Dividends can be an investor's best friend. Not only do they represent a tangible return on your investment, but they also contribute a stream of passive income that can flow directly into your bank account. If you are an income investor, you should be looking for companies that have sturdy business models that generate copious amounts of free cash flow. Ideally, investors will not be expecting these businesses to expand rapidly, so they can pay out most of their earnings as dividends rather than reinvesting heavily in growth efforts.
But that's not the only aspect of a business you should weigh. Another pertinent consideration is its dividend track record. When management has proven willing and able to continue rewarding stockholders with larger and larger payouts over time, that can give you confidence about their chances of keeping that up. Businesses that have increased their dividends annually without fail for an impressive 50 years or more earn membership in the exclusive club known as the Dividend Kings.
Here are three dividend stocks that meet all of those criteria that you should double up on right now.
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1. Sysco
Sysco(NYSE: SYY) is a market leader in the marketing and distribution of food products to a wide variety of restaurants, food service sites, healthcare centers, and educational institutions. Its worldwide network of 333 distribution facilities dishes out food products to more than 700,000 customer locations.
The company reported robust results for its fiscal 2023, which ended July 1: Sales increased by 11.2% to $76.3 billion, operating income jumped nearly 30% to $3 billion, and net income climbed 30% to $1.8 billion. It also generated a healthy free cash flow of $2.12 billion, 79% higher than the $1.18 billion it churned out in fiscal 2022.
Sysco continued its strong performance into the first half of its fiscal 2024, with sales inching up 3.1% year over year to $38.9 billion and net income surging 51% year over year to $919 million. Free cash flow more than doubled to $527.4 million. And in April 2023, management upped the quarterly dividend from $0.49 per share to $0.50 per share -- the 54th consecutive year that the company boosted its payout. The dividend yield on the stock is 2.66%.
Sysco has initiatives in place that should ensure its continued growth. In October, the company broke ground on a new $102 million distribution facility in Arizona that should be operational by spring 2025. In the same month, management also announced the acquisition of Edward Don & Company, a leading distributor of food service equipment, supplies, and disposables. Integrating that 100-year-old company into its operations will provide Sysco with new capabilities and boost its already-diversified offerings. The company has more than 12,000 customers in its loyalty program, Sysco Perks, which provides them exclusive access to a variety of rewards. In 2022, Sysco's total addressable market stood at $353 billion, of which the company had a 17% share. The good news is that this market continues to grow and is fragmented, so Sysco will have ample opportunities to increase its revenue and profits, which it can use to continue growing its dividends.
2. Grainger
Grainger(NYSE: GWW) distributes maintenance, repair, and overhaul products, boasting an impressive product range of over 2 million items. The company reported solid results for 2023, with sales rising by 8.2% to $16.5 billion, operating income up 15.8% to $2.6 billion, and net income up 18% to $1.8 billion. The business also churned out free cash flow of $1.6 billion, up 47% from the previous year's $1.1 billion. This healthy performance enabled Grainger to raise its quarterly dividend by 8% to $1.86 per share in April 2023, marking its 52nd consecutive annual dividend increase. The stock has 0.77% yield, in part, because of decent price performance this year.
For 2024, Grainger expects net sales of $17.2 billion to $17.7 billion, representing growth of 4.3% to 7.3%. The business also expects to continue generating free cash flow, with capital expenditures at around $500 million versus an expected operating cash flow of $2 billion. Like Sysco, Grainger also has construction plans: It's building a new 1.2 million-square-foot distribution center near Houston that will be operational by 2026. The facility will be one of the company's largest, and it will contain more than 250,000 industrial supply items, providing additional capacity for order fulfillment. Grainger also has a warehouse slated to open later this year and a distribution center in Oregon set to open next year. Management anticipates better times ahead for the U.S. economy and is building out its infrastructure to prepare for the expected increase in business volumes. Grainger sees its current total addressable market as around $193 billion, and while it's the largest player in that space, it has just a 7% market share, which would suggest it has ample opportunities for further growth.
3. Target
Target(NYSE: TGT) owns and operates around 2,000 discount stores and hypermarkets in the U.S. The retailer reported a mixed set of results for its fiscal 2024, which ended Feb. 3. Sales dipped by 1.7% to $105.8 billion, but operating income jumped 48% to $5.7 billion, and net income surged nearly 49% to $4.1 billion. Target also generated a free cash flow of $3.8 billion, reversing its negative free cash flow of $1.5 billion in fiscal 2023. In June, the retailer raised its quarterly dividend by 1.9% to $1.10 per share, its 52nd consecutive annual payout hike. The dividend yield on the stock is a healthy 2.63%.
Target opened eight net new stores in fiscal 2024, bringing its total store count to 1,956. It also introduced a new low-price brand, Dealworthy, with nearly 400 no-frills basic items. These products continue to be covered by Target's one-year return policy, making them even more appealing to budget-conscious shoppers. Just this month, the company also reintroduced its loyalty membership program, Target Circle, offering its members more personalized shopping along with attractive savings. Target also plans to introduce two other brands -- Up&up and Gigglescape -- that will provide a combination of quality, style, and value, to help further drive sales.
Meanwhile, the retailer says it plans to build more than 300 new stores in the next decade while enhancing supply chain operations and upgrading and remodeling its existing stores. Investors will be kept busy with these exciting business developments and can look forward to higher dividends when these initiatives bear fruit.
Should you invest $1,000 in Sysco right now?
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Royston Yang has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Target. The Motley Fool has a disclosure policy.
