The best dividend stocks have one thing in common. The companies behind the stocks routinely increase their payouts. The data makes this abundantly clear. Over the last 50 years, dividend growers and initiators have delivered an average annual total return of 10.2%, according to data from Ned Davis Research and Hartford Funds. That’s much higher than companies with no change in their dividend policies (6.7%) and those that cut or eliminated their payouts (negative 0.6%).
Verizon (VZ ), Johnson & Johnson (JNJ), and Nike (NKE) have a knack for growing their dividends. That’s one of the many reasons they’re great dividend stocks to double up on right now if you already own shares (or buy if you haven’t added them to your portfolio yet).
Your connection to an attractive and steadily rising dividend
Verizon stock currently offers a dividend yield of more than 6%. That’s several times higher than the S&P 500’s average (less than 1.5%). The primary reason for Verizon’s high yield is its dirt cheap valuation. The telecom giant trades at 15 times earnings (and less than 10 times its forward P/E). That’s well below the S&P 500’s multiple of 24 times earnings and 23 times forward P/E ratio.
On the one hand, Verizon deserves to trade at a lower valuation multiple because of its lackluster growth profile. Its revenue has risen by a meager 0.6% over the past year, while its adjusted earnings per share were down 5% in the second quarter. Likewise, its operating cash flow declined. However, the company is generating substantial and growing free cash flow. Its free cash flow rose $500 million in the second quarter to $8.5 billion. That was more than enough to cover its $5.6 billion dividend outlay.
Verizon’s rising free cash flow should enable it to continue increasing its dividend. It delivered its 17th consecutive annual dividend increase late last year. That’s the longest current streak in the U.S. telecom sector.
A very healthy dividend
Johnson & Johnson stock currently offers a dividend yield approaching 3%. The healthcare giant has increased its payment for 62 straight years. That’s kept it in the elite group of Dividend Kings, companies with 50 or more years of consistent dividend growth.
Premier companies like Johnson & Johnson typically trade at a premium valuation. However, that’s not the case these days. It sells for 11 times earnings and roughly 17 times forward earnings. That company trades at a cheaper multiple following last year’s spinoff of its consumer healthcare business, Kenvue.
The healthcare company is in an excellent position to continue growing its dividend. It has a fortress-like balance sheet and is a free-cash-flow machine. It had $25 billion in cash and marketable securities on its balance sheet at the end of the second quarter. It produced $7.5 billion in free cash flow in the period (easily covering its $3 billion quarterly dividend outlay). The company has been using its financial strength to make acquisitions, which, along with its organic growth drivers, should enable Johnson & Johnson to continue increasing its payout.
In the bargain bin (for now)
Nike currently sports a nearly 2% dividend yield. The shoe and athletic apparel giant has increased its payout for 22 straight years, including by 9% last November.
Nike has become a bit of an underdog in recent years. The company’s shoe sales have lagged due to some strategic missteps that enabled rivals to grab market share. However, the company is taking steps to return to its winning ways.
In the meantime, Nike stock is on sale. It trades at around 22 times earnings. That puts Nike in the bargain bin compared to the premium valuation its stock used to fetch.
While the company’s sales have been sluggish, its profits are improving. Meanwhile, it generates lots of cash. It ended its 2024 fiscal year with $11.6 billion in cash on its balance sheet, a $900 million increase from the prior year, despite paying $2.2 billion in dividends (an 8% increase) and purchasing $4.3 billion of shares. The company continues to use its excess free cash to gobble up its cheap stock, which could help boost its valuation once its business stages a comeback.
A great time to add
Verizon, Johnson & Johnson, and Nike have been top-notch dividend stocks over the years. They currently trade at attractive values and dividend yields. That makes now a great time to double up on these elite dividend stocks while they’re still bargains.
— Matt DiLallo
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Source: The Motley Fool