Dividend reinvestment is an amazingly powerful investment strategy. It is used by the best of the best of long-term stock market investors to build lifetime wealth.
In fact, studies have shown that over a 20-year holding period, dividends account for 60% of all the gains in the S&P 500! Think about this for a minute. Since 1998, the S&P 500 would be around 60% lower if not for the benefits attributed to dividends.
To put it bluntly, you are nuts not to build a long-term dividend producing portfolio and reinvest those dividends!
The question has always been just what dividend stocks to buy. How does one locate the perfect dividend stocks? Here’s what I look for:
First, identify stocks with yields higher than average in the S&P 500. The average yield is around 2%, and with Treasuries offering just under 3%, it makes sense to only invest in stocks providing higher than average yields.
Second, cash flows are critical when it comes to dividends. Any dividend stock that you may consider must have cash flows expected to grow for at least the next several years.
Thirdly, dividend payout ratios are critical when it comes to locating perfect dividend stocks. The ratio measures the percent of a company’s earnings that are given back to investors as dividends. I like to see this number 75% or less, which tends to show that there is room for continued dividend hikes in the future.
Finally, I consider the long-term debt to capital ratio. Ideally, this ratio should be under 75%. Too much debt is a dividend killer for any company.
Applying this criterion, I discovered seven dividend-paying stocks that make sense right now.
Perfect Dividend Stocks: Merck & Co., Inc. (MRK)
Merck & Co., Inc. (NYSE:MRK) is currently yielding 3.3% and is trading lower by over 6% in the last year. A low payout ratio of 47 combined with debt to the total capital ratio of just over 36% means Merck should be able to continue paying stable dividends into the future.
Merck’s drug Keytruda boasted nearly $4 billion in sales last year and is forecasted to grow to $6 billion this year.
The company produces around $3.70 per share of free cash flow this year. In 2019, the number is expected to grow to $4.71 per share. I love the potential and long-term viability of Merck.
Perfect Dividend Stocks: Walgreens Boots Alliance Inc (WBA)
Shares of drugstore giant Walgreens Boots Alliance Inc (NASDAQ:WBA) are down over 20% over the last year and the stock yields 2.5%. The dividend payout ratio is 30, while the long-term debt-to–total-capital is ratio posting just over 31%, fitting flawlessly within the dividend criteria.
WBA is forecasted to earn just under $6.00 per share in this fiscal year ending in August — 16% higher than last fiscal year. The company has continually increased its dividend and is expected to boast it again this year.
I like the fact that the stock is trading lower, creating an ideal buying opportunity for long-term income investors.
Perfect Dividend Stocks: Valero Energy Corporation (VLO)
Energy refining stock Valero Energy Corporation (NYSE:VLO) is higher by over 90% in the last year and boasts nearly $100 billion in revenue. It is throwing off a dividend just under 3% on a dividend payout ratio of 56. Its long-term debt–to-total-capital ratio is just over 28 %.
Valero has a policy of distributing around 50% of its operating cash flows to investors via dividends and buybacks. Over the last seven years, its dividend has increased nearly ten times from $.30 to $3.20 per share.
At the same time, outstanding shares have been reigned in over 23% creating a compelling stock for long-term wealth building.
Perfect Dividend Stocks: Kraft Heinz Co (KHC)
The highest payout ratio on the list at 69% and a 36% loss over the last year may make you wonder why its included on the list of perfect dividend stocks.
Well, the company is forecasted to earn just under $3.80 per share this year, up over 6% since 2017. At the same time, Kraft Heinz Co (NASDAQ:KHC) long-term debt to capital ratio is sub 30%, and cash flow is expected to increase next year.
The substantial cash flow combined with a higher than 4% dividend yield earns the company a spot on our list. Bargain hunters will love the low price.
Perfect Dividend Stocks: Johnson & Johnson (JNJ)
Having increased its dividend for the last 55 years, Johnson & Johnson (NYSE:JNJ) is one of the most robust dividend payers on the market. Its share price has stayed steady just dipping around 1% over the last year.
Source: Dawn Via Flickr
Boasting a dividend payout ratio of 45 and a long-term debt to capital ratio of just over 32%. The company is well known for creating substantial cash flows. Next year cash flow is expected to be $9.48 per share up from $8.71 this year. At the same time, just increased its dividend by 7%.
Every income portfolio should have JNJ as part of the mix.
Perfect Dividend Stocks: Carnival Corp (CCL)
Carnival Corp (NYSE:CCL) is my favorite company on the list. The cruise ship company is trading higher by nearly 8% over the last year and is currently yielding a respectable 3%.
Source: Via Carnival
I expect the dividend to continue as consumer demand combines with dividend payout ratio of 42 and a long-term debt/ total capital of just under 21% paints a compelling investment case for the long haul.
Perfect Dividend Stocks: Target Corporation (TGT)
By far Target Corporation (NYSE:TGT) is the best recent performer on the list. Shares of the retail juggernaut have soared around 40% over the last 52 weeks.
Throwing off a respectable 3.3% yield on a 52% dividend payout ratio and 49% long-term debt/total capital ratio supports the long-term viability.
The company expects its EPS to increase by 13% for the fiscal year ending in January.
Risks To Consider: History is not indicative of future performance. Always use stops and position size wisely when investing.
Action To Take: Consider adding one or more of the above perfect dividend stocks to your long-term investment portfolio.
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