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3 Top Sustainable Dividend payers to Buy Now 02/20/16

3 Top Sustainable Dividend Payers to Buy Now


With the market struggling to start the year, it's a great time to focus on the benefits provided by companies with lengthy streaks of annual dividend increases. There are more than 760 companies that have raised their dividend for at least five straight years—330 of them offer company-sponsored dividend reinvestment plans (DRIPs). DRIPs provide a way to commit to stocks slowly, at a variety of price points, instead of making a lump-sum investment—an important risk-reducing option in the current environment.

 

Among the companies that have recently declared a dividend increase are Cincinnati Financial (CINF) (56 years, Ex-Div. 3/21/16), Consolidated Edison (ED) (42 years, Ex-Div. 2/12/16), McGraw-Hill Financial (MHFI) (43 years, Ex-Div. 2/23/16), and Praxair Inc. (PX) (23 years, Ex-Div. 3/3/16). Buying such stocks just before the Ex-Dividend Date gets the “compounding machine” running as soon as possible, so keeping an eye on the previous year's increase date provides a distinct advantage over other investors.

 

Investing in stocks that pay dividends—particularly ones that have a history of steadily increasing the dividend—is a great strategy for building wealth in any market. Opening positions in such companies just before they once again boost their payouts is a great way to start building wealth right from the start.

 

Here's a sampling of candidates that have established a history of steadily rising dividends and have Ex-Dividend Dates coming up in the weeks ahead:

 

 

Note that it may take several weeks to complete the enrollment in a company's DRIP, so becoming a participant in the plan may mean missing the next dividend, but the important thing to remember is that another dividend is just around the corner, so patience-–always important in long-term investing-–will pay its own dividend over time.

 

Of course, you can’t just select stocks with impressive yields. A high yield can be an indication of falling stock prices and there’s no guarantee that the current dividend will be maintained. Companies have the right to cancel, alter, or delay dividends at any time. Watching the dividend payout ratio (the percentage of earnings used to pay the dividend) rise, or waiting for a dividend cut before you sell is probably a good way to assure a loss on the sale.

 

Comparing payout ratios may seem like a good way to choose companies, but even that notion has its wrinkles. For example, Real Estate Investments Trusts, or REITs, are legally required to pay out at least 90% of earnings. Telephone companies may seem to pay out more than they earn, but their earnings are reduced by non-cash write-offs of old equipment, so the payout ratio is distorted. And utilities typically pay out 70% or more of their earnings in the form of dividends.

 

So while there’s no way to anticipate which companies may be most vulnerable, it’s reasonable to conclude that companies with a history of increasing dividends tend to continue to do so. But even companies with consistent records of increasing their dividends are not necessarily smart investments. Below, we feature several companies (drawn from the list above) that meet our criteria for good long-term investment and have payout ratios that compare favorably to their peers. Each offers a DRIP, which makes investing in the company accessible even to those who with small amounts to commit or who prefer to build holdings at a variety of price points.

 

NextEra Energy (NEE) is the parent of Florida Power & Light, which provides electricity to customers in the Sunshine state, where population growth is above average. But the real kicker for future growth is its wholesale power generation unit, which features hundreds of windmills in the nation's midsection, generating renewable energy and enhanced profitability. The company is about to raise its dividend for the 22nd consecutive year.

 

General Mills (GIS) markets familiar branded consumer foods both here and abroad, including cereals, pizza, soups, side dishes, baking mixes, and frozen foods. Although it has “only” raised its dividend for the past 12 straight years, GIS has paid a dividend in each of the past 115 years, without a single decrease. Its product line fares well in good times and bad, making it somewhat “immune” to economic downturns.

 

Genuine Parts Company (GPC) is on the verge of boosting its dividend for the 60th straight year, a record shared by only three other stocks. Best known for providing replacement auto parts, GPC also distributes industrial parts and supplies, electrical materials, and office products. During recessionary times, the company is a go-to provider of affordable replacement parts and service for consumers and industrial users.

 

Owning such companies magnifies returns by using reinvested dividends that are steadily rising to generate dividends of their own.