. That puts it a few years away from joining Coca-Cola and Johnson & Johnson as Dividend Kings.
The company is currently investing heavily to build out its consumer-centric healthcare solutions platform to drive future growth. It recently invested $3.5 billion to support VillageMD's acquisition of Summit Health and closed acquisitions of Shields and CareCentrix. It has been selling non-core assets to help finance this strategy and maintain its investment-grade balance sheet. While this transition period has put some downward pressure on the share price (driving up the dividend yield), it should pay off over the long term by reaccelerating earnings growth. That should enable it to continue increasing its dividend in the future.
Top-quality dividend stocks
Coca-Cola, Johnson & Johnson, and Walgreens have delivered steady dividend growth for decades. That should continue. All three companies have the cash flow and financial flexibility to continue investing in growing their businesses and dividends. You can confidently buy any of their stocks right now to collect a potential lifetime of attractive and growing dividend income.
