Investing in dividend stocks isn't the only way to make money in the stock market, but it's a pretty effective one. Buying dividend stocks and holding them for long periods of time can be a great way to generate income from your portfolio or help build a position over years through dividend reinvestment. For this to be effective, though, investors need to find stocks of quality companies that are going to crank out dividends at a decent rate quarter after quarter.
Three companies with dividend yields of 3% or greater that fit the bill of a company investors would want to hold over the long term are Nucor (NUE -3.26%), HollyFrontier (HFC), and Brookfield Infrastructure Partners (BIP 1.43%). Let's take a look at why these companies fit the description of a solid long-term, dividend-paying stock you may want to consider for your own portfolio
A bright spot in a dim market
One market that hasn't exactly been the most stable over the past several years is steel. For close to five years now, the industry has been suffering from a general oversupply globally, and many state-run mills in other nations have been dumping steel on the market at prices less than what it can be manufactured for.
This is what sets steelmaker Nucor apart from its peers. Despite such a miserable operating environment, the company has managed to remain profitable, free cash flow positive, and modestly grow its dividend while so many other steel manufacturers have been hemorrhaging money. There are two notable reasons why Nucor is able to do this. One, it uses newer electric arc furnaces versus traditional blast furnaces. These types of furnaces can run efficiently on a smaller scale and can ramp up and down versus blast furnaces that pretty much need to run full tilt to be cost effective. Also, electric arc furnaces can also use scrap steel to generate new steel again versus only using raw iron ore, which can be a cheaper furnace feedstock.
Another aspect that makes Nucor a more nimble business is its incentive-based salaries for its employees who share in the profits of the boom times, but also feel the effects of the lean times. This gives Nucor an immense amount of cost flexibility that its peers can't manage. As Mr. Market has soured on Nucor's shares, the company's stock currently yields about 3% and is a great long-term investment in a critical commodity.
A more refined dividend payment
In the oil and gas industry, there are many misunderstood stocks. One of those industry groups is refiners. Unlike producers that see profits wax and wane with oil prices, refiners' prospects is more determined by the difference in price between crude oil and the refined products they manufacture. Refining margins can be just as good when oil prices are high or low as long as the spread between the crude feedstock and the refined product is high.
There are a lot of fixed costs in the refining business, though, so a good refiner is one that can routinely operate efficiently, keep costs down, and allocate capital well to generate high returns. One refiner that has been notably good at these three aspects is HollyFrontier. For the past five years, the company has routinely generated some of the best returns on invested capital in the business.
Last year, management stopped paying a hefty special dividend on top of its regular dividend in lieu of buying back stock, but its regular dividend still pays a strong 3.8%. Considering how strong management has been at allocating capital over the past several years, it would seem that the company should be able to maintain its dividend policy for some time.
A diverse revenue stream
Companies that are set up as publicly traded partnerships typically own assets that produce steady cash flows over the long term. The downside to many of them is that they own assets within one particular industry or geographic region, which makes them susceptible to ups and downs in that particular industry. That is what makes Brookfield Infrastructure Partners so unique, though. It owns a wide array of infrastructure assets ranging from ports in Australia, toll roads in Brazil, and natural gas pipelines in the U.S. What also makes many of these investments appealing is that 44% of the company's assets are in regulated businesses, which means that it is granted immense competitive advantages in exchange for set rates of return. With a diverse revenue stream in many regulated markets, Brookfield Infrastructure Partners can afford to see some weakness in a business segment or two without it completely compromising its overall business.
With investors souring on any investment that might have the words "energy" or "emerging market" in the description, the yield for Brookfield Infrastructure Partners has been pushed to 5.2%, giving investors an interesting opportunity to buy shares while the market keeps a rather pessimistic view of Brookfield's stock.