Warren Buffett once said, "Our favorite holding period is forever." For investors with a long time horizon, dividend stocks are an excellent place to start because they provide a steady source of income and are often less volatile against market fluctuations. Best yet, consistent dividend-paying socks have a history of outperforming the benchmark S&P 500 over the long term.
With that in mind, here are two dividend stocks that are market leaders in their respective industries.
1. Caterpillar
Caterpillar (CAT 1.59%), the world's largest manufacturer of construction equipment, has rewarded shareholders handsomely over the past decade with a total return (change in stock price plus dividends) of 267%, outperforming the S&P 500 benchmark by over 70%.
Caterpillar has paid a quarterly dividend since 1989 and raised it annually for 30 consecutive years. Today, Caterpillar pays a quarterly dividend of $1.30 per share, representing an annual dividend yield of roughly 2.2%.
One important metric for any dividend stock is its payout ratio (annual dividend payments divided by annual earnings), which signals whether a company has enough net income to sustain and increase its dividends. Generally, if a company has a payout ratio higher than 75%, there is a higher risk of a dividend cut. With Caterpillar's payout ratio at roughly 28%, shareholders can reasonably expect the manufacturer to keep raising its dividend for years to come.
Additionally, Caterpillar management returns capital to shareholders more tax-efficiently than dividends through share repurchases. By reducing the total number of outstanding shares, existing shareholders receive a higher ownership percentage of a company without acquiring additional shares. Over the past five years, Caterpillar management has repurchased nearly 12% of its outstanding share count.
Caterpillar management's commitment to returning capital to shareholders won't end soon as it recently stated it expects to continue using "substantially all" of its machinery, energy, and transportation free cash flow -- which is expected to exceed $8 billion in 2023 -- on dividends and share repurchases.
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The bear case for Caterpillar is that an increase in global interest rates could lead to a decrease in demand for construction products. This could be already playing out as the manufacturer's order backlogs fell from $30.7 billion in Q2 2023 to $28.1 billion in Q3 2023. Additionally, management's sales guidance for Q4 2023 disappointed the market with an outlook of only "slightly higher sales" compared to Q4 2022.
Nonetheless, Caterpillar remains a market leader in manufacturing construction equipment, and using the standard valuation metric price-to-earnings (P/E) ratio, the stock appears on sale. That's because the stock currently trades at a P/E ratio of roughly 13, well below its five-year average of 19.
2. Nike
One of the most recognizable global brands is also a longtime dividend payer. Nike (NKE 0.19%), the manufacturer of footwear and apparel, pays a quarterly dividend of $0.34 per share, representing an annual dividend yield of 1.28%. The Oregon-based company generates over $50 billion in annual revenue, has paid a dividend since 1985, and has raised it for 20 consecutive years.
Nike stock has faltered in 2023, with its share price down nearly 11% year to date, as its net sales have struggled to keep up with inflation. For its most recently reported quarter, Nike generated $12.9 billion in revenue, representing modest year-over-year growth of only 2%.
Management does expect revenue growth to improve, but not substantially. It recently gave its full-year fiscal 2024 guidance, which called for modest revenue growth in the "mid-single digits." Additionally, it expects its costly selling and administrative expenses -- totaling $4.1 billion during its fiscal Q1 2024 -- to outpace revenue growth, which means the company's earnings could stall. That was the case in Nike's fiscal Q1 2024, where it produced $1.5 billion in net income, representing a year-over-year decline of 1%.
Despite some short-term headwinds, Nike has an outstanding balance sheet with only $671 million in net debt (total debt minus cash and cash equivalents). As a result, Nike likely won't be hamstrung with skyrocketing interest expenses like other companies that rely on debt to grow. Additionally, Nike management expects to expand its gross margin -- a metric that demonstrates a company's pricing power -- by 1.4% to 1.6% during its fiscal year 2024, a sign that its products are still in demand despite possible consumer spending tightening.
Like Caterpillar, Nike is also committed to returning capital to shareholders through share buybacks, lowering its outstanding shares by roughly 14% over the past decade. Nike's board of directors also approved a four-year $18 billion share repurchase program in June 2022. As of its most recently reported quarter, Nike had $12.1 billion remaining to repurchase shares.
For dividend seekers, whether or not Nike grows net sales significantly over the next year shouldn't affect its ability to pay and raise its dividend. With a relatively low payout ratio of 40%, investors should expect Nike to remain shareholder-friendly for a long time.
Are these two dividend stocks worth adding to your portfolio?
Warren Buffett has since amended his "forever" holding period quote. In his 2016 annual shareholder letter, he wrote, "It is true that we own some stocks that I have no intention of selling for as far as the eye can see (and we're talking 20/20 vision). But we have made no commitment that Berkshire will hold any of its marketable securities forever."
In other words, occasionally checking up on companies in your portfolio is important; however, some need less babysitting than others. Nike and Caterpillar are two of those stocks, given their leading market position and history of prioritizing shareholder returns. That makes both stocks worthy of any dividend-seeking portfolio.
