Dividends are nice, to be sure … particularly to long-term investors who specifically need reliable income.
But not all dividend stocks are created equally.
To remain a viable long-term holding to income seekers, these cash-producing stocks also need to offer reliable dividend growth over time to fight off the effects of inflation. What good is a stagnant dividend, after all — as the payout stays the same, its purchasing power slowly erodes.
And it’s surprising how many dividend paying companies don’t up their payouts to even keep pace with inflation.
With that in mind, here’s a closer look at eight dividend stocks that not only are consistent payers, but are just as consistent when it comes to increasing their dividend. (And yes, the strength and growth potential of the company’s business were major considerations for inclusion in this list.)
Dividend Stocks for Income Growth: 3M (MMM)
Dividend Yield (as of 7/22): 2.7%
Although frequently overlooked due to its complete lack of sexiness, 3M (MMM) may be the best-kept secret in Dividend Land.
It has increased its dividend steadily since 1970. Not once has it ever not paid, and not once has it ever reduced its payout — something that can’t be said even for many of Wall Street’s very best dividend stocks.
It’s not the reliability of the dividend growth that makes MMM one of the few truly must-have dividend stocks for income-seekers, however. It’s the pace of dividend growth. On average, its payout doubles less than every nine years, and has grown at that rate for a very long time.
That rate of growth casts the seemingly anemic current yield of 2.7% in a new light. For instance, buyers a decade ago are currently enjoying a yield somewhere in the range of 5.5% to 6%.
Dividend Stocks for Income Growth: Procter & Gamble (PG)
Dividend Yield (as of 7/22): 3.3%
Procter & Gamble (PG) isn’t a name investors have been thrilled with in recent years.
Once the name to beat in the personal goods market as well as one of the most-loved dividend stocks, over-diversification ended up forcing the company to lose its edge. Sales and earnings growth suffered — the former has been stagnant for years, and the latter hasn’t seen much growth either.
The flip side is, even a bad P&G is still better than many other stocks on their best day.
Procter & Gamble remains a profitable company, it’s still giving shareholders dividend growth, and perhaps most important, PG is finally getting serious about doing better with fewer things than trying to do well with too many things. The exit of a big chunk of its beauty business is one example of this streamlining that should boost efficiency, and therefore boost profitability, and therefore facilitate more dividend growth.
Not that it needs much help on that front.
Although some suggested it was dishing out more of its earnings as dividends than it could afford to in recent years, in so doing, P&G maintained a multidecade streak of rising quarterly dividends. And it didn’t break the bank to do so.
The yield of 3.3% may not look like much now, but given the reliable dividend growth, and more recently, a renewed focus from (relatively) new CEO A.G. Lafley, PG shareholders can expect this company to get back to its roots. That includes maintaining a tradition of higher and higher payouts.
Dividend Stocks for Income Growth: HCP (HCP)
Dividend Yield (as of 7/22): 6%
Although it took a brief break from its dividend growth habit between 2002 and 2003, HCP (HCP) got back on track in 2006 and has never looked back. The quarterly per-share payout has grown from 46 cents in early 2006 to 56.5 cents as of the most recent quarter.
That pace of payout growth isn’t apt to change anytime soon either. See, HCP is a healthcare facility real estate investment trust, and the Affordable Care Act has created a bullish tidal wave of insured individuals, so hospitals and clinics need to do little more than open their doors to make money.
With that bullish undertow well established, HCP is poised to be one of the strongest — even if one of the most overlooked — dividend stocks the market has to offer.
The kicker: The current dividend yield on HCP is already a healthy 6%. That’s about as strong of a payout as one could expect given the minimal level of risk here.
Dividend Stocks for Income Growth: Dr Pepper Snapple Group (DPS)
Dividend Yield (as of 7/22): 2.4%
Not only does Dr Pepper Snapple Group (DPS) rarely come to mind as part of a hunt for dividend stocks, it barely comes to mind at all.
Big mistake on both fronts.
The beverage company actually brings a surprising amount of success to the table, occasionally besting bigger and better-known players such as the ubiquitous Coca-Cola (KO).
DPS’s trick isn’t a trick at all. It simply makes a point of knowing its customer and running a very tight ship, and it’s small enough to remain nimble.
