Dividends can be a tremendously powerful part of your investing strategy. Not only can they give you a continuing source of cash to reinvest, but they also serve as powerful tools to align a company's management's priorities with its shareholders'.
This alignment comes because many companies offer their leadership some form of stock-based compensation. Thanks to a solid, supported, and generally rising dividend, that leadership has an incentive to hold on to the company's stock for the long haul. After all, the dividend can continue to reward them for their efforts long after they're done directly working for the company.
With that in mind, smart investors looking for dividends don't just focus on the company's current yield, but also on factors that show a commitment to maintaining and boosting that dividend over time. These two dividend stocks look like they fit that bill well enough to be worth considering as potential investments to double up on right now.
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A business that can do well in tough times
Genuine Parts (GPC -0.71%) is perhaps best known as the company behind the NAPA Auto Parts chain. That's a particularly useful economic niche to be a part of, as auto parts tend to remain in demand during weak economies.
When you think about it, that makes a ton of sense. Cars are an expensive purchase. Often, people face a choice between repairing their old car or purchasing a newer-to-them car. When times are tough, folks are more likely to shell out a bit of money to fix their existing car, rather than shell out a whole bunch more money to buy a newer one.
The ability to do well in tough times is key to Genuine Parts' impressive 68-year streak of consecutive annual dividend increases. The company's 5% dividend hike puts its payment at $1 per share per quarter, giving it a solid yield around 2.6%.
Its dividend consumes only around 41% of the company's earnings. That gives it room to continue its streak of increases, particularly if its operations continue to grow. With analysts expecting its earnings to rise by around 7% annualized over the next five years, Genuine Parts could very well soon find itself in rarefied company with a 70+ year streak of dividend increases.
A not-so-secret real estate titan
McDonald's (MCD -0.91%) is perhaps best known as a fast food burger flipper. Despite that reputation, savvy investors often think of it as a real estate mogul that happens to sell hamburgers.
From an investor's perspective, a key feature about real estate is that it often generates steady and predictable cash flows. That is a wonderful trait for a business to have if that company plans to pay its shareholders dividends.
Sure enough, McDonald's has been able to increase its dividend for 47 consecutive years, with its most recent increase clocking in at a substantial 10%. Often, when companies prioritize their dividend growth streak, their rate of increases will drop to help protect them against losing the streak due to a bad year.
That McDonald's is still able to deliver a double-digit increase after nearly a half-century of raises speaks volumes for its strategy. In addition to that potential for continued dividend growth, investors get a solid current yield of around 2.4%. Plus, with its dividend consuming a little more than half of its earnings, McDonald's has room to continue boosting its payout in line with its earnings growth over time.
Analysts expect McDonald's to be able to increase its earnings by almost 7% annualized over the next five years. That potential growth, combined with McDonald's long-term history of dividend increases and reasonable current payout ratio, gives good reason to believe it will keep its streak of hikes alive.
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As awesome as both McDonald's and Genuine Parts' dividend histories and prospects may be, you'll only benefit from them if you own their shares over time. To get a dividend, you need to own a company's stock before its ex-dividend date and hold at least through that date. To really benefit from a rising dividend, you'll need to hold its shares throughout multiple annual increase cycles.
That long-term reality makes today a great day to consider an investment in one of these two dividend dynamos. While nothing is ever guaranteed in the market, their great combination of strong operations, long-term dividend growth trends, and solid prospects for the future make them certainly worth a second look.
