Like many here at the Fool, I believe in the power of dividend investing, and so have set out to build a killer portfolio of high-quality dividend stocks. While a high yielder can get me salivating, I tend to focus more on finding companies that will reward shareholders with reliable dividend payments for years -- preferably decades -- to come. In short, I'm looking for workhorse stocks. They may not be flashy, but they're built for the long haul.
When I'm searching for workhorses, there are four basic traits I like to see.
- An economic moat: Any profitable business will eventually come under pressure from competition. This could drive prices down and eventually start to shrink the bottom line, unless the company has some kind of sustainable competitive advantage protecting it.
- Repeat-purchase business: Ideally, I'm looking for consumable goods that the customer can't put off replacing for long.
- Well-established dividend history: A company that has managed to build a decades-long track record of consecutive dividend payments will usually do everything in its power to keep the record going.
- Payout ratio below 80%: That being said, sometimes a company has no choice but to cut a dividend. A payout ratio below 80% should give the company enough of a buffer to get through earnings dips without having to cut the dividend.
I should note that not every workhorse dividend will have these traits, and that not every company that has them is worthy of your portfolio. However, the traits do make a good starting point for your research. Now, with this in mind, let's take a look at four potential workhorse companies.
2 consumer goods giants
It's hard to find a better example of a workhorse dividend stock than Procter & Gamble (NYSE: PG). The company has a track record of 121 years of consecutive dividend payments and 55 years of consecutive dividend increases. It currently pays a 3.3% dividend with a comfortable payout ratio of 60%.
Those dividends should continue coming thanks to P&G's massive brand portfolio, which includes 24 billion-dollar brands, including Nyquil, Tide, and Gillette. These well-known brands have helped P&G dig an impressive moat, which it can protect with its proficiency in consumer research and marketing. As an added bonus, the company's presence in 180 countries offers investors a degree of international diversification, which is always a good thing.
Global tobacco maker Philip Morris International (NYSE: PM) probably has the shortest dividend record of the stocks I've selected today. It only goes back to 2008, when it spun off from Altria. However, I think it's a safe bet that the company will continue its parent company's tradition of rewarding investors with ever-growing dividends. At the moment, Philip Morris sports a 4% yield and a payout ratio of 57%.
I know many investors have qualms about investing in tobacco, but after years playing the role of Johnny Pink-lung around my smoker friends, I came to the conclusion that smoking is ultimately a personal choice. If you agree, you'd be hard-pressed to find a better stock than Philip Morris. The company holds a 27.6% share of the cigarette market outside of the U.S. and China, with a brand portfolio that includes 15 of the top international brands, including Marlboro.
I want to say one word to you. Just one word.
If you've ever bought a bag of prewashed salad or a six-pack of toilet paper, you're familiar with the work of Bemis (NYSE: BMS), which specializes in flexible packaging. You'll likely find its products in nearly every aisle of the grocery store.
The company protects its market position by constantly innovating. Over the years, it has built a portfolio of roughly 1,200 patents and applications. In addition to creating high barriers to entry, this portfolio also grants the company the ability to pass increases in material costs along to its customers, thereby protecting its margins. As a result, the company has built up a record of 29 consecutive annual dividend increases and currently pays a yield of 3.2% with a 56% payout ratio.
Another background player
Like Bemis, you may have benefited from Sysco's (NYSE: SYY) services without realizing it. The company is the leading food-service distributor in North America. It pays a 3.6% dividend with a payout ratio of 40% and has managed to increase its dividend for 42 consecutive years. Although food distribution doesn't produce the widest of margins, Sysco has managed to build a large distribution network which allows it to spread out high fixed costs. It has also worked to streamline its supply chain, cut costs, and dig a nice wide moat around itself.
A few more for your stable
I own shares of Philip Morris and believe any of these stocks would make great additions to your portfolio. If you would like even more ideas, then you should check out this special report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." It's absolutely free, so click here to download it today.
