If you don't have many dividend-paying stocks in your portfolio, you might want to rethink your asset allocation because dividend payers can be surprisingly powerful long-term performers.
For starters, a company generally needs to grow enough to have relatively reliable income, giving management the confidence with which to initiate -- and then maintain -- a dividend payment to shareholders. Such companies will then offer not only the chance of stock price appreciation, but also a good chance of increasing dividends over time.
Image source: Getty Images.
I'll introduce you to five solid dividend payers shortly. But first, check out the numbers below, from a Hartford Funds report, to appreciate the power of dividends.
Dividend-Paying Status | Average Annual Total Return, 1973-2023 |
|---|---|
Dividend growers and initiators | 10.19% |
Dividend payers | 9.17% |
No change in dividend policy | 6.74% |
Dividend non-payers | 4.27% |
Dividend shrinkers and eliminators | (0.63%) |
Equal-weighted S&P 500 index | 7.72% |
Data source: Ned Davis Research and Hartford Funds.
Five promising dividend-paying stocks
Here, then, are five dividend-paying stocks to consider for your long-term portfolio. You'll note that each offers a solid or hefty current dividend yield, and each has been hiking its payout over time, too -- though not always at a good clip. I included an S&P 500 index fund, too, for comparison purposes.
Stock | Recent Dividend Yield | 5-Year Avg. Annual Dividend Growth Rate | 5-Year Avg. Annual Return | 10-Year Avg. Annual Return |
|---|---|---|---|---|
Altria(NYSE: MO) | 8.2% | 4% | 7.75% | 5.51% |
Chevron(NYSE: CVX) | 4.3% | 6.5% | 8.73% | 5.65% |
Verizon Communications(NYSE: VZ) | 6.5% | 2% | (2.01%) | 3.12% |
AbbVie(NYSE: ABBV) | 3.3% | 7.7% | 23.17% | 14.45% |
Realty Income(NYSE: O) | 5% | 3.7% | (0.31%) | 7.4% |
Vanguard S&P 500 ETF | 1.28% | 4.7% | 15.87% | 13.47% |
Data sources: Yahoo! Financial and Morningstar.
1. Altria
Altria, the tobacco giant, may seem like an odd stock to include, as the rate of cigarette smoking in the U.S. hit an 80-year low earlier this year, per Gallup. Not surprisingly, Altria's top Marlboro brand has seen shrinking volumes of sales. Still, it's worth considering as an investment if you're more interested in dividend income than in stock-price appreciation.
That's because its dividend yield is fat -- and the company has been increasing its payout for more than 50 years in a row. Better still, its payout ratio, the percentage of its earnings being paid out in dividends, was recently 68%, suggesting that its dividend is sustainable. The company has been investing in cigarette alternatives, too, such as vaping products.
2. Chevron
Chevron's recent stock performance has been lackluster -- in part due to relatively low oil prices. But oil prices tend to fluctuate, and Chevron has performed fairly well in varied economic environments. Its dividend is generous, recently yielding more than 4%, and it has been hiking its payout at a good rate -- upping it from $4.32 per share in 2017 to $5.16 in 2020 and $6.52 most recently. Its recent payout ratio of 62% is reassuring, too. Anyone optimistic about the energy industry might consider investing in Chevron.
3. Verizon Communications
Verizon's dividend yield is steep, in large part because the stock is down over the past few years. The company has been struggling to boost revenue, but its profitability has been improving. It also generates lots of free cash flow, which can be used not only for dividends, but also for paying down its considerable debt and investing in growth. Verizon may not grow quickly, but it should grow as it expands its fiber and 5G networks.
4. AbbVie
AbbVie is a drug company, spun off from Abbott Laboratories in 2013. Its dividend yield is on the small side compared to others in the table above, but note that its stock price has been growing much faster than the others, too. Its payout ratio was recently above 100%, which is not ideal, and it has been challenged by the loss of patent protection for its big seller Humira, but it has other irons in the fire, such as its next-generation immunology drugs. Debt is another issue, but the company does generate lots of free cash flow, and its fortunes could change with some new blockbusters.
5. Realty Income
Finally, there's Realty Income, a real estate investment trust (REIT). REITs are companies that own lots of real estate properties, charging rent for them. They're required to pay out at least 90% of their taxable earnings as dividends, so they're often good dividend payers. Realty Income is actually one of relatively few monthly dividend payers -- most companies pay quarterly.
As of the end of June, the company boasted 15,450 properties, leased to 1,551 customers in 90 industries. It's still growing, too, with second-quarter revenue rising 31% year over year.
Don't forget exchange-traded funds (ETFs)!
If you're not confident enough to choose individual dividend stocks, that's perfectly fine -- because you can do quite well with exchange-traded funds (ETFs) that are focused on dividends and income generation. Here are a few to consider.
ETF | Recent Yield | 5-Year Avg. Annual Return | 10-Year Avg. Annual Return |
|---|---|---|---|
SPDR Portfolio S&P 500 High Dividend ETF (NYSEMKT: SPYD) | 4.18% | 8.67% | N/A |
Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) | 3.61% | 13.05% | 12.02% |
iShares Core Dividend Growth ETF (NYSEMKT: DGRO) | 2.24% | 12.59% | 12.49% |
Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) | 1.65% | 12.93% | 12.33% |
Data source: Morningstar.com, as of Oct. 22, 2024.
However you go about it, it's a sound strategy to add dividend payers to your long-term portfolio.
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Selena Maranjian has positions in AbbVie, Realty Income, Schwab U.S. Dividend Equity ETF, and Verizon Communications. The Motley Fool has positions in and recommends AbbVie, Abbott Laboratories, Chevron, Realty Income, Vanguard Dividend Appreciation ETF, and Vanguard S&P 500 ETF. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.
