Stocks that pay dividends have historically outperformed those that do not. This shouldn't come as a big surprise, because companies that regularly deliver strong profits and cash flow are in better position to return income to shareholders. However, what can be surprising is the incredible effect that owning sturdy companies, setting their dividend payouts to reinvest, and harnessing the power of compounding tends to have on a portfolio's long-term performance.
To help readers find dividend stocks that have the potential to deliver market-beating returns, we asked three Motley Fool contributors to profile a top income-generating investment. Read on to see why they think that Apple (NASDAQ: AAPL) , Altria (NYSE: MO) , and Antero Midstream Partners LP (NYSE: AM) are top dividend stocks to buy right now.
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An appealing growth and income combo
Keith Noonan (Apple): Tech giant Apple offers a dividend yield of roughly 1.5%, which admittedly doesn't look like much when stacked up against the S&P 500 index yield of 1.8% or the 2.8% yield for a 10-year Treasury bond. However, the stock's dividend credentials and overall growth prospects appear to be underappreciated.
High yield is certainly an attractive characteristic for income seekers, but focusing exclusively on stocks that offer big payouts often means limiting your search to businesses that are expanding earnings at relatively slow rates. On the other hand, dividend-growth stocks tend to offer smaller yields up front, with the promise of more robust profit and payout growth down the line. In many cases, that's a trade-off that winds up working out better for long-term investors.
Apple only returned to paying a dividend in 2012, but it has delivered annual payout growth in each subsequent year and boosted its payout by roughly 93% over the stretch. The company still has plenty of room to continue building on its returned-income component.
Apple's most recent dividend increase arrived in May, delivering a 16% boost, double the S&P 500 index average dividend growth rate of roughly 8% for the year. With the cost of distributing its current payout coming in at roughly 26% of trailing earnings and 28% of trailing free cash flow, Apple is in great shape to continue delivering big payout raises down the line.
The company's current valuation also looks reasonable, trading at roughly 16.5 times this year's expected earnings. With iPhone sales still performing well, opportunities in the wearables and smart-home spaces, and software sales expanding rapidly, there are promising catalysts for strong and sustainable earnings growth. Factor in the dividend momentum, and Apple looks like a worthwhile buy even after its recent pricing gains.
Diversification and a dependable dividend
Leo Sun (Altria): Altria, the maker of Marlboro, is the top tobacco maker in America. It spun off its overseas operations as Philip Morris International (NYSE: PM) in 2008, and gradually diversified away from cigarettes with cigars, snuff, wine, and e-cigarettes. Altria makes most of its money from cigarettes, but revenue from its "smokeless" products accounted for 13% of its revenue (net of excise taxes) during the first quarter of 2018.
Altria might seem like a wobbly investment , since U.S. smoking rates are at historic lows, and the Food and Drug Administration is drafting new regulations to lower nicotine levels and control sales of flavored cigarettes, cigars, and e-cigarettes. However, Altria offsets its declining cigarette sales with price hikes, cost-cutting strategies, and stock buybacks. Those moves bolster Altria's earnings and dividends, even as its sales remain stagnant.
Wall Street expects Altria's revenue to rise just 1% this year, but for its earnings to climb 18%. The stock trades at just 13 times forward earnings, and it pays a hefty forward dividend yield of 4.8%. Altria spent just 45% of its earnings on that dividend over the past 12 months, so it has plenty of room to continue its nine-year streak of annual dividend hikes.
Altria's earnings growth strategy can't last forever. But the gradual diversification of its business, its low valuation and dependable dividend, and the possibility of a takeover by Philip Morris International -- which needs to counter British American Tobacco 's (NYSE: BTI) takeover of Reynolds American -- should set a floor under the stock.
An energy stock with big plans for its dividend
Maxx Chatsko (Antero Midstream Partners LP): While the Permian Basin in West Texas is grabbing all the headlines for American energy right now (deservedly so), there are other shale oil and gas regions offering plenty of action for investors. For instance, the gas-heavy Utica Shale and Marcellus Shale in the Northeast United States are quietly crushing expectations. That's been great news for Antero Midstream Partners, which mostly serves the operations of its parent company Antero Resources .
The midstream business generates about two-thirds of its EBITDA from natural-gas gathering and compression, and one-third from freshwater delivery to support drilling activity. Those relatively simple operations have delivered growth that's almost too good to be true. Antero Midstream Partners expects to report $730 million in adjusted EBITDA in 2018, up from just $66 million in 2014. It didn't even have a freshwater delivery segment back then.
That growth in profits has been matched by increasing cash flow. In fact, if full-year 2018 guidance is met, then the business will have grown distributable cash flow 1,032% since 2014. That has allowed Antero Midstream Partners to grow its distribution from $0.68 per unit to $1.72 per unit in that span -- all while increasing its distribution coverage from 1.1 times to 1.3 times.
That might be just the beginning. Antero Midstream Partners expects growth from existing assets and new projects to provide enough financial flexibility to grow the distribution 28% to 30% per year through 2020 and 20% annually in 2021 and 2022. That could result in a distribution of over $4.18 per unit by the end of 2022, which would be equivalent to a nearly 14% yield at current share prices. That makes this dividend stock worth a closer look at the very least.
10 stocks we like better than Apple
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Keith Noonan has no position in any of the stocks mentioned. Leo Sun owns shares of Apple. Maxx Chatsko has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy .