No Lies: These Stocks Pay You To Own Them | personal finance

(Keith Noonan)

When the market hits a tumultuous stretch, investors often flock to dividend stocks. Companies in this category will actually pay you to own their stock, and stocks that pay dividends have historically outperformed those that don’t by a wide margin.

Returning cash to shareholders over a long period of time is often a strong indicator of a strong business. If a company can reliably return cash to shareholders, its balance sheet is very likely to be strong and the business will generate strong earnings and free cash flow on a consistent basis.

A company that has a long streak of increasing the amount of cash it returns to shareholders annually may be an even better indicator. Read on for a closer look at a selection of income-producing stocks you should consider adding to your portfolio.

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Dividend Growth, Yield, and Your Portfolio

Because they offer reliable cash returns and generally have strong businesses, dividend-paying stocks can provide a buffer against volatility and are often favored when market conditions are tough. With the turbulence hitting the market lately, now might be a good time to consider strengthening your portfolio with some of the top income earning stocks.

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The chart below looks at five dividend stocks, their dividend yields, and the number of consecutive years in which shareholder payouts have increased.

Business Industry Dividend yield Years of consecutive payment growth
lam research (NASDAQ:LRCX) semiconductor equipment 1.2% 8
walmart (NYSE:WMT) Retail sale 1.5% 49
PepsiCo (NASDAQ:PEP) food drink 2.7% 49
exxonmobile (New York Stock Exchange: XOM) petroleum gas 3.9% 39
Verizon Communications (NYSE: VZ) telecommunications 5.4% fifteen

Data source: Lam Research, Walmart, PepsiCo, ExxonMobil, and Verizon Communications. Table by author.

Companies with high returns or a long history of payout growth often have mature businesses and tend to raise their dividends at relatively slow rates. For example, take a look at Verizon’s payment growth over the last five years.

VZ dividend data by YCharts.

About 11% growth over half a decade is better than nothing, but it’s probably not the kind of boost that would convince you to invest in stocks on its own. Fortunately, Verizon stock is already paying a fantastic 5.4% return at current prices, and any rise above that is juicy.

Meanwhile, companies that are newer to paying dividends or that have relatively small returns often increase their payouts at a much faster rate. Here’s a look at Lam Research’s payout growth over the same stretch.

LRCX dividend data by YCharts.

Lam has been growing revenue and profits at a much faster rate than Verizon, and overall, the semiconductor equipment industry looks poised for much stronger growth than the telecommunications industry over the next decade. On the other hand, the steady rise in demand for Internet and communications services seems like a pretty safe bet, and Verizon’s strong brand and category-leading services should help it continue to deliver strong performance and return cash to shareholders.

There are exceptions to this type of dynamic, but these are the types of compensation you can expect when choosing between dividend-growth stocks and yield-oriented stocks.

Focus on supporting strong companies

When investing in dividend stocks, it pays to put your money behind companies that benefit from strong brand names, strong competitive moats, and reliable demand. These advantages help companies keep cash flowing back to shareholders, even when times are tough. Investing in dividend stocks that have these characteristics can be a great way to build passive income and add defensive fortification to your portfolio.

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Keith Noonan has no position in any of the stocks mentioned. The Motley Fool has positions and recommends Lam Research. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.

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