The end result is a steady string of dividend growth ever since Dr Pepper Snapple Group was spun off from Cadbury in 2008. In fact, the current 48-cent payout is nearly double the quarter per share DPS was paying out in 2011. So while today’s yield of 2.4% for DPS shares might not be sky-high, the company’s stable forward progress assures that it can afford to up its payout over time.
Dividend Stocks for Income Growth: Ameriprise Financial (AMP)
Dividend Yield (as of 7/22): 2.1%
One of the nice parts about being a money manager is that you collect a quarterly fee regardless of how well or poorly those assets perform. That’s how Ameriprise Financial (AMP) has managed to grow income for the past couple of years.
Ameriprise’s quarterly dividends have grown too, from 18 cents per share in the middle of 2010 to 67 cents per share as of the most recent quarter. The increased payout not only extends a decade-long streak of rising payouts, but it accelerated that trend, ushering AMP to the market’s upper echelon of dividend stocks.
And that’s not even the best part.
What makes Ameriprise Financial so compelling to income investors right now is that its payout ratio as a percentage of earnings is holding steady at around 25% to 30%; the bigger dividends are simply a function of earnings growth, which has been phenomenal of late. Net income has grown from $1.11 billion in 2011 to $1.62 billion last year, with more of the same expected for the foreseeable future. Per-share profits are projected to rise 10% this year and 16% next year.
Whatever AMP is doing to grow the bottom line, it’s working. Look for similar dividend growth.
Dividend Stocks for Income Growth: Regions Financial (RF)
Dividend Yield (as of 7/22): 2.2%
Like most big banks, Regions Financial (RF) struggled in 2008, forcing the organization to cut its dividend to practically nil while watching its stock plummet.
Prior to the meltdown, though, RF was one of the market’s top dividend stocks, giving income investors solid dividend growth for well over a decided leading up to the 2008 crisis.
What’s the past got to do with the present? Well, Regions Financial looks like it’s getting back to its old ways.
Although the payout is still nowhere near the 38 cents per share RF shareholders were getting as of the first quarter of 2008, the bank has steadily raised its quarterly dividend since 2012. It was paying 1 cent per share then, but paid 6 cents as of last quarter.
It’s likely a sign of what’s to come.
The edge that newcomers may have with Regions Financial is the simple fact most investors don’t recognize or really believe the bank is getting serious about its payout again. Best of all, it can easily afford them. Last year’s payout ratio was still less than 25% of earnings despite the steady increases in its dividends since 2012.
Dividend Stocks for Income Growth: Wells Fargo (WFC)
Dividend Yield (as of 7/22): 2.6%
Whereas Regions Financial is a dividend payer few people see coming, Wells Fargo (WFC) is a dividend growth stock everyone knows about — there’s no “hidden gem” here.
Still, it’s worth talking about.
Dividend growth is soaring, and the mega-bank is making money hand over fist. In fact, WFC is arguably the best bank stock out there in that it manages to continually improve earnings year-over-year even without strong revenue growth. And now, it’s the world’s most valuable bank.
Critics are quick to point out that sales growth remains anemic, and the dividend yield of 2.6% isn’t exactly a barn-burner. Those critics are right, to be fair. Wells Fargo even acknowledged things were a little lethargic and less than ideal right now during their last earnings call.
And yet, dividends continue to rise, from 5 cents per quarter in 2009 to 37.5 cents per share as of the most recent dividend announcement.
Dividend Stocks for Income Growth: Xilinx (XLNX)
Dividend Yield (as of 7/22): 3%
Last but not least, Xilinx (XLNX) is one of the few dividend stocks that investors can realistically expect will deliver consistent and sizable dividend growth from for the foreseeable future.
For those not familiar with it, Xilinx is a semiconductor stock. Right away that might raise mental red flags, in light of the headwinds that more prolific players like Advanced Micro Devices (AMD) and Micron (MU) have hit this year thanks to a slowdown in PC sales.
It’s not a perfect apples-to-apples comparison, though. Broadly speaking, Xilinx technologies are more value-oriented and less cyclical than the chips and chipsets the media and consumers love to discuss on a regular basis.
The upside of such a product base is steady sales and earnings growth, which translates into reliable — and surprisingly significant — payout growth. Over the past 10 years, the company’s quarterly dividend has grown from 7 cents to 31 cents per share. That translates into an annualized dividend increase of more than 15%, and with revenue as well as earnings projected to grow again next year, so too should its payout.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.