Dividends can make you rich. It's really that simple.
However, it's not always easy to pick the right dividend stocks -- the ones that will help you crush the market over the long run. Serious dividend investors are looking for a rare blend of high yields, rising payouts, and long-term stability.
AT&T: Like clockwork
Telecom giant AT&T has a long history of steady dividend increases. A true dividend aristocrat, Ma Bell has boosted her payouts in each of the last 29 years. The increases aren't always large, but a rock-steady devotion to modest growth adds up to large gains in the long run.
You will often find AT&T unmatched among the 30 Dow Jones (DJINDICES:^DJI) components when it comes to large dividend yields. That's certainly been the case since the spring of 2010.
So AT&T clearly meets two of our three core criteria for a powerhouse dividend stock: Steady growth and high yield. With a history stretching all the way back to Alexander Graham Bell in 1876, you might argue that AT&T has proven its long-term stability as well. And you'd be right.
However, past results do not guarantee future performance, and Ma Bell has been throwing a few Hail Mary passes lately. The company seems less than confident about its prospects in the increasingly competitive telecom market, seeking new growth avenues elsewhere.
That being said, AT&T isn't going away overnight. The company will be around for many years yet, paying generous dividends along the way. Worry about AT&T's long-term druthers only if you're hoping to sit on your dividend-paying shares for decades ahead.
Intel: Big growth, in fits and starts
AT&T takes the slow and steady approach to dividend increases, but semiconductor maker Intel goes a very different route.
Ma Bell's dividend boosts work out to an average of 3.6% a year over the last decade. Intel, on the other hand, has stopped to take a breath twice during that period -- but still came out ahead, with an average annual increase of 10.8%.
The current yields are in line with the Dow's average payouts of around 2.8%. It's a far cry from AT&T's massive 5.3% yield, but a rich difference-maker nonetheless.
If you bought Intel shares a decade ago, you'd be sitting on a respectable 57% return by now. Investing dividends along the way, the total return doubles to nearly 108%. These payouts make a big difference in your pocketbook.
Now, Intel hasn't raised its quarterly payouts since the summer of 2012, as every available penny of spare cash flow is being reinvested into bigger and better chip manufacturing facilities. The company's capital expenses are sure to come back down at some point in the near future, but we Intel shareholders don't know whether that'll be in 2015, 2016, or maybe even later.
Until then, Intel's payouts are stuck at their current level. When the cash machine shifts gears again, you should expect the next dividend boost to be large -- but all of this will take some patience.
In short, Intel is a good dividend play for investors who don't mind the occasional hiccup in return for very generous increases over the long run.
Seagate: To everything (turn, turn, turn)...
And then there's hard drive maker Seagate, one of only two survivors in a recently consolidated industry.
Seagate took a break from paying dividends entirely during the 2008-2009 financial meltdown. Back then, the budding smartphone revolution joined forces with a cutthroat industry climate: no fewer than six major manufacturers were fighting over a slice of a shrinking market pie.
At one point, as Seagate's trailing free cash flows dipped below $250 million, and the dividend's future looked uncertain; investors nearly gave up on the company. Share prices fell below $5, spiking dividend payouts to more than 11%. If you bought Seagate shares right there, locking in those ultra-low buy-in prices, you're enjoying fantastic effective yields today alongside 1,200% higher share prices.
That's because Seagate and arch rival Western Digital (NASDAQ:WDC) survived the storm. There's nothing stable or steady about Seagate's recent past, but it's all clear skies and smooth sailing ahead.
The turbulent hard drive market has boiled down to two major survivors (plus Toshiba, which treats this market as a hobby with a modest 15% market share). You can buy Seagate at the bargain price of 12 times trailing earnings, enjoy a 3.1% dividend yield, and look forward to many years of profitable stalemate between Seagate and Western Digital.
Future growth may be limited, but duopolies like this one tend to support large, dividend-juicing cash flows.
This stock looks risky only if you're looking back at Seagate's past. From now on, I'm comfortable calling it a sturdy dividend powerhouse.