Imagine not working at a job but still receiving money quarterly. That might sound too good to be true, but it can happen when you buy high-quality dividend stocks.
That's not to say that you don't have to do any work. It's important to do your homework to ensure that the companies you invest in have the ability and willingness to pay dividends. Two great dividend stocks to take a look at are Procter & Gamble (PG -0.78%) and Target (TGT 0.18%). Both have raised dividends annually for at least half a century, making them Dividend Kings.
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Procter & Gamble
Procter & Gamble has a stable of well-known and popular brands that command strong market shares. These include Head & Shoulders, Old Spice, Gillette, Crest, Downy, and Pampers, to name a few.
These products have consistent demand. People will continue buying necessities like shampoo, deodorant, razors, detergent, and diapers no matter what's going on with the economy and their job prospects, and many will be willing to stick with brand names even when times get tough.
It's that type of consistency that has helped the company pay dividends for 133 straight years and raise them for the past 67 years. This includes a 3% increase in May's quarterly payment to $0.94.
The company has the free cash flow to comfortably continue its dividend trend. Procter & Gamble generated $13.8 billion of free cash flow in the latest fiscal year (which ended on June 30), providing plenty of cushion for the $8 billion of dividends.
The stock has an above-market dividend yield of 2.5%, compared to 1.6% for the S&P 500 and is definitely worth investors' attention.
Target
Retail giant Target had some well-publicized troubles when management miscalculated by stocking the shelves with discretionary items rather than everyday basics.
This was a short-term problem, however. Management decided to mark down the items to clear the excess inventory, and it appears to have worked. Target ended its fiscal second quarter (ended July 29) with $12.7 billion of inventory, down from last year's $15.3 billion. And its gross margin expanded from 21.5% to 27%.
While weak spending in discretionary categories continued to weigh on Target's top line, driving a 5.4% same-store sales decline, its "frequency" business -- essentials & beauty and food & beverage -- continued to do well. Target's long-term formula of offering everyday items and differentiated merchandise will undoubtedly continue proving successful. This is a company that's been around since the early 1900s; it knows how to adapt.
Investors looking for an ongoing stream of passive income can take comfort in the fact that Target has paid a dividend since its initial payout in 1967. With the board of directors raising September's payment by about 2% to $1.10, it has increased payments for 52 straight years.
Target has a 59% payout ratio, showing that it has the capacity to continue paying dividends. And investors buying shares at today's price will receive a 4% dividend yield, more than double that of the S&P 500.
Procter & Gamble and Target have the ability to continue raising their dividend payments. That and their above-average dividend yields make the stocks appealing.
