While a lot of folks are busy trying to identify the next big investment trend, keep this tidbit of information in mind: Over the long run, dividend stocks have run circles around their non-dividend-paying peers.
Dividend stocks might lack the pizzazz of high-growth stocks and appear boring on the surface, but they're a model of consistency. Income stocks are almost always profitable, they typically have time-tested business models, and they're the real key to compounding investor wealth over the long term. Dividend reinvestment plans, or Drips, are what many of the most successful money managers use to create wealth for their clients.
But let's face it -- no two dividend stocks are alike. There are hundreds upon hundreds of income stocks for investors to choose from, and quite a few look to be poor places to park your money. That's where the following five companies come into play. These might as well be the top dividend stocks in the world. Income-seeking investors can safely buy into these five stocks and shouldn't have to worry about ever having to sell.
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Johnson & Johnson
Healthcare conglomerate Johnson & Johnson (JNJ 0.89%) might find itself in the news of late for all the wrong reasons (opioid lawsuits and cancer scares tied to its baby powder), but that doesn't in any way impact the belief that it's probably the safest dividend stock on the planet. After all, Johnson & Johnson is one of only two publicly traded companies with a AAA credit rating from Standard & Poor's, which is a higher rating than the U.S. government. Put another way, S&P has more faith in J&J repaying its debts than it does of the U.S. government making good on its own debts. That should tell you something about the caliber of company you're dealing with in J&J.
What makes J&J so great is its business setup. Its three operating segments each check off an important box to help complete the puzzle. Consumer healthcare products, for instance, is a slow-growth division, but it generates extremely predictable cash flow. Then there's medical devices, which has been hurt by commoditization in the near term, but should shine as the global population continues to age. In other words, it's the long-tail growth opportunity for J&J. Lastly, there's pharmaceuticals, which provides the bulk of Johnson & Johnson's margins and growth. Keep in mind, though, that brand-name drugs have a finite period of exclusivity, which is why medical devices and consumer healthcare play such key roles.
In each of the past 35 years, Johnson & Johnson has delivered adjusted operating earnings grow, and it's riding a 57-year streak of having increased its annual dividend. With J&J, you simply reinvest its current annual yield of 2.8% and let management do the work for you.
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NextEra Energy
Anytime you can add an established company to your portfolio that provides a basic-need good or service, there's a pretty good shot you'll never need to sell it. That's exactly the reasoning why shareholders of electric utility NextEra Energy (NEE -0.10%) should consider hanging on to this stock forever.
The beauty of providing electricity to consumers is that their consumption habits don't change much if the economy is booming or in recession. This allows NextEra to map out its capital expenditures with a very good idea of what sort of cash flow it can expect in a given year. Plus, with its traditional electricity operations regulated (meaning it has to request price increases from state utility commissions and can't pass them along to consumers at will), NextEra avoids exposure to the potentially volatile wholesale electricity market.
What separates NextEra from being just any old utility is the fact that it's made significant investments in renewable energy. No utility is generating more electricity from wind or solar than NextEra Energy, which is a big reason why the company is set to grow at a considerably faster pace than its peers. Additional projects, such as "30-by-30," which seeks to install 30 million solar panels by 2030, should add to NextEra's already enviable position. Suffice it to say that this 2.2% yield is exceptionally safe.
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AT&T
Remember, folks, boring is beautiful when it comes to collecting a healthy dividend, and there may not be a more boring business model on Earth than AT&T (T 0.71%). As a shareholder, I'll admit that things have gotten a bit more exciting now that it owns Time Warner, but the days of being surprised come earnings time are long gone (which is actually a good thing).
What anchors AT&T's business is the company's wireless operations. Since this is predominantly a subscription-based model, and consumers are far less likely to cancel subscriptions during periods of weak economic growth, this makes AT&T's wireless services a borderline basic need. Maybe the best part about this segment is the ongoing rollout of 5G networks. This first major upgrade in network infrastructure in almost a decade should lead to a considerable bump in consumer data usage, which is great news considering that data is where AT&T makes its margin in wireless.
As noted, AT&T can also lean on newly acquired Time Warner to bolster its bottom line. Time Warner's core assets (TNT, CNN, and TBS) should provide added pricing power when negotiating with advertisers, and could be the dangling carrot that helps to lure streaming users away from competitors. At a yield of 5.4%, and sporting a 35-year streak of increasing its annual payout, you probably won't find a safer high-yield dividend stock than AT&T.
Image source: Getty Images.
Microsoft
Growth stocks can be top dividend stocks, too! Just take a look at Microsoft (MSFT -0.78%), which is currently yielding 1.4%, and should be on track for its 15th consecutive year of higher annual payouts in 2020. Microsoft also happens to be the other AAA rated company that sits alongside Johnson & Johnson. This is how you know as an investor that there's virtually no concerns about the company's existing debt.
For Microsoft, virtually everything has been working of late. With the exception of gaming, which has always been prone to its ups and downs, Microsoft has seen the biggest growth boost come from its cloud services. In particular, Azure saw a 63% constant currency jump in year-over-year sales in the recently completed fiscal first quarter, ended September. Azure also landed a $10 billion cloud contract from the Pentagon late last month. It's safe to say that Microsoft's cloud momentum isn't slowing down anytime soon.
But even if it did, the company still leans on its exceptionally high-margin legacy products to drive modest growth and generate predictable cash flow. Microsoft's Office 365 commercial operations saw constant currency sales skyrocket 28% from the previous year in the latest quarter, with Windows operating system sales up a healthy 9%. There's simply no major competition here, which cements Microsoft in as a dividend stock to never sell.
Image source: Procter & Gamble.
Procter & Gamble
Have I mentioned how wonderful it can be for income-seeking investors to buy companies that provide basic-need goods and services? If that point hasn't been hammered across by now, let me introduce you to the final of five top dividend stocks to hold forever, Procter & Gamble (PG 0.34%).
Procter & Gamble is a consumer goods giant with dozens of well-known consumer brands in its portfolio -- and probably in your cupboards. Some of its iconic brands include Tide detergent, Crest toothpaste, Pampers and Luvs diapers, Bounty paper towels, and Charmin toilet paper. What these products all have in common, aside from being brand-name, is that they're going to be purchased whether the economy is growing robustly or if we're mired in a steep recession. Consumers need to do laundry, brush their teeth, and clean up messes with paper towels all the same. That provides a level of certainty to Procter & Gamble's business model that few consumer goods companies can boast.
With P&G's high-growth days in the rearview mirror (much like AT&T), the company's focus these days is mostly on three things:
- Marketing its existing brands.
- Acquiring innovative businesses that'll broaden its product portfolio.
- Taking care of its shareholders.
Procter & Gamble's streak of increasing its annual payout is practically unmatched at 63 consecutive years. When combined with its penchant for repurchasing its own stock, this 2.5% yield becomes tough to beat and virtually impossible to sell.
