Dividend stocks have long been popular among investors for the steady streams of passive income they provide. But not all dividend-paying companies are created equal when it comes to long-term investment potential. The savvy investor knows to look beyond the temptation of a high current yield and focus on the characteristics that signal that a company will be able to provide sustainable returns over time.
So what should buy-and-hold investors look for in a dividend stock? Three crucial factors stand out. First, a conservative payout ratio below 50%, which indicates the company isn't stretching its finances to maintain its dividend. Second, a track record of annual distribution hikes spanning multiple decades. Finally, a robust economic moat that safeguards the company's profitability.
While high yields might catch your eye, they are often red flags that portend the possibility of dividend cuts to come. These events can send share prices plummeting and derail your returns for years. By prioritizing the sustainability and growth of dividends over current yield, investors can build a portfolio of reliable income-generating stocks that stands the test of time.
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Now, let's explore six standout dividend growth stocks that embody these crucial characteristics.
Target stands out as a dividend powerhouse
Retail giant Target(NYSE: TGT) boasts an impressive 53-year streak of consecutive dividend increases. Its current yield of 2.9% is attractive, supported by a reasonable payout ratio of 45%. The company's five-year annualized dividend growth rate of 10.4% demonstrates its commitment to rewarding shareholders.
Target's forward price-to-earnings (P/E) ratio of 14.5 for 2026 suggests the stock may be reasonably valued compared to the broader market. The S&P 500, after all, is trading at around 17.3 times estimated 2026 earnings, according to some bullish forecasts. Target's economic moat stems from its strong brand recognition, extensive retail network, and efficient supply chain management.
Parker-Hannifin engineers dividend growth
Parker-Hannifin(NYSE: PH), a leader in motion and control technologies, offers a compelling dividend growth story. The company has hiked its payouts for an astounding 68 consecutive years.
While its current yield of 1.1% may seem modest, Parker-Hannifin's low payout ratio of 27.8% and impressive five-year annualized dividend growth rate of 13.2% indicate significant room for future increases.
The company's 2026 projected P/E ratio of 20.2 indicates investors are currently paying a premium for its earnings compared to the S&P 500's average ratio. Parker-Hannifin's economic moat is built on its technological expertise, diverse product portfolio, and strong relationships with original equipment manufacturers.
W.W. Grainger distributes dividends consistently
W.W. Grainger(NYSE: GWW), a leading distributor of maintenance, repair, and operating products, has increased its dividends for 53 consecutive years. Its current yield of about 0.8% is backed by a conservative payout ratio of 20.9%. Its five-year annualized dividend growth rate of 6% demonstrates steady, sustainable increases.
Grainger's projected 2026 P/E ratio of 21.3 suggests the stock is trading at a premium relative to the S&P 500. The company's economic moat is derived from its vast distribution network, economies of scale, and strong customer relationships in a fragmented market.
Tennant cleans up with dividend growth
Tennant(NYSE: TNC), a global leader in cleaning equipment and solutions, offers an attractive dividend profile. The company has raised its payouts for 52 consecutive years, and its current yield of about 1.2% is supported by a very conservative payout ratio of 19%. Its five-year annualized dividend growth rate of 4.9% indicates steady increases.
Tennant's 2026 projected P/E ratio of 14 may indicate the stock is relatively affordable compared to its projected earnings and the benchmark S&P 500. Its economic moat is rooted in its innovative product development, strong brand reputation, and global service network.
Walmart flexes its dividend muscle
Walmart(NYSE: WMT), the world's largest retailer, has established itself as a dividend juggernaut with 51 years of consecutive increases. The company's current yield of 1.1% is backed by a payout ratio of just 41.4%. While Walmart's five-year annualized dividend growth rate of 1.5% is more modest than some peers in the retail sector, its consistent increases and strong market position make it a reliable choice.
Wall Street's projected 2026 P/E ratio of 28 suggests the stock is trading at a premium relative to the S&P 500. Walmart's economic moat is built on its massive scale, efficient supply chain, and increasing e-commerce capabilities.
S&P Global rates high on dividend growth
S&P Global(NYSE: SPGI), a leading provider of credit ratings, benchmarks, and analytics, rounds out our list with an impressive dividend record. The company has increased its payouts for 51 consecutive years. S&P Global's current yield of 0.7% may seem low, but its conservative payout ratio of 34.3% and its five-year annualized dividend growth rate of 6.3% indicate the potential for further increases.
With a projected 2026 P/E ratio of 28, the stock is priced at a premium compared to the S&P 500. S&P Global's economic moat stems from its strong reputation, critical role in financial markets, and high customer switching costs.
Building a passive income portfolio
These six companies demonstrate the key characteristics of a company positioned to deliver sustainable dividend growth: long track records of increases, conservative payout ratios, and strong competitive positions. While each stock offers unique benefits, their true power as investments lies in combining them into a diversified portfolio.
By spreading your investments across different sectors and companies, you can mitigate risk while potentially enhancing your overall dividend yield and growth. That being said, investors will probably want to choose just one of the two big-box retailers on this list, Target and Walmart, for diversification purposes.
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George Budwell has positions in Target. The Motley Fool has positions in and recommends S&P Global, Target, and Walmart. The Motley Fool recommends Tennant. The Motley Fool has a disclosure policy.
