Dividends are an income investor's best friend. Not only do they represent a tangible return on your investment that is unrelated to share price movements, but they also provide a stream of passive income that helps to supplement your earned income.
Large, reputable companies might go through volatility in revenue and earnings, but most are unlikely to want to cut their dividend as it sends a bad signal to their investors. If you are looking for dependable dividend-paying stocks, here are some attributes you should seek:
- The business should possess a robust competitive moat and/or strong brands that confer pricing power so that customers keep coming back.
- It should also generate consistent free cash flow and have a track record of increasing its dividends over years or even decades.
- Such stocks give you more than just peace of mind; they can be held forever or even passed down to your children because of their reliability.
Here are two dividend stocks that you can count on to keep increasing their payouts well into the future.
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Procter & Gamble
Procter & Gamble (PG -0.78%) is a $350-billion consumer goods company that sells a wide variety of hair care, personal care, and home care products. The company has a well-recognized portfolio of brands such as Head & Shoulders, Crest, Oral-B, Pampers, and Pantene. The company enjoys strong pricing power because consumers use these brands often in their daily lives.
That superb pricing power was evident in its fiscal 2023 third quarter. Organic sales grew more than 7% year over year driven mainly by pricing. In the same period, the company also reported broad-based organic growth across all 10 of its product categories, but foreign exchange headwinds led to a 4-percentage-point drop in total revenue.
Despite the economic headwinds caused by high inflation, Procter & Gamble continued to generate healthy free cash flow (FCF) for the first nine months of fiscal 2023. FCF came in at $9.2 billion, 13% lower than the $10.5 billion in the year-ago period. For the fiscal years 2020 to 2022, the consumer goods company generated an average positive FCF of $14.5 billion.
This impressive track record of FCF generation has allowed the business to pay out a dividend for 133 consecutive years -- and to increase it for 67 consecutive years without fail.
There is reason to believe that Procter & Gamble can continue to raise its dividends in the foreseeable future. CEO Jon Moeller expects the majority of the company's growth to be organic, although that does not rule out selective acquisitions in the beauty and personal healthcare sectors.
Procter & Gamble acquired prestige beauty brand Tula Skincare last year and haircare brand Mielle Organics earlier this year to increase the number of brands within its portfolio. The company hopes to optimize its supply chain to achieve $1.5 billion of cost savings per year and focus on targeted marketing to reinforce brand loyalty.
3M
3M (MMM 0.46%) is a conglomerate that manufactures products for a wide variety of purposes such as industrial, transportation, electronics, healthcare, and consumer goods. Its portfolio of products includes adhesives, wound care, filtration systems, stationery, and more.
The company has a track record of innovative products and cutting-edge research and development, and it has raised its dividend for 65 consecutive years -- while paying shareholders without fail for over a century.
Like Procter & Gamble, 3M is also a free-cash-flow machine. The business generated an average free cash inflow of $5.4 billion for 2020 to 2022, and for the first quarter of 2023, the conglomerate delivered $800 million in FCF despite net income falling by nearly a quarter year over year.
CEO Mike Roman has pledged to restructure the business to simplify it and reduce its fixed-cost base by eliminating around 6,000 jobs in addition to the previous announcement of 2,500 layoffs. Operating income is slated to improve by between $700 million to $900 million annually from these actions, and the company will prioritize investments in high-growth end markets such as automotive electrification, semiconductors, and healthcare.
Apart from organic growth, 3M has a history of making choice acquisitions to boost its industrial capabilities and widen its portfolio of products. Back in 2019, it made one of its largest-ever acquisitions by purchasing bandage and wound products company Acelity for $4.3 billion. Just last year, the company's food safety division completed a merger with Neogen to increase its product range and geographic coverage.
Recently, however, 3M has been beset by lawsuits alleging that its combat-grade earplug fails to protect the user against loud noises, resulting in gradual hearing loss and tinnitus over the years. More than 200,000 military service members and veterans are suing the company and lawyers have set aside $1 billion to settle these lawsuits, with a trial expected by year-end. Meanwhile, 3M has also set aside $10.3 billion over 13 years to settle around 4,000 lawsuits over chemicals that contaminated drinking water.
While these lawsuits are worrying as they point to possible practices that management should address, the financial impact is negligible as the conglomerate generates an average of more than $5 billion in free cash flow annually. Although these lawsuits may be a temporary setback, they should not affect 3M's ability to keep increasing its dividends for the foreseeable future.
Management also intends to recycle capital by divesting assets to unlock value and reallocating the capital to promising growth areas to maximize value across its portfolio. Armed with a portfolio of solid brands and innovative products, 3M is well-positioned to continue growing its dividend.
