There are no absolutely surefire ways to make big profits as an investor, but it's hard to do better than dividend-paying stocks. Businesses that commit to sharing a portion of their profits with their investors tend to outperform businesses that don't, and by a wide margin.
Over the 50-year period from 1973 through 2022, stocks in the S&P 500 index that grew or initiated dividend payments rose by 10.24% annually on average, according to Hartford Funds and Ned Davis Research. But stocks in that benchmark index that didn't pay dividends rose at an average pace of just 3.95% annually.
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These two companies have long histories of raising their dividend payouts. Here's why putting them in your portfolio now and holding on for at least a decade could deliver market-beating returns, and won't expose your capital to much risk.
Medtronic
Hardly anyone gets to choose when they need one of Medtronic's (MDT 0.62%) pacemakers, insulin pumps, or any of the other medical devices that it manufactures. Steadily growing sales to a growing global population have allowed Medtronic to raise its dividend payout every year for 46 consecutive years.
Yet shares of Medtronic are down by about 48% from the peak they touched in 2021. At recent share prices, the stock offers a 3.9% dividend yield -- way above the S&P 500's average of just 1.6% at the moment.
The bad news is that Medtronic's trailing free cash flow is down near a five-year low of about $4.4 billion. The company needed about 82% of the free cash flow it generated over the past 12 months to meet its dividend commitments. This means there won't be much room for big dividend bumps if profits don't start rising steadily again.
Medtronic's continuous glucose monitors haven't performed well against competing products from Dexcom and Abbott Laboratories, but they don't necessarily need to. Training surgeons to use new devices is expensive in time and other resources, so when possible, most hospitals would rather avoid it. This has helped propel Medtronic's cardiovascular and neuroscience segments to steady gains that have offset its diabetes unit's disappointing performance.
As the world's largest medical device company, Medtronic might not be the fastest-growing business in your portfolio, but a diverse product lineup could make it extremely reliable.
AbbVie
AbbVie (ABBV -4.58%) shares are down around 21% from the peak they hit in 2022. At recent prices, the stock offers a tempting 4.5% dividend yield.
The stock has offered an unusually high dividend yield since the payout's inception in 2013 (shortly after AbbVie's spinoff from Abbott Labs) because investors have been nervous about the long-term sales prospects of its lead product, the blockbuster injectable anti-inflammatory drug Humira. Humira lost patent-protected market exclusivity in the U.S. earlier this year, and in the third quarter, U.S. sales of the drug fell 39% year over year to $3.0 billion.
At an annualized rate of $12.1 billion based on those third-quarter results, U.S. sales of Humira could fall much further. But AbbVie can offset the losses by growing its sales of newer drugs. For example, Skyrizi is a psoriasis injection that launched in 2019 and it's already on pace to rack up $8.5 billion in annual sales. Rinvoq, a treatment for rheumatoid arthritis that launched around the same time as Skyrizi is on pace to reach $4.4 billion in sales this year. Those two drugs were developed to treat many of the same conditions as Humira.
AbbVie recently raised its earnings per share outlook for 2023 to a range of between $11.19 and $11.23. Humira's sales declines are expected to shrink the company's earnings next year -- but not by much. AbbVie hasn't issued a guidance range for 2024 earnings yet, but it is expecting at least $11 per share.
AbbVie's dividend payout is currently set at just $6.20 annually. This means the company could keep raising its payout for at least a few years even if its bottom line hovers around management's predicted 2024 earnings floor. Adding some shares to a portfolio now could be a great way to upgrade your future passive income streams.
