Dividend stocks can make wise investments. Dividend payments have historically contributed over 40% of the S&P 500's total return. That's helped dividend stocks outperform. Dividend payers in the S&P 500 have delivered an average annual total return of 9.2% over the last 50 years compared to 7.7% for an equal-weighed market index, according to data from Hartford Funds and Ned Davis Research.
While dividend stocks have performed exceptionally well overall, dividend growth is the key to driving outperformance. Dividend growers and initiators have delivered a 10.2% average annual total return compared to 6.6% for companies with no change in their dividend policy.
Southern Company (SO -1.56%) stands out for its dividend growth. The utility has given its investors a raise each year for more than two decades, a trend that seems likely to continue. It makes Southern look like a brilliant dividend stock to buy for those seeking a potential lifetime of dividend income.
Showcasing the power of a growing dividend
Southern Company has an elite track record of paying dividends. It has paid dividends equal to or greater than the prior year for over three-quarters of a century. Meanwhile, it has increased its payment annually for the past 22 consecutive years.
The company's steady dividend growth has helped it produce powerful total returns. Since 2001, Southern Company has generated an over 820% total return, more than double that of the S&P 500's roughly 400% total return.
Southern's strong returns have enriched shareholders over the years:
Image source: Southern Company.
As that slide shows, the company has grown a $1,000 investment made over 20 years ago by over $6,000. Dividend payments made up the bulk of that return:
Image source: Southern Company.
Overall, a $1,000 investment in the utility has generated more than $4,500 in dividend income over the last two decades. Those payments have supplied roughly 70% of its total return.
Plenty of power to continue pushing the payout higher
Fueling Southern Company's steady dividend growth has been its investments to reduce its carbon emissions. The company has gone from generating the bulk of its electricity from coal (69% in 2007) to a much cleaner energy mix (52% natural gas, 16% nuclear energy, 18% renewables, and 14% coal). These investments in cleaner energy have enabled the company to grow its earnings while reducing its emissions.
The company is currently putting the finishing touches on its biggest clean energy project. Its Georgia Power subsidiary has invested over $10 billion to build the country's first new nuclear-generating facilities in decades. It completed its Vogtle Unit 3 earlier this year, while Vogtle Unit 4 should start-up by the end of this year or early next year. The company estimates this investment will provide a $700 million jolt to its annual operating cash flow when both units are online. That will give it more money to pay dividends and invest in new capital projects to power its growth.
Southern's other utilities are investing capital to support their expansion and operations. Many of those projects aim to reduce carbon emissions, including building new clean energy generation, like renewables. These investments will support the growth of its rate-regulated operations, which generate very predictable returns and earnings.
On top of that, it's growing its merchant power company, Southern Power. That entity generates and sells electricity to other utilities and large corporate buyers under long-term power purchase agreements. It recently agreed to buy its 30th solar energy facility to complement its 15 wind energy facilities. These investments also produce predictable returns and cash flow.
Southern Energy's investments should continue growing its stable cash flow. That will give it the power to continue increasing its dividend.
A potentially wise long-term investment
Southern Company has done an excellent job growing shareholder value over the years, fueled mainly by its attractive and growing dividend. The utility's payout currently yields 4.3%. At that rate, it would turn a $1,000 investment into $43 of annual dividend income. That income stream will likely grow over the years and should really add up over the longer term. That makes Southern Company a smart dividend stock to buy and hold for the long haul.
