Dividend stocks have been a key driver of U.S. stock market returns for over a century. However, many investors have overlooked them in favor of growth stocks in the past decade. This could be a mistake, as history shows that a balanced portfolio should include some high-quality dividend payers with solid fundamentals, competitive advantages, and consistent dividend growth.
Which dividend stocks meet these criteria? Philip Morris International(NYSE: PM) and W.W. Grainger(NYSE: GWW) are both well-regarded dividend payers with a remarkable history of delivering decent capital gains and paying a generous yield. Here's why these two blue chip dividend stocks could be a valuable addition to a balanced portfolio in 2024 and beyond.
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Philip Morris: An undervalued high-yield stock
Philip Morris is the largest tobacco company in the world by sales volume. It also has immense pricing power thanks to its premium cigarette brands like Marlboro and Parliament. However, Philip Morris is a company in transition. Management's goal is to have smoke-free products, such as heated tobacco sticks and nicotine pouches, account for 75% of its annual revenue by 2030. Some analysts have called the feasibility of this operating goal into question, but the company is seeing double-digit sales growth in this category at the moment.
What makes it a great dividend stock? Apart from its generous 5.63% yield, Philip Morris has proven to be a reliable income play by increasing its cash distributions every year since 2008. The tobacco titan also has an impressive 7.2% historical dividend-growth rate. Stocks with high dividend-growth rates (above 5%) rarely fail to deliver positive returns over holding periods over three years. Finally, Philip Morris is reasonably priced at 17.9 times projected earnings, which is markedly lower than the average S&P 500-listed stock at the moment (21.7 times forward earnings).
In sum, Philip Morris is an entrenched competitor in a multibillion-dollar industry, its shares are cheap, it pays an above-average yield, and it has grown its dividend at a high rate for a prolonged period.
W.W. Grainger: A market-beating dividend payer
W.W. Grainger is an American industrial distributor that offers a range of products and services for maintenance, repair, and operations. It earns money through two segments known as high-touch solutions (HTS) and endless assortment, respectively. W.W. Grainger's HTS unit, however, is its main moneymaker, accounting for 81% of total sales in the most recent quarter. There are five solid reasons why investors should consider buying W.W. Grainger stock.
First, W.W. Grainger has a long history of outperforming the S&P 500 index (see graph below).
GWW Total Return Level data by YCharts.
Second, the company has a consistent track record of increasing its dividend for 52 years in a row and counting, making it a Dividend King. Dividend Kings are companies which have raised their payouts for at least 50 straight years.
Third, the industrial specialist has a solid dividend-growth rate of 7.2% over the past decade. That's not quite as high as all-star dividend growers like Visa, but it is superior to several other quality dividend-paying companies like Walmart.
Fourth, W.W. Grainger has consistently repurchased shares on the open market, resulting in a whopping 45.6% decline in its outstanding share count over the past 20 years.
GWW Average Diluted Shares Outstanding (Quarterly) data by YCharts.
Fifth, the company's shares are trading at a reasonable valuation of 22.5 times forward earnings, which is downright cheap for a top-performing large-cap stock with a highly dependable dividend program.
Bottom line, W.W. Grainger is a fundamentally sound company that offers a spectacular shareholder-rewards program and a proven business model that's produced market-beating returns over an extended period.
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George Budwell has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Visa and Walmart. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
