Investors hoping to produce income from their investments are in a tough spot. With interest rates at historic lows, traditional fixed income securities aren't providing very high yields. For example, the yield on the 10-Year U.S. Treasury Bond, a benchmark for bonds, is just 2.3%, meaning bonds in general don't yield very much right now. As a result, many investors are turning to stocks to provide income, which is a good alternative. But even there, it's still difficult. That's because the stock market has roared back to an all-time high, and since stock prices and yields move in opposite directions, dividend yields are suppressed right now too.
These factors make it difficult for investors to find satisfactory yields. But there are still great dividend stocks out there that represent strong businesses with high dividend yields. For retirees looking to generate income, Procter & Gamble (NYSE:PG) is a great dividend stock to buy.
Decades of dividends
P&G has a remarkable history of paying dividends to shareholders. It has paid a dividend to shareholders for an amazing 124 consecutive years, ever since its incorporation in 1890. Even better, because of its reliable growth, P&G has increased its dividend for 58 years in a row. This type of track record is fairly common in the consumer staples sector. Other stocks, such as The Clorox Company, have also raised their dividend for many years. Clorox has raised its dividend every year since 1977. That's a streak of 37 years in a row.
P&G's impressive streak is possible because it is a giant in the consumer products industry. P&G has been in business for 177 years and its products are sold in more than 180 countries worldwide. It has a massive portfolio of brands, 23 of which are known as "billion dollar brands," which each collect at least $1 billion in annual sales. Just a couple of these include Tide laundry detergent and Crest toothpaste. Last quarter the company grew organic revenue, which excludes the effects of currency fluctuations, by 2% year over year. Earnings per share grew 9%. Results were particularly strong in its health care business, where organic revenue increased 6% thanks to 4% growth in shipment volumes.
P&G's huge size and scale allow it to generate strong cash flows. Free cash flow totaled $2.8 billion just last quarter, which more than doubled from the same period last year. With its cash flow, P&G rewards shareholders by paying a strong dividend. P&G has a 3% dividend yield, which is a higher yield than the stock market as a whole, and even many types of bonds because of low interest rates.
Dividends will keep rolling in for decades to come
There should be plenty of room for P&G's dividend streak to continue, because of its cash flow position. P&G spent just $1.8 billion of cash on dividends last quarter, which represented only 64% of its free cash flow. Its payout ratio is modest enough that P&G should have no trouble growing its dividend at similar rates to its historic average for many years to come. P&G raised its dividend by 7% earlier this year, which is right in line with its increases in recent years. Over the past five years, P&G has bumped its dividend by 7% compounded annually.
P&G is in a fortunate position. As a consumer staples company, its products see relatively stable demand. After all, even when the economy slows down, most people still need to buy toothpaste, laundry detergent, and many other P&G products. This stability is what has helped P&G maintain its long history of paying and raising its dividend, and is exactly why its dividend streak should continue for many years.
With mid-single digit earnings growth and its modest payout ratio, I expect P&G to keep delivering high-single digit dividend increases over the next several years. This will allow the company to reward shareholders with a very solid dividend, as well as keep its strong financial position. For investors who want income, such as retirees, investing in stocks can be a great way to do that. If you're not afraid to take the risks of buying individual stocks, P&G is a great dividend stock that should have a place in a retirees' investment portfolio.
Bob Ciura has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.