I get similar questions, all the time.
- Are Dividend stocks really worth it?
- Can I really make money with dividend stocks?
The answer to both questions is, YES, but the problem with most investors is they do not have the patience to let the process play out. The moment investors see their stock drop, even a little bit, they sell. Emotional trading is a losing strategy.
Patience combined with the power of compounding dividends can build you a treasure trove of passive income.
There are certain stocks that are meant to be short lived within a portfolio, but the foundation of your portfolio needs to consist of foundational positions that are high-quality long-term positions. In today’s piece, we will look at 5 FOREVER dividend stocks to consider for your portfolio.
5 FOREVER Dividend Stocks
Dividend Stock #1 – Apple Inc (AAPL)
Apple is the largest company in the US, operating as a technology company. Apple currently has a market cap of $3.1 trillion and over the past 12 months the stock has risen 29%, and up nearly 300% over the past five years.
Apple does not really need much of an introduction as you are aware of many of the products they already produce, one of which you may be using to read this article. Products include: iPhone, iPad, Macbooks, Wearables, and all this feeds into their faster growing service segment, which includes iCloud and Apple Music, among other things.
The company is an iconic American Company that was revolutionized by the great Steve Jobs when the company was treading water. Since the release of the iPhone back in 2007, mere months before the US economy fell into a Great Recession, Apple was reborn. Since that time, the company has continued to climb the ranks, being the first company to reach a market cap of $1 Trillion, then $2 Trillion and now the first US company to reach a $3 Trillion market cap.
Apple is well known for many things, great products we use every day, and the company has also made investors a lot of money over the years, but one thing they are not as well known for these days is their dividend. The stock currently yields a dividend of only 0.5%, but it is not due to them not increasing the dividend because they have done that for 11 consecutive years now, although the dividend growth has slowed the past 2 years.
However, if you recall, the dividend yield has an INVERSE relationship with the stock price, so even though they increase the dividend every year for the past 11 years, the stock has climbed 300% in just the past 5 years, thus the yield has continued to fall because of this, but that’s alright because we invest for total return.
Now for valuation, and again, this piece is focused on FOREVER dividend stocks, which may not necessarily mean the stock is a buy right this instance. Apple is one of those stocks I wouldn’t want to buy at current price due to the fact I already have a position in AAPL and the valuation appears stretched at the current moment.
Over the past three years, AAPL has traded at a price to earnings multiple of 27.7x, and most of the time I prefer to look at the five and 10-year averages, but AAPL is a much different company today than they were 10 years ago, which is why I look at the three year average for them, as the company is much more service and subscription based, which has earned them a higher multiple.
Analysts are calling for next 12 months EPS of $6.60, which implies 10% EPS growth, which currently equates to a P/E multiple of 29.7x.
Dividend Stock #2 – Microsoft Corp (MSFT)
Let’s transition from the largest company in the US to the 2nd largest in terms of market cap, which is Microsoft Corporation. Microsoft is a technology giant with a very diverse portfolio of offerings. The company currently has a market cap of $2.5 trillion and over the past 12 months the stock has risen 21%, and up nearly 220% over the past five years.
Microsoft is one of my favorite companies for a number of reasons:
- Great Management team
- Strong portfolio of offerings
- AAA credit rating
- Consistent and reliable growth
When it comes to Microsoft, they have long been known for their operating systems on computers and their office suite which includes the likes of Microsoft Excel, Microsoft Word, and Powerpoint.
However, over the past five t ten years, the company has transitioned into utilizing more of a subscription based model along with becoming one of the largest cloud players in the industry. They also have cyber security offerings as well as building out their gaming segment as well, making the technology company very well rounded.
The recurring revenue from subscriptions as well as being a top three cloud provider has provided solid margins and that consistent flow of revenues that companie long for these days.
Microsoft is another company that has been performing quite well over the past decade, but that performance has taken a toll on the company’s dividend yield.
Looking at this chart you can see how 10yrs ago investors could have picked up MSFT shares with a yield near 3%. Today, new investors would only earn a yield slightly below 1%.
As you can see, it is not due to the company keeping the dividend flat, but rather the strong share price appreciation. Microsoft has been growing their dividend at a faster rate than AAPL, especially the past 5 years with a 5-year DGR of 10% and they have been increasing their dividend for 20 consecutive years and counting.
Now let’s look at valuation, where analysts are looking for next twelve months EPS of $10.97, which have been revised down after the company’s recent earnings results. This estimate still implies 12% EPS growth from 2023, which is much more reasonable for a higher multiple stock. This equates to a forward P/E multiple of 30.6x. Over the past 5 years, shares of MSFT have traded at an average multiple of 31x and over the past decade closer to 25x.
Dividend Stock #3 – The Home Depot (HD)
Home Depot has long been a FAVORITE among the dividend growth investor community. Not only because the company offers strong dividend growth, but they have also offered solid share price growth as well, yet again giving investors the best of both worlds as we strive for TOTAL RETURNS.
Home Depot currently sports a market cap of $334 billion and over the past 12 months the stock has risen 10%, with shares up 68% over the past five years.
Home Depot is the largest home improvement retailer in the US, operating in a duopoly of sorts with Lowe’s Companies (LOW), another very strong dividend growth stock in itself. However, HD has long been the leader when it comes to efficiency and growth within the sector.
Producing strong revenues on a year in and year out basis and all while doing it in an efficient matter to improve margins and free cash flow for the most part. There was a lot of demand pulled forward during the pandemic, which saw revenues and FCF explode, before taking a breather in the most prior year.
Looking at this chart you can see just how consistent the company was at growing FCF from 2013 through the global pandemic period.
