There’s nothing like getting paid by a big company. That’s what happens when we invest in a stock that hands out a dividend: the company distributes a portion of its take as a direct payment — usually, but not always, in cash — to its shareholders. Theoretically, this adds to the appeal and value of the company’s shares.
For those just starting to invest in equities, putting money in firms that pay regular dividends (typically on a quarterly basis) is an excellent way to start drawing tangible returns quickly.
With that in mind, we asked three Motley Fool contributors to each pick a stock they believe is positioned to keep spitting out dividends for their shareholders. Read to on to see which stocks they chose.
Keith Noonan (Microsoft): Microsoft (NASDAQ: MSFT ) has established a reliable history of payouts and has significant room for dividend growth — two factors that make it a great stock for those new to dividend investing.
When structuring a long-term investment around the value provided by dividends, it makes sense to seek out companies that are unlikely to lower their payouts. Microsoft fits that bill; in fact, it’s never lowered its payout and has delivered dividend growth for 11 consecutive years.
Dividends are typically paid from a company’s free cash flow, and Microsoft’s huge revenue and fantastic margins make it an absolute monster on that front, delivering over $22 billion in free cash flow in its last fiscal year.
The company’s surging stock price has pushed its dividend yield down to roughly 2.6%, but that’s still an attractive yield given Microsoft’s strong business position. A 10-year Treasury Bond currently yields roughly 2.3%, so even if the company’s stock price were to remain stagnant over the next decade, it would still be a better investment than a savings bond.
The stock may experience some bumps related to turbulence in the PC market, but Microsoft’s leading position in cloud services and architecture creates the opportunity for big growth going forward and further solidifies its appeal as a long-term dividend play.
Andres Cardenal (PepsiCo): When you are taking your first steps in the market, it’s important to go with companies you know and understand. PepsiCo (NYSE: PEP ) is a household name. It owns 22 brands that make over $1 billion each in global revenue, including massively popular names such as Pepsi, Lay’s, Tropicana, Quaker, Doritos, and Gatorade, among several others.
Brand power is a crucial source of differentiation that protects the business from its competition. What’s more, PepsiCo has a gigantic global distribution network, which would be enormously difficult to replicate by smaller industry players. In addition to scale, the company has abundant financial resources to invest in areas such as R&D and marketing, providing additional layers of competitive strength.
Consumers around the world are moving away from traditional sodas due to their negative health implications, but PepsiCo has a diversified portfolio of drinks and various types of snacks that make the company well-positioned to withstand changing consumer dynamics. As of 2014, less than 25% of PepsiCo’s global sales came from carbonated soft drinks.
During the last quarter, organic revenue grew 4.4%, with global snacks up 7% and global beverages up 1.5%. The company also delivered expanding profit margins, and stock buybacks are reducing the number of shares outstanding, so core constant currency EPS grew by a healthy 16% year-over year.
PepsiCo stock pays a dividend that yields 2.9%, and the company has a consistent track record of dividend growth in the long term: it’s consistently raised dividends over the last 43 consecutive years.
Eric Volkman (3M): A good place for investors to start looking for stable, income-producing stocks is the list of Dividend Aristocrats. These are companies that have raised their payouts at least once annually for a minimum of 25 years in a row. Lifting a dividend several times within a few years is an achievement, but doing so consistently over a quarter of a century requires a well-run company with a competitive strength.
One such company is 3M (NYSE: MMM ) , one of the most successful conglomerates in American corporate history. 3M makes everything from scotch tape to online library systems, and many of its consumer products are staples in our homes and offices — like Post-It Notes, Ace Bandages, and Scotch-Brite cleaning supplies. .
As far as its dividend is concerned, the company is so aristocratic it should wear a crown. Forget 25 years; 3M has raised its payout at least once annually for over half a century. At the moment, its quarterly distribution is nearly $1.03 per share, which at the current stock price results in a dividend yield of 2.6% — well above the current 1.9% average of dividend-paying stocks on the S&P 500 index.
Meanwhile, free cash flow is robust and growing — it increased by nearly $1 billion in 2014 compared to the previous year to land at over $5.1 billion. This easily covered the $2.2 billion in dividend payments the firm made that year.
There’s probably plenty more where that came from; after it posted per-share earnings of $7.49 in 2014, analysts are expecting the company to earn $7.93 this fiscal year, and $8.78 the next.