No Lie: These Stocks Pay You to Own Them |  Smart Change: Personal Finances

No Lie: These Stocks Pay You to Own Them | Smart Change: Personal Finances

(Keith Noonan)

When the market hits a tumultuous time, investors often flock to dividend-paying stocks. Companies in this category will actually pay you to hold 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 usually a strong indicator of a strong business. If a company can reliably return cash to shareholders, chances are it has a strong balance sheet and the company consistently generates strong earnings and free cash flow.

A company with a long streak of increases in the amount of money it returns to shareholders each year may be an even better indicator. Read on to take a closer look at a selection of income-generating 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 companies, dividend-paying stocks can provide protection against volatility, and they are often favored when market conditions are tough. With the turmoil that has rocked the market lately, now might be a good time to consider bolstering your portfolio with some income-generating stocks.

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The chart below looks at five dividend-paying stocks, their dividend yields, and the number of consecutive years they’ve increased payouts to shareholders.

Company Industry Dividend yield Years of Consecutive Payment Growth
Search Lam (NASDAQ: LRCX) Semiconductor equipment 1.2% 8
walmart (NYSE: WMT) Retail 1.5% 49
PepsiCo (NASDAQ: PEP) Food and drinks 2.7% 49
ExxonMobil (NYSE: XOM) petroleum gas 3.9% 39
Verizon Communications (NYSE:VZ) Telecommunications 5.4% 15

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

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

VZ dividend data by YCharts.

Growth of around 11% over half a decade is better than nothing, but it’s probably not the kind of momentum that would convince you to invest in the stock alone. Thankfully, Verizon shares are already yielding a fantastic 5.4% return at current prices, and any increase beyond that is gravy.

Meanwhile, companies that no longer pay dividends or have relatively low yields often increase their payouts at a much faster rate. Here’s a look at Lam Research’s payout growth over the same period.

LRCX dividend data by YCharts.

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

There are exceptions to this kind of dynamic, but these are the kinds of trade-offs you can expect when choosing between stocks focused on dividend growth and those focused on yield.

Focus on supporting strong businesses

When investing in dividend-paying stocks, it pays to put your money in companies that benefit from brand strength, strong competitive moats and reliable demand. These benefits help companies ensure that cash flows back to shareholders, even when times are tough. Investing in dividend-paying stocks that exhibit these characteristics can be a great way to generate passive income and add a defensive fortification to your portfolio.

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When our award-winning team of analysts have stock advice, it can pay to listen. After all, the newsletter they’ve been putting out for over a decade, Motley Fool Equity Advisortripled the market.*

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

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