There is more to successful dividend investing than simply
spotting high yields. Rather, the most successful dividend stock
investments are those where the company's underlying fundamentals
continue to improve and where ongoing free cash flow growth can
continue to support higher payouts. The following, then, are seven
companies that have been uncommonly strong dividend growth stories
over the past 25 years.
1. AT&T (
The company once known as Ma Bell has had a convoluted history.
While the break-up of AT&T (
) was heralded as a major event in American business history, one
of the resulting "Baby Bells" (Southwestern Bell) ultimately
rebuilt the company, and today's AT&T includes about half of
the original Bells and the long distance operations.
Throughout that convoluted corporate history though, this
company has a very strong record of paying and increasing
dividends. Dividends have grown nearly 6% a year on average over
the past decade, while free cash flow has increased by a roughly
similar amount. Ongoing capex needs to stay competitive in wireless
services might limit further payout expansion, but AT&T is a
reliable and stable company with ongoing dividend growth potential.
Shares are up more than 35% over the past year, doubling the
2. Johnson & Johnson (
Johnson & Johnson (
) is one of the best-known healthcare companies in the world;
simultaneously part of Big Pharma, one of the largest device
companies (particularly in orthopedics and surgery), and one of the
largest OTC healthcare and personal care companies. Major new drug
launches and the acquisition of Synthes ought to drive better
growth in the next few years, while repairing the image of the
company's OTC business in the wake of high-profile recalls could
take a little more time.
Dividends have grown nearly 12% a year for the past decade at
Johnson & Johnson, outpacing the 7% or so growth in free cash
flow. J&J recently began to join the healthcare stock rally
this year, as the shares are now up about 7.5% from a year ago.
3. Kimberly-Clark (
With brands like Kleenex, Kotex, Scott, and Huggies,
) has built a stable of valuable branded paper-based consumer
products. Better still, diapers, tissues, and toilet paper are the
sort of products that consumers have to continue to buy over and
over again. While Kimberly-Clark does face some trade-down risk
(that is, consumers turning to cheaper store-brand products),
consumers can be pretty loyal to these brands and seem more willing
to go with generic soda than generic TP. What's more, as disposable
income continues to rise in emerging markets, Kimberly-Clark is now
appealing to millions of new customers that previously could not
afford their products.
Dividends have grown at a healthy 10% clip over the last decade
(on average), while free cash flow has scarcely grown at all. It
should be noted, though, that Kimberly-Clark has unusually high
year-to-year volatility in cash flow and the roughly 2% compound
per-share book value growth may be useful for putting that in
context. Shares are up more than 23% over the past year, making it
one of the best-performing large consumer goods companies.
4. Abbott Labs (
) is often thought of as a rather sleepy healthcare company, but it
actually has a pretty interesting history of continual reinvention.
Fifteen years ago, Abbott was built around a diversified model that
included products like antibiotics, infant and adult nutrition, and
supplies and devices for the hospital market. Since then, the
company has spun out the hospital products business (now known as
)), developed the blockbuster drug Humira, and added businesses
like stents, diabetes, and diagnostics.
Soon, though, Abbott will morph again as the company splits off
its pharmaceuticals business, and while both are likely to continue
paying dividends, the non-pharmaceutical operations might be more
Abbott has increased its dividend by an average of 8% over the
past decade, while free cash flow has grown more than 11%. With the
shares up more than 33% over the past year, Abbott has been a
strong name in big-cap healthcare.
5. HCP, Inc. (
The lone REIT on this list, HCP (
) (once known as Healthcare Property Investors) owns or has
interests in over 900 healthcare-related properties in 46 states.
HCP leases properties that include senior living, medical offices,
skilled nursing facilities, and life sciences/biotech facilities.
As one might imagine, these tenants cannot easily or casually
change location, so HCP's tenants tend to be "sticky." While
national budget issues may impact the availability of Medicare
funds (constraining rent growth), the aging population of the U.S.
suggests strong future demand.
Dividend growth has not been so spectacular here, which just 2%
average compound growth over the past ten years. During that time,
free cash flow has reversed from a negative starting number, but
free cash flow can be a misleading metric for REITs. Per-share FFO,
though, has grown nearly 4% over the last decade, while the shares
are up 33% from one year ago.
6. Procter & Gamble (PG)
Like Kimberly-Clark and JNJ's OTC business, Procter & Gamble
) is a company built around a host of well-known consumer brands
that customers buy over and over. Notable brands include Tide,
Charmin, Cover Girl, and Crest. Unfortunately, P&G has not had
the best operating performance of late, as new product innovation
has lagged and mismanaged pricing and promotion strategies have
hurt sales and market share in both developed and emerging
Recent problems aside, P&G's 11% dividend growth since 2003
is not bad at all, though recent issues with free cash flow
production have dropped the decade-long growth rate there to about
3%. Up around 10% over the past year, these shares have clearly
lagged the broader market.
7. Bemis (BMS)
) is proof positive that companies can do basically boring things
in interesting ways and reap extra rewards for doing so. A
superficial look will show Bemis to be a packaging company, but the
company's specialty products like cook-in-the-bag, sterile, and
flexible packaging make it a valued supplier to major food,
medical, and chemical companies.
Bemis' 7% dividend growth over the past decade is not bad, but
the 4% growth in free cash flow does point to a risk factor in
terms of whether Bemis can continue to increase its payout
substantially. These shares are the only ones to show very little
growth over the past year, with BMS stock up only about 2%.
The Bottom Line
It's always important to note that past performance does not
guarantee future results. To that end, some of these companies are
likely to find that their size limits their free cash flow growth
potential and, with it, their dividend growth potential. That said,
investors can rest a little easier knowing that these companies do
prioritize returning capital to shareholders and run strong
businesses geared towards generating solid cash flow.
Be sure to visit our complete recommended list of the
Best Dividend Stocks
, as well as a detailed explanation of
our ratings system here