Consistent, dividend-paying stocks are a favorite among many investors for their ability to provide passive income and, according to research, generally outperform the broader stock market. For dividend investors, it's essential to understand a company's history of raising its dividend and look at its financial metrics to see whether it can continue increasing it in the future.
With that in mind, here are three stocks that have a long history of growing dividends and are well positioned to continue.
1. American Express
American Express (AXP -0.62%) is a well-known global payments company that distributes a quarterly dividend of $0.60 per share, equating to an annual dividend yield of 1.5%. The stock is a favorite of Warren Buffett, with Berkshire Hathaway first purchasing it in 1991. To illustrate the power of dividends, Berkshire completed its purchases in 1995 at a total cost of $1.3 billion. Today, Berkshire makes $302 million annually in dividends from American Express, and the investment, without reinvesting those dividends, is now worth $26.4 billion.
With those results, American Express' dividend has obviously grown over the years. The company's quarterly dividend is 167% higher than in 1995, and while management has paused its increases periodically, it has never cut it during that time, either. Additionally, the company consistently buys back its outstanding stock, lowering the share count by an impressive 31% over the past decade. Through share repurchases, existing shareholders receive an increased ownership stake at no additional cost.
Looking at American Express' recent financials, the company recently reported its sixth consecutive quarter of record revenue, with $15.4 billion, representing 13% year-over-year growth. Additionally, the payments company produced a record $2.5 billion in net income, or $3.30 per share, representing a year-over-year increase of 30% and 34%, respectively.
The bear case for American Express is that the competition for payment processing is fierce, and American Express spends considerably more on marketing than its competitors, Mastercard and Visa.
Specifically, for the first nine months of 2023, American Express spent $4 billion in marketing expenses compared to Mastercard and Visa, spending $561 million and $1 billion, respectively. American Express' marketing expenses, coupled with spending $11.5 billion in card member rewards year to date, suggest the company is paying up for its growth, which may prove challenging to maintain over the long term.
Nonetheless, American Express stock looks cheap compared to its competitors using the common price-to-earnings (P/E) ratio metric. American Express' P/E multiple is roughly 15, which is significantly lower than Mastercard's and Visa's P/E ratio of 35 and 30, respectively.
AXP P/E Ratio data by YCharts.
2. Home Depot
The home improvement boom from the height of the pandemic is over, but that doesn't mean stocks like Home Depot (HD 0.94%) should be forgotten. The world's largest home improvement retailer's stock has been essentially flat over the past year as consumer demand has cooled, but it remains one of the more shareholder-friendly stocks on the market.
Home Depot has paid a quarterly dividend dating back to 1987 and raised it 14 consecutive years after pausing the raise during the Great Recession. Today, the company pays a quarterly dividend of $2.09, representing an annual dividend yield of 2.7%.
Similar to American Express, Home Depot takes advantage of stock repurchases, having reduced its outstanding shares by 29% over the past decade. Additionally, Home Depot's Board of Directors announced a $15 billion share repurchasing program in August, and management allocated $1.5 billion toward share repurchases during its most recently reported quarter.
Home Depot's sales have struggled in 2023, with the company generating $118 billion in net sales through the first three quarters of its fiscal 2024, representing a year-on-year decline of 3%. Yet, its net sales are proving more resilient than its competitor, Lowe's Companies, which experienced a 9% revenue decline in its second quarter to $25 billion.
Image source: Getty Images.
Finally, a key metric for any dividend payer is its payout ratio -- annual dividend payments divided by annual earnings -- to ensure the company can afford to maintain and potentially raise its dividend. In the midst of the Great Recession, Home Depot faced a payout ratio exceeding 60%, leading management to halt the annual dividend increase. Today, with the payout ratio hovering around 50% and consumer demand showing signs of softening, the upcoming dividend hike may not match the levels seen in prior years. However, there is no indication that management will pause future increases.
3. Sherwin-Williams
Sherwin-Williams (SHW 0.54%) is a 157-year-old leading paint and coating manufacturer, currently paying a quarterly dividend of $0.605 per share, representing an annual dividend yield of 0.91%. While its yield may not be impressive for dividend-seekers, it's comforting to know that the company has paid and raised its payout annually for 44 consecutive years. And with a payout ratio of only 26%, it's reasonable to expect the company to continue that streak indefinitely.
Beyond Sherwin-Williams' dividend, the company is back to expanding its gross profit margin -- a metric demonstrating the profitability of its products -- to 47.7% in Q3 2023, up from 42.8% a year earlier. CEO John G. Morikis said the expansion was "driven by pricing discipline and moderating raw material costs."
One area of concern for Sherwin-Williams is that the company's net debt (total debt minus cash and cash equivalents) soared from nearly zero to over $9 billion over the last seven years, mainly due to the acquisition of competitor Valspar in 2017 for $11.3 billion. Still, management has smartly been paying it down since a recent high of nearly $11 billion at the end of Q1 2023, as elevated interest rates make servicing debt more expensive.
To illustrate how debt snowballs in high-interest rate environments, Sherwin-Williams paid $322 million in interest expense through the first three quarters of 2023 compared to $283 million for the same period in 2022 despite having roughly $1 billion less in net debt.
Nonetheless, Sherwin-Williams stock looks cheap when considering that it trades at a P/E ratio of roughly 28, significantly below its five-year average of nearly 35.
Are these three dividend stocks worth buying?
A common refrain in investing is that past performance does not guarantee future results. And while that is true, industry-leading dividend-paying stocks may be the exception. This stems from dividend investors anticipating regular payouts that increase over time. Achieving this requires disciplined capital allocation, as management recognizes the ongoing need to allocate a portion of the company's earnings to meet these expectations.
These three stocks, in particular, fit that bill as well-established leaders in their respective industries with long track records for paying dividends, making them excellent additions to any portfolio.
