Investing in dividend stocks can be a great way to generate some supplemental income. Many top dividend stocks have long histories of paying stable and rising dividends. Because of that, they can supply their investors with a lifetime of income.
The Southern Company (SO -1.56%), Clearway Energy (CWEN 0.26%) (CWEN.A 0.28%), and American States Water (AWR -0.57%) stand out to a few Fool.com contributors for the durability of their dividends. Here's why they believe these could be great dividend stocks to buy and hold forever.
This company's next project is almost done
Reuben Gregg Brewer (The Southern Company): There's a big change on tap for The Southern Company, which is one of the largest utilities in the United States. It has been building a pair of nuclear power plants, a process that has been beset by cost overruns and delays. But one of the two plants is now operational, and the next should come online in late 2023 or early 2024. At that point, this project will turn from a cash drain into a money producer. Management estimates the two nuclear power plants could add as much as $700 million to cash flow.
Some of that will go toward debt reduction and other capital investments, but a portion is also likely to be put toward dividends. That could push the dividend growth rate up from the low single digits to the mid-single digits. That's not a huge change, but enough to grow the buying power of the dividend over time as opposed to simply keeping pace with the ravages of inflation.
SO Dividend Per Share (Annual) data by YCharts
Here's the interesting thing about Southern's dividend. It has been increased every year for 22 years, which isn't bad. But for 76 years it has either been increased or held steady, which is an incredible level of reliability. The dividend yield today is around 4%, which will probably be attractive to conservative investors looking for dividend consistency. The potential for more rapid dividend growth in the future is just an added bonus.
Plenty of power to pay dividends
Matt DiLallo (Clearway Energy): Clearway Energy is already ideally positioned for the transition to lower-carbon energy. It's one of the U.S.'s largest renewable energy producers. In addition, it has a portfolio of environmentally sound natural gas power-generating facilities. It sells the electricity its assets produce to utilities and corporate buyers under long-term power purchase agreements. Those contracts enable it to produce very durable cash flow.
The company uses its stable cash flow to pay an attractive dividend that currently yields 6.1%. Clearway plans to grow that payout in the upper end of its 5% to 8% annual target range through at least 2026.
It already has all the power it needs to support that plan. The company cashed in on the value of its thermal assets in 2022. The sale provided it with nearly $1.4 billion in cash proceeds to recycle into higher-returning renewable energy investments. It has already secured enough deals to allocate all those proceeds, giving it a clear view of future cash flow. The company's growing cash flows from investing in income-producing renewable energy assets will give it the power to deliver high-end dividend growth.
Meanwhile, Clearway will have plenty of power to continue growing its dividend after 2026. Its parent company, renewable energy developer Clearway Energy Group (CEG), has a massive backlog of renewable energy projects under development. CEG can drop down future projects to its affiliate once they reach commercial service and start producing cash flow.
In addition, Clearway can opportunistically acquire assets from third-party sellers and invest in organic growth projects, like adding battery storage to existing assets and repowering older wind farms. Clearway has many funding sources for new investments, including retained cash after paying its dividend, additional capital recycling, and selling stock.
Clearway should produce steadily rising cash flow as its clean power portfolio grows. Because of that, investors could generate a lifetime of income by investing in its stock.
This water company makes the dividends flow
Neha Chamaria (American States Water): A stock that has paid dividends every year since 1931 should be able to pay you for life. Even better, it could give you a dividend raise every year for life if its 69-year track record of consecutive dividend increases is anything to go by. Yes, such solid dividend-paying companies do exist, and the one I'm talking about here is American States Water.
Utilities offer some of the most reliable dividends. The reason is simple: Demand for electricity, gas, or water doesn't ebb and flow with the economy, and utilities often run as monopolies in the regions they serve. The dual factor means utilities can generate predictable sales and steady cash flows, and pass them along to shareholders in the form of regular dividends.
American States Water provides water in parts of California, and it also provides water and wastewater services to 11 military bases in the U.S. under 50-year government contracts. Just earlier this month, the company bagged a contract worth $350 million from a U.S. Navy air station located in Maryland.
As I already mentioned, American States Water has not only paid a regular dividend for decades, but increased it every year for the past 69 straight years. It last hiked its dividend by 8% earlier this month. You could easily bank on American States Water for regular income, what with the company targeting compound annual growth in dividends per share of at least 7% in the long term.
American States Water is also the kind of stock that teaches you not to chase dividend yields impulsively. It may be a low-yielding stock, but the kind of money investors have made out of its dividend growth over the years is nothing short of phenomenal.