As FCF spiked, it then fell the following year as expected when demand fell off. Of late, things are now starting to return to normal yet again.
As a dividend investor, FCF is key because this is where dividends and debt are paid from. As I mentioned a few minutes ago, HD has been a strong dividend growth stock and as you can see on this chart, the quarterly dividend has climbed from just $0.40 in 2013 to $2.09 per share today, which equates to an annual dividend of $8.36 per share. This puts the current dividend yield at 2.5% and as you can see here, HD has a 5-year dividend growth rate of 15% and they have been increasing their dividend for 14 consecutive years.
Now we get to start looking at some dividend stocks that not only I love but are trading at much more reasonable valuations as well. Over the past 5 years, HD shares have traded at an average earnings multiple of 22x. Analysts are looking for January 2024 EPS of $14.99 which equates to an earnings multiple of 22.1x, nearly in-line with their five year avg.
Dividend Stock #4 – Starbucks Corporation (SBUX)
Starbucks is the global coffee beverage company with their two largest markets being the US and China. Starbucks currently has a market cap of $116 billion and over the past 12 months, shares of SBUX are up 22%, including being up 100% over the past five years.
Starbucks is one of those iconic brands with a loyal customer base as the company last reported having over 31 million rewards members just in the US alone and that number grew over 15% year over year in the company’s latest earnings release. Rewards members account for roughly 60% of the company’s transactions in the US.
Under the leadership of Howard Schultz over the years, who recently handed over the reins to a new CEO, again, has built the company from just a small coffee shop to a global coffee powerhouse, adding:
- Locations all over the globe
- Starbucks Reserve locations
- Breakfast and lunch options
- New innovative drinks that appeal to various customers
- And so on
This has helped the company continue to not only grow revenues, but also generate large amounts of free cash flow.
As you can see here, the pandemic crippled the business as many cafe locations were closed down for an extended period of time but SBUX quickly transitioned to more drive thru options and outdoor pickup options during that period and now things are starting to normalize a little more. The black eye for the company of late has been the lack of economic growth in China right now, which has been much lower than expected.
The quarterly dividend has grown from $0.12 per share in 2013 to now paying $0.53 per share per quarter which equates to an annual dividend of $2.12 and a dividend yield of 2.1%. Starbucks has been growing their dividend at an average of 12% per year over the past 5 years and they have raised the dividend for 12 consecutive years.
Now for valuation, analysts currently are looking for next 12 months EPS of $4.09 which equates to an earnings multiple of 24.8x. Over the past 5 years, SBUX shares have traded closer to 30x, so there is some value to be had in SBUX especially once the China economy returns to growth.
Dividend Stock #5 – Johnson & Johnson (JNJ)
Johnson & Johnson is a healthcare conglomerate that has gone through some BIG changes in 2023. The company currently has a market cap of $439 billion. Over the past 12 months the stock is flat and over the past five years, shares have climbed 30%.
JNJ has a long 100+ year history as a company and they have long been known for their consumer health segment, which included products such as:
- Band Aid
The company has operated in 3 segments for decades:
- Consumer Health
In 2023, the company spun off its consumer health segment into its own public company, now called Kenvue (KVUE), with the idea of unlocking shareholder value by allowing more focus on the other individual segments.
Kenvue went IPO at $22 in May of this year and the stock is up roughly 5% from those levels thus far.
However, Johnson & Johnson still owns roughly 90% of the new business, but the company has opened an exchange offer where JNJ shareholders can exchange their shares of JNJ for KVUE shares at a slight discount. JNJ will still own a decent position of KVUE.
That leaves the new Johnson & Johnson with its powerful Pharmaceutical business, which has long been the best performing and largest sector in the business and then their fast growing Medical Devices segment, known as MedTech.
JNJ is also in the news for reasons they would prefer not to be, as there is a number of cases around their talc related baby powder in which lawsuits allege may have cause ovarian cancer to a number of patients. This week, JNJ was dealt a blow when a judge rejected the drug company’s second attempt to use a unit’s bankruptcy filing as a way to handle the talc-related lawsuits it faces.
So there is a lot going on, and as a shareholder, I obviously would like clarity on the matter because it could be big dollars but to this point.
In terms of the business, JNJ has a loaded pipeline of current and upcoming drugs that are expected to power the company moving forward.
Like the other companies we had discussed, something they ALL have in common is their ability to generate large amounts of free cash flow.
Where Johnson & Johnson differs from the others on the list today is the fact that not only is JNJ a Dividend Aristocrat, but they in fact are a Dividend King with over 60 CONSECUTIVE years of dividend hikes. JNJ currently yields a dividend of 2.8% and they have a 5-year dividend growth rate of about 6%, so higher yield but lower dividend growth.
Now for valuation, which looks quite intriguing given the unknown about the ongoing litigation. Analysts are looking for 2023 EPS of $10.75 which equates to a forward P/E multiple of just 15.7x. Over the past 5 years, JNJ shares have traded at an average multiple of 17.2x, which is also in line with their 10-year average as well.
When it comes to a successful investing strategy, it is important to have a well diversified base for your portfolio filled with high-quality stocks. All five of these dividend stocks have shown their ability to weather the storm when the economy slows and boom when the economy is expanding.
All five of these companies have exceptional management teams that allow them to operate officially, generate strong amounts of free cash flow, which allows for reinvestment back into the business in addition to growing their dividend on a consistent basis.
In the comment section below, let me know which 5 stocks you would consider foundational positions.
Disclosure: This article is intended to provide information to interested parties. I have no knowledge of your individual goals as an investor, and I ask that you complete your own due diligence before purchasing any stocks mentioned or recommended.