Holding shares in robust companies that consistently provide passive income to shareholders can be quite reassuring. By carefully choosing the right dividend stocks, an investor can easily assemble a portfolio that delivers an annual dividend income of approximately 3%. As these companies grow their earnings, they often enhance dividend payments, thereby increasing the yield on your initial investment.
To help you begin, three contributors from Motley Fool have been tasked with identifying their top stock picks that can ensure lifelong passive income. Here’s why they recommended Coca-Cola (0.58%), Philip Morris International (0.60%), and Home Depot (0.39%).
Invest in Warren Buffett’s Favorite
John Ballard (Coca-Cola): Investing in companies with robust competitive advantages can safeguard and grow your wealth over the decades. Coca-Cola’s global brand strength and substantial annual sales volume certainly meet this criterion, which is why Warren Buffett has maintained a significant stake in the company for over 30 years.
Daily, people consume 2.2 billion servings of Coke products, translating to about 800 billion servings annually. This encompasses over 200 brands owned by the company, including Fanta, Sprite, Minute Maid juices, Dasani water, Costa Coffee, Fuze Tea, Powerade, and Simply. This extensive product portfolio offers numerous routes to drive sales.
In the last four quarters, these servings generated $10 billion in profit on $46 billion in revenue. The company distributed three-quarters of its earnings as dividends over the past year, amounting to $0.485 per share, which brings the forward dividend yield to 2.71%.
Coca-Cola has increased its dividend for 62 consecutive years and raised the quarterly payment by 5% earlier this year. The management continues to wisely allocate capital and streamline operations to improve margins, all contributing to the growth of earnings and dividends for shareholders.
Investors have appreciated the company’s ability to maintain double-digit earnings growth despite a challenging retail landscape. Wall Street analysts anticipate a 14% increase in the company’s adjusted earnings this year. Consequently, the stock is reaching new highs, yet its above-average dividend yield indicates that the shares remain reasonably priced for new investors to initiate a position.
A Transformative Tobacco Stock
Jeremy Bowman (Philip Morris International): PMI might seem like an unusual choice for a dividend stock to buy and hold indefinitely, especially given the declining smoking rates over generations. Nonetheless, PMI, which operates in international markets where smoking rates surpass those in the U.S., continues to prosper and deliver impressive results.
Today, PMI is much more than a traditional tobacco company. Approximately 40% of its revenue derives from next-generation, smoke-free products such as iQOS heat-not-burn devices and Zyn chewable nicotine pouches, which it acquired through the purchase of Swedish Match in 2023.
Philip Morris International is currently on the offensive. For example:
– The company recently secured the rights to sell iQOS in the U.S. from Altria and is gearing up for a product launch later this year.
– It also announced a $232 million investment to expand a Zyn production facility in Kentucky.
– Last month, it revealed plans to spend $600 million to construct a Zyn production plant in Colorado.
Recent figures from PMI demonstrate strong growth for a dividend stock. Organic revenue increased by 9.6% year-over-year in the second quarter to $9.5 billion. Revenue growth from its smoke-free segment was even more impressive at 18.3%, while traditional tobacco products grew by a respectable 4.8%. Adjusted earnings per share also rose 11% to $1.77.
As a dividend payer, PMI currently offers a yield of 4.3%, which should satisfy investors, especially given the strong business growth. With its blend of growth and yield, Philip Morris International merits a spot in any dividend investor’s portfolio.
A Market-Beating Stock with an Excellent Dividend
Jennifer Saibil (Home Depot): Home Depot is a stock that not only outperforms the market but also pays a growing dividend with an appealing yield, making it an excellent choice for dividend investors.
Currently, Home Depot faces challenges as customers shift towards more affordable products across retail, and its larger, costlier items are not essentials that consumers are eager to splurge on right now. The company is further pressured by a still-struggling real estate market.
However, Home Depot stands as the largest home improvement chain globally, having achieved industry leadership by offering an exceptional shopping experience with an omnichannel approach. In the 2024 fiscal second quarter (ending July 28), comparable sales declined by 3.3% from the previous year, yet total sales saw a slight increase of 0.6%.
Management is not anticipating any miraculous turnaround at this time. They are focused on their core strengths: providing customers with what they need while navigating the inflationary climate and fortifying the business’s position. A decline in comparable sales and a lower operating margin are expected for the full year.
Meanwhile, Home Depot offers a top-tier dividend. The company has paid a dividend for nearly 40 years, increasing the payout by over 4,500% since its inception. This dividend has significantly enhanced the stock’s value. Even without the dividend, shareholders would have outperformed the market over the past decade, but with it, the gain extends from 306% to 412%.
Although Home Depot stock is trailing the market this year, it has risen 8%. The business is poised to recover under better macroeconomic conditions and is expected to return to outperforming the market in the long run. It remains highly profitable, with $4.60 in earnings per share (EPS) in the second quarter and $4.7 billion in free cash flow, more than sufficient to sustain the dividend.
At its current price, Home Depot’s dividend yields 2.3%. The company has consistently paid dividends under various circumstances, offering shareholders both market-beating potential and passive income.
