I've often said dividend stocks are the foundation of most successful long-term portfolios.
Dividends can serve multiple purposes for investors. They can provide income when the stock market is falling or add the icing on the cake when it's hitting a new high. Dividends can also be reinvested with the intent of compounding your gains over the long run to supercharge the generation of wealth.
But, more so than the money they can provide investors, dividends also signal the durability of a business model. Think of it this way: If a business is willing to share a percentage of its profits on a regular basis, then that company's outlook is likely positive. It also says something about the management team behind that company that it realizes its fiduciary responsibility to its investors.
Pump your portfolio up with three Dividend Aristocrats
With that in mind, today we'll look at three of the highest-yielding Dividend Aristocrats to see how they might pump up your portfolio.
A Dividend Aristocrat is a company that has increased its payout on an annual basis for a minimum of 25 consecutive years. Just 53 companies meet this criteria, and they are some of the strongest companies today. The following three companies are this rarefied club's current highest-yielding members.
AT&T (NYSE:T): 5.4% dividend yield
At the top of the list is telecommunications giant AT&T. In December, AT&T announced a 2.2% increase to its quarterly dividend, from $0.46 per quarter to $0.47. It was the 31st consecutive year in which the company had increased its payout.
How is AT&T able to keep these dividend increases going? Simply put, it takes advantages of its size and incredible pricing power, along with the fact that wireless subscriptions and televisions have become basic-needs goods for many consumers.
AT&T's size and pricing power go hand-in-hand. The U.S. wireless industry has only four major players, and only Verizon seriously challenges AT&T for market share. Because consumers have few choices when it comes to wireless, broadband, and TV subscriptions, AT&T can use its size to ensure that its pricing keeps pace with, or surpasses, the rate of inflation. It also doesn't hurt that AT&T is among the most recognizable companies in America.
Sporting a payout ratio of 74% based on this year's estimated earnings, I'd suggest AT&T's dividend increase streak is safe for now.
HCP (NYSE:HCP): 5.3% dividend yield
What's an easy way to generate income? Locate a real estate investment trust, or REIT such as HCP.
REITs can be smart investments because, in return for tax breaks that save them from paying the corporate tax rate, they are required to pay out 90% or more of their profit in the form of a dividend. That often means a dividend yield that crushes the broad-market S&P 500. In January, HCP announced its 30th consecutive annual dividend increase, pushing its payout to $0.565 per quarter from $0.545 in the previous quarter.
What makes HCP's returns so unique and sustainable is that it invests in property primarily in the healthcare industry. As our nation's population grows older and baby boomers retire in increasing numbers, the need for hospitals, senior housing, life science buildings, and skilled nursing facilities is only expected to rise. That means higher demand and better rental pricing for HCP. It also doesn't hurt that lending rates are near a record low, allowing the healthcare REIT to borrow at exceptionally favorable rates.
Like AT&T's, I'd suggest that HCP's annual dividend growth streak will continue.
Chevron (NYSE:CVX): 3.9% dividend yield
Finally, we have integrated oil and gas giant Chevron, which has increased its dividend for 27 consecutive years, and in spite of a recent pullback in oil prices, is expected to boost the payout for a 28th year in April.
What allows Chevron's business to shine is that it's a diversified energy company. While the bulk of its profit and revenue come from the production of oil and natural gas, it also has midstream transportation and storage assets, as well as refining operations, which can offset weakness in oil prices.
Chevron also has approximately two dozen natural gas finds off the coast of Australia that could be the perfect segue to big profits with fast-growing Asia a hop, skip, and jump away. Known as the Gorgon Project, I expect it to drive profits in a big way for the next decade or longer.
Long-term energy trends are also on Chevron's side. The demand for energy is expected to increase in both developed and emerging markets. This bodes well for long-term oil prices even if the current per-barrel price is near a five-year low.
Although Chevron's dividend isn't as safe as those of the previous two companies, I don't anticipate a payout reduction anytime soon.
The power of compounding
An investor who purchased an equal amount of all three companies would currently sport an average yield of 4.87%. If the dividend payments from these three companies were reinvested over 10 years, an investor could net a 70% return on investment from the dividends alone if these payouts grow by an average of 2% annually. This assumption also excludes any stock gains.
In other words, piggybacking on the three highest-yielding Dividend Aristocrats and reinvesting your payouts could double your money in less than 13 years! That's a powerful strategy that could pump up your portfolio.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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