The classic strategy of buying quality stocks and holding them for several years can be an excellent way to get rewarded for your patience. Companies that pay their investors dividends and have the potential to grow in value offer a one-two punch of both short-term and long-term benefits. What's more, dividends provide an added incentive not to sell a stock, and can be a great way to supplement income in retirement.
Investing $15,000 in equal parts of Brookfield Renewable (BEPC -1.06%) (BEP -1.03%), United Parcel Service (UPS -0.26%), and Illinois Tool Works (ITW 0.09%) and holding them for six years should produce at least $3,000 in passive income. Here's what makes each of these dividend stocks worth buying and holding for years if not decades to come.
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Charge up your passive income with Brookfield Renewable
Scott Levine (Brookfield Renewable): With the fear of a recession lurking on the horizon, many investors are on the prowl for ways to fortify their portfolios with stalwart stocks that can generate strong passive income -- dividend powerhouses like Brookfield Renewable and its 4.2% forward-yielding stock. A clean energy dynamo, Brookfield Renewable operates one of the largest renewable energy portfolios in the world, representing 25 gigawatts of operating capacity that includes hydropower, solar power, wind power, and energy storage.
It's not only the stock's attractive yield that's alluring for dividend investors. Management has expressed an interest in steadfastly increasing the amount it returns to investors. And it's not a new vision. The company has consistently stated its target of increasing the distribution at an annual rate of 5% to 9%. And it's not as if this is a pie-in-the-sky aspiration. Should the company achieve its goal of returning $1.35 per share to investors in 2023, it will have increased its distribution at a compound annual growth rate of 6% since 2014.
Cautious investors may question whether the company's dividend ambition will imperil its financial well-being. To this end, there seems to be little to worry about. Brookfield Renewable's business model includes a desire for inking long-term power purchase agreements. These arrangements provide the company with good insight into future cash flows, affording it the ability to plan for future capital expenditures. In addition, conservative investors will appreciate that the company has an investment grade balance sheet and plans to source future dividends with internally generated cash flows.
UPS will get back to growth
Lee Samaha (UPS): The package delivery giant UPS' stock now yields more than 3.8% and is held by Warren Buffett's Berkshire Hathaway -- and that might be enough to convince investors to hold the stock.
For those who prefer to look more closely and do their own research (always a good idea), there's a lot to like about UPS for patient investors. I use the word "patient" because UPS' revenue will decline this year due to a weakening economy. When economic activity slows, so do package delivery volumes and UPS' revenue.
That said, UPS continues to invest in its key target markets, which include small and medium-sized businesses (SMB) and healthcare -- for example, expanding its digital access program into international markets and opening new healthcare facilities.
Furthermore, UPS' focus on maximizing the profitability of its deliveries means that, despite declining volume in the first quarter, its revenue per piece continued to grow. As such, when volume growth does come back, UPS' profit margin will expand and be better positioned in its targeted end markets (SMBs and healthcare).
Meanwhile, investors will earn a 3.8% dividend yield while they wait for the economic cycle to turn and drop down into volume growth again. It's a compelling proposition for investors willing to see out a challenging year for the company.
Illinois Tool Works has it all
Daniel Foelber (Illinois Tool Works): Safe dividend stocks are known for being reliable sources of passive income no matter what the stock market is doing. But there are some dividend stocks that are safe and also market outperformers. Enter Illinois Tool Works, commonly known as ITW, which has beaten the S&P 500 over the past year, three years, five years, and 10 years.
1 Year | 3 Years | 5 Years | 10 Years | |
|---|---|---|---|---|
ITW performance | 12.9% | 57.3% | 80.1% | 334% |
S&P 500 performance | 2.1% | 50.6% | 69% | 208.2% |
Data source: YCharts.
ITW operates a highly diversified business split into seven core business units, and many of its brands and products serve industrial and commercial customers. For example, ITW-owned Hobart makes equipment and appliances for the food service industry. The company's segments include automotive, food equipment, test and measurement/electronics, welding, polymers and fluids, construction products, and speciality products.
Like other industrial conglomerates, there are a lot of moving parts to ITW that can make the business complicated. The good news is that you don't have to be familiar with every single product to understand that ITW is worth investing in. Rather, it's more productive to focus your efforts on how ITW's business is performing in totality. The best way to do that is by looking at its key financial metrics, such as operating margin, free cash flow, revenue, and earnings to make sure the business is growing and is capable of returning value to shareholders through buybacks and dividends.
ITW Revenue (TTM) data by YCharts
There's a lot to unpack in the above chart. But essentially what we are seeing is that ITW is generating all-time high revenue and earnings and is only using about half of its earnings on dividend payments -- which frees up plenty of dry powder to buy back stock. Over the last 10 years, ITW has done an excellent job of keeping a reasonable payout ratio despite growing its dividend, a sign that earnings growth is keeping up with dividend growth. The company's outstanding share count has fallen by 32.2% in the last decade, which adds long-term value to shareholders by boosting earnings per share.
In sum, ITW is a well-run, efficient, and diversified company worth buying now.
Daniel Foelber has no position in any of the stocks mentioned. Lee Samaha has no position in any of the stocks mentioned. Scott Levine has positions in Brookfield Renewable. The Motley Fool has positions in and recommends Berkshire Hathaway and Brookfield Renewable. The Motley Fool recommends Brookfield Renewable Partners and United Parcel Service. The Motley Fool has a disclosure policy.
As someone deeply immersed in the world of investing, let me provide insights into each concept mentioned in the article you shared.
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Dividend Investing: Dividend investing involves selecting stocks that pay dividends, which are regular cash payments made by a company to its shareholders out of its profits. These payments are typically made quarterly and are a portion of the company's earnings. Dividend stocks can provide a steady income stream for investors, making them particularly attractive for those seeking passive income or looking to supplement their retirement savings.
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Brookfield Renewable (BEPC, BEP):
- Brookfield Renewable is a leading player in the renewable energy sector, operating a vast portfolio of renewable energy assets including hydropower, solar power, wind power, and energy storage.
- The company offers a dividend yield of around 4.2%.
- Management has a track record of consistently increasing dividends, aiming for an annual growth rate of 5% to 9%.
- The company's business model includes long-term power purchase agreements, providing visibility into future cash flows and ensuring financial stability.
- With an investment-grade balance sheet and plans to fund dividends from internally generated cash flows, Brookfield Renewable presents a compelling opportunity for dividend investors.
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United Parcel Service (UPS):
- UPS is a global package delivery company with a dividend yield of over 3.8%.
- Despite potential revenue declines during economic slowdowns, UPS continues to invest in key markets such as small and medium-sized businesses (SMB) and healthcare.
- The company's focus on maximizing profitability per delivery helps maintain revenue growth even during periods of volume decline.
- Investors can benefit from UPS's dividend yield while waiting for economic conditions to improve and drive volume growth.
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Illinois Tool Works (ITW):
- Illinois Tool Works is a diversified industrial conglomerate with a history of market outperformance.
- The company operates in seven core business units serving industrial and commercial customers, with products ranging from automotive components to food equipment.
- ITW has consistently beaten the S&P 500 over various timeframes, demonstrating its strong performance.
- Key financial metrics such as revenue, earnings, operating margin, and free cash flow indicate the company's financial health and ability to return value to shareholders through dividends and buybacks.
- ITW's disciplined approach to dividend growth, along with share buybacks, has contributed to long-term shareholder value creation.
Each of these concepts contributes to a comprehensive understanding of the classic strategy of buying quality dividend-paying stocks and holding them for the long term, as exemplified by the stocks mentioned in the article.
