Long-term investors create portfolios that are often divided into three. In one basket, they pack high growth companies like Zoom Video and Alteryx. The goal is to make money as these companies transform from growth to value. In another, they pack value stocks, which are quality and undervalued stocks. In the final basket, they invest in quality dividend stocks intending to receive regular dividends. This analysis will look at the five dividend stocks you should invest in and hold forever.
- Industry: Technology
- Dividend yield: 2.74%
- Payout ratio: 27%
Intel is a technology company that provides processors, hard drive products, servers, and other software. Its primary customers are original equipment manufacturers like HP, Apple, and Lenovo. The company also provides solutions to technology companies like Amazon, IBM, and Microsoft. Intel has the biggest market share in the central processing unit (CPU) industry.
Intel has a market cap of more than $197 billion and annual revenue of more than $78 billion. It is also a highly-profitable company, generating more than $21 billion in net profit.
However, Intel has been under pressure recently, which has seen its stock lag that of its peer companies. This pressure has come from the company’s missteps in launching new processors. That has seen it lose market share to some companies like Advanced Micro Devices (AMD) and Nvidia. Indeed, this year, the stock has lost ~19% of its value, while AMD and Nvidia have jumped by 78% and 131%, respectively.
Yet, Intel offers an attractive dividend yield of ~2.74% and a healthy payout ratio of 27%. The payout ratio means that the firm can easily sustain its dividend. This is supported by the fact that Intel has a leading market share in the processing industry. It is also a leading player in the fast-growing Internet of Things (IoT) and Artificial Intelligence (AI) business.
Illinois Tool Works (ITW)
- Industry: Industrial
- Dividend yield: 2.10%
- Payout ratio: 76%
Illinois Tool Works is an industrial company headquartered in Glenview, Illinois. The company provides essential tools for firms in seven industries. The company makes 22% of its income from automotive companies like General Motors and Ford. It then makes 15% of its revenue from the testing and measurement industries and 15% from the food industry.
The other vital segments for the company are polymers and fluids, welding, construction, and specialty products. In total, the company produces hundreds of products and has more than 18,000 patents.
The firm generated more than $12 billion in revenue and a net profit of more than $2 billion. It is also a dividend aristocrat that has grown its dividend for more than 25 years. Importantly, the firm has a dividend yield of 2.10% and a healthy payout ratio of 76%.
This year, the stock has grown by 15%, which is a relatively good performance considering that we are still in a recession. Also, the firm has struggled because most of its customers have gone through a rough patch. Still, we believe that it makes sense to invest in the company because of its substantial market share and the strength of its balance sheet.
Procter & Gamble (PG)
- Industry: Consumer
- Dividend yield: 2.19%
- Payout ratio: 56%
A few years ago, Procter & Gamble, Unilever, Kimberly-Clark, and other traditional consumer staples companies were written-off by investors, who believed that they were under threat by the fast-growing, well-funded start-ups and the transition to e-commerce. However, in recent years, some of the new-age start-ups have gone out of business. At the same time, many people have remained loyal to the traditional brands.
P&G remains the biggest consumer goods company in the world, with a market cap of more than $353 billion. This makes it bigger than Coca-Cola, Unilever, and Pepsi. It also has a total annual revenue of more than $72 billion and a $17 billion profit. And, in the most recent quarter, its revenue grew by more than 5%, which is a good thing for a firm of its size.
Importantly, P&G is a dividend aristocrat that has grown its dividend for the past 25 years. It has a yield of 2.19% and a payout ratio of 56%, which means that it can continue supporting these payouts for years. Also, the firm has a sizable market share and strong brands.
Verizon Communications (VZ)
- Industry: Telecommunication
- Dividend yield: 4.26%
- Payout ratio: 52%
Verizon is the biggest telecommunication company in the United States, with a more than $239 billion market cap. It is followed by Comcast and AT&T that are valued at more than $205 billion and $198 billion, respectively.
Verizon operates the business in three segments. It has its consumer business, where it provides mobile telecommunication and internet services. It also has Verizon Business, which offers services and solutions to other companies. Also, it has a media group that houses brands like Yahoo, Techcrunch, and AOL.
Verizon makes more than $128 billion in revenue and a net income of more than $18 billion. It also has a dividend payout ratio of 4.26% and a payout ratio of 52%. This makes its dividend relatively sustainable. Also, the company has a strong market share, low churn, and a quality, dependable business model.
This year, Verizon’s share price has declined by more than 1%, which is a better performance than AT&T’s decline of more than 19%. This decline has been because of the pandemic impacts and its high debt load of more than $137 billion. Still, we believe that the company can manage this debt load in the future.
International Business Machines (IBM)
- Industry: Technology
- Dividend yield: 5.6%
- Payout ratio: 69%
International Business Machines (IBM) is a company that offers cloud computing, software, and consulting companies globally. The firm has a market cap of more than $103 billion and annual revenue of more than $75 billion. It is also a highly-profitable company with a net income of more than $1 billion. The company has more than $70 billion in net debt.
IBM has struggled over the years for several reasons. For example, it has lagged behind other companies like Microsoft and Amazon in cloud computing. Also, it has lower margins than other tech companies because of its large consulting branch.
Still, IBM has some catalysts supporting the stock. First, it has a large cloud computing business that is also growing. It is being helped by its acquisition of RedHat, a company that has a large share in the open-source industry. Second, it is clearly undervalued. And finally, the new CEO is attempting to transition the business to the cloud by disposing of some assets.
Investing in dividend stocks is an excellent way of making money, especially for long-term investors. It provides guaranteed returns even when the stock drops. Indeed, the yield usually improves when the stock price falls. Therefore, we recommend that you invest in companies that have a sizable market share, high dividends, and a stable payout ratio.