Wayne Gretzky probably had no idea how much one thing he said would be repeated through the years. But one of his most famous statements certainly was memorable and worthy of repetition: "I skate to where the puck is going to be, not where it has been."
His idea is applicable in lots of areas. Income investors could certainly benefit from it. Don't just look at a stock's current dividend; also consider where it could be in the future.
With this in mind, three Motley Fool contributors identified dividend growth stocks they think are great picks to buy and hold. Here's why they chose AbbVie (ABBV -4.58%), Johnson & Johnson (JNJ -0.46%), and Pfizer (PFE 0.55%).
Upward and onward
Keith Speights (AbbVie): One of the first things you'll probably notice about AbbVie is its juicy dividend yield of over 4.4%. What that yield doesn't reveal, though, is just how great of a track record the big drugmaker has with its dividend program.
AbbVie belongs to the elite group of stocks known as Dividend Kings. The company has increased its dividend for 51 consecutive years. That's impressive, but here's the real kicker: AbbVie's dividend has grown by a whopping 270% since 2013, when it spun off from Abbott Labs.
Not everything is sunshine and roses in AbbVie-land these days, though. Sales are tanking for the company's top-selling drug, Humira, now that it faces biosimilar competition in the U.S. This decline is weighing on AbbVie's total revenue and profits as well.
However, income investors don't have anything to worry about. AbbVie remains in a great position to keep the dividends flowing and growing.
Better yet, the company predicts a return to solid revenue and earnings growth by 2025. AbbVie has prepared well for Humira's sunset years by building a robust pipeline and making smart acquisitions. The company -- and its dividend -- should continue to move upward and onward.
A generous dividend king with an above-average yield
David Jagielski (Johnson & Johnson): If you're investing in dividend stocks, it's hard to find a stock that ticks off all the important checkboxes: dividend growth, a high rate of increases, a solid yield, and stability. But with Johnson & Johnson, you get all that, which is what makes the healthcare company an ideal dividend growth stock to buy and hold.
Buying the stock right off the bat gets you an above-average yield. At 3%, you're collecting close to double what the average S&P 500 stock pays at 1.6%. To collect $1,000 in annual dividends from Johnson & Johnson's stock, you would need to invest a little over $33,000. With the average S&P 500 stock, you would need to invest more than $62,000 to expect the same type of payout.
With Johnson & Johnson's stock, you're also getting an investment that already has an incredibly strong track record for long-term dividend growth. In April, the company announced it was raising its dividend for the 61st consecutive year, making it a standout dividend stock even among Dividend Kings.
What's more impressive is that the company has generously raised its payouts over the years. While some dividend growth stocks might raise their payouts by a modest 1% or 2% each year, that's not the case with Johnson & Johnson. Its most recent rate hike was a 5.3% increase. And over the past 10 years, the company has raised its dividend by more than 80%, averaging a compounded annual growth rate of 6.1% during that time frame.
Lastly, there's also stability. The company is a safe bet to record a profit, and over the past four years, its earnings have totaled nearly $69 billion. Over the past 12 months, the company has paid out 68% of its free cash flow in dividends, suggesting there's still room for more rate increases without negatively affecting the business.
Johnson & Johnson will look different now that consumer health is not part of its operations. However, I think that will be for the better as its core operations have been medical devices and pharmaceuticals. By focusing on those areas, Johnson & Johnson could potentially generate more earnings growth in the future, making it an ideal investment to buy and hold for the long term.
The dividend is the tip of the iceberg
Prosper Junior Bakiny (Pfizer): Over the past five years, Pfizer has raised its dividends by 20.6%. Note that this period includes a pandemic, a recession, and seemingly countless other things that affected the market and businesses in many ways. Pfizer's ability to increase its payouts through these times says a lot about its commitment to rewarding shareholders with dividend increases. But it's also a testament to the strength of the company's underlying business.
That is a key reason dividend investors should hold onto Pfizer's stock. Despite slowing coronavirus-related sales, the company used the massive windfall it received from vaccine sales to push other important programs through the pipeline and make strategic acquisitions. That should help Pfizer substantially rejuvenate its lineup of medicines, something that will help drive stronger top- and bottom-line growth, especially once comparisons to the unusual pandemic years wear off.
Last month, the company earned approval for Litfulo, a medicine for alopecia areata, an autoimmune disease typically characterized by patchy hair, among other symptoms. In May, Pfizer earned the green light in the U.S. for Abrysvo, an RSV vaccine. Abrysvo became one of the first such vaccines approved by the U.S. Food and Drug Administration. Pfizer should earn many more approvals in the next few quarters.
In the meantime, the market continues to underestimate the company. Its forward price-to-earnings ratio is below 11 times as of this writing, compared to an average of more than 15 times for the pharmaceutical industry.
Pfizer certainly is an excellent dividend growth stock, but the company has much more to offer than just that. It is a steady, reliable business with solid long-term prospects thanks to its ability to develop new medicines and vaccines and all at a reasonable valuation. In my view, these factors make Pfizer's stock an excellent pick right now.
