Stocks that pay dividends have never been more popular, especially among investors looking for as much income as they can generate from their portfolios. If you're a dividend investor, you need to know that the stocks you choose will give you dependable income not only now but well into the future.
What not to focus on
The mistake that many dividend investors make is to pay too much attention to current yield. Admittedly, if you need income right now, then the temptation to get instant gratification from a high-yielding dividend stock can be overwhelming.
But all too often, stocks that pay high dividends end up having to cut their payouts. By contrast, stocks that have demonstrated their ability provide strong growth in their dividends -- even if their yields aren't as high -- give investors more assurance that those stocks will be able to sustain their payouts going forward.
With that in mind, let's turn to four stocks that have attractive yields of 3% or more yet have been able to produce impressive dividend growth at a 10% or greater annual clip for the past decade.
Lockheed Martin (NYSE:LMT)
This defense specialist has managed to boost its dividend at a 25% annual clip over the past decade, currently yielding 4.6%. The stock doesn't come without current risk, though, as the defense contractor's F-35 fighter program has created huge cost overruns, leading to concerns among budget-conscious governments about the long-term viability of the project. Yet even defense-budget cuts didn't stop the company from boosting its payout 15% in November, and Lockheed earns roughly double what it pays out as dividends, giving it a margin of safety against any challenges to earnings.
Mattel has been riding the wave of toy demand for a long time, with its American Girl and Monster High brands having taken the baton from the company's iconic Barbie. Average annual dividend growth of 14%, including a 16% boost earlier this year, gives shareholders a 3.2% yield. But Mattel's true growth prospects come from potential licensing agreements with entertainment companies, and with its share of deals from the DC Comics line and elsewhere, Mattel should find more money to pay to dividend investors for a long time to come.
Hasbro shares many of the same features that Mattel sports, including a 29% average rate of annual dividend increases over the past 10 years and a current yield of 3.4%. If anything, Hasbro's prospects are even brighter than Mattel's, because Hasbro has done a better job of connecting with the highly popular Marvel line of movies and related entertainment. In addition, plans to reenergize the popular Star Wars franchise could lead to a brand-new wave of toy sales for Hasbro.
The fast-food king has generated almost 30% in annual dividend increases on average since 2003, with a yield of 3%. International growth has been the factor that led to its big payouts, as the Golden Arches can now be seen around the world in growing numbers. Recently, concerns about a slowdown in its international expansion have weighed on McDonald's shares, but with a payout ratio of just 55%, McDonald's has more room to push its dividend higher in the future even if earnings growth flags temporarily.
Get to know these stocks
Every smart dividend investor should own a mix of stocks with good yields and solid growth prospects. These four stocks aren't free of possible pitfalls down the road -- no stock can claim that level of certainty. But with well-established businesses and a history of having overcome past challenges, these stocks are ones that dividend investors should get to know better.
Tune in every Monday and Wednesday for Dan's columns on retirement, investing, and personal finance. You can follow him on Twitter @DanCaplinger.