Building long-term wealth is the goal for many. Building a passive income stream from dividend stocks is a dream. Personally, I’ve always been drawn to dividend growth investing, so it’s natural that companies on the Dividend Aristocrats and Kings lists often come to mind, as they have a long-standing history of increasing dividends.
However, dividends alone aren’t enough to support the long-term growth of an investment portfolio. It's important that we look at other factors such as cash flow and net income growth, and then reinforce it with what the analysts say before taking the plunge. I also like to look at price targets to get an idea of where the stock might go in one year. Naturally, we don't want to buy high, only for the stock to drop.
Identifying prospective dividend stocks to buy isn't just about picking the highest yield. It's about finding quality names with a history of increasing their dividends, while not overextending themselves.
How I Came Up With The Following Stocks
As I often do, I started by using Barchart’s free stock screener tool to compile my list.
- Annual Dividend Yield: I left this blank, so I rearranged the results from highest to lowest..
- Current Analyst Rating: 4 (Moderate Buy) to 5 (Strong Buy) for the most positive consensus.
- Cash Flow Growth Last Year: 10% or more. Higher cash flow means better headroom for a potential dividend increase.
- 5-Year Revenue Growth: 30% or more. I prefer companies that have increased their top line figures over the past 5 years.
- Net Income Growth Last Year: 30% or more. Mature companies often exhibit relatively low net income growth; however, we aim for growth of 30% or more to support dividend increases.
- Watchlists: Dividend Aristocrats and Kings. These companies have increased dividend payments for 25 and 50 years, respectively, and have weathered various market downturns.
After setting the filters, I ran the screener, seven companies came up, and I sorted them from highest to lowest dividend yield.
I’m going to skip Middlesex Water Company for this list as the stock price has been declining over the past 5 years.
So that will make my top three dividend stocks: California Water Service Group Holding, Air Products and Chemicals, and Abbott Laboratories.
California Water Service Group Holding (CWT)
California Water Service is a public utility company that’s been around for almost a century. Today, it serves clients in California, Washington, New Mexico, and Hawaii. What it does is pretty straightforward - sources water, treats it to become drinkable, and distributes it to the consumer.
Very recently, California Water Service agreed to acquire two smaller water systems: Casa Loma Water Company and Palm Mutual Water Company, which serve a combined total of 300 homes, respectively. Although it’s still pending regulatory approval, this means another expansion for California Water Service.
The company has increased its dividend for 56 consecutive years, cementing its status as a Dividend King. Its forward payout is $1.20 per share ($0.30 per quarter), which translates to a forward yield of 2.57%. Their dividend payout ratio works out to approximately 52%, still within an acceptable range.
A consensus among analysts rate CWT stock a “Strong Buy” rating (perfect 5 out of 5). The highest target for the stock $60 per share, which translates to around 28% upside potential from its current levels.
Air Products and Chemicals (APD)
Next on my list of dividend stocks is Air Products and Chemicals. It’s one of the primary suppliers of industrial gases like oxygen and nitrogen. The company has been in operation since the 1940s and serves various industries today, including oil refineries, electronics, steel, and healthcare. Today, the company is also focusing on clean energy, particularly hydrogen fuel.In terms of dividends, Air Products pays $7.16 per year (or $1.79 per quarter), which translates to a respectable 2.46% forward yield. The payout ratio is approximately 43% of its earnings, which is also within an acceptable range. Furthermore, the company has increased its dividend for 43 consecutive years and is a member of the Dividend Aristocrats.
Despite the financial setbacks, Wall Street remains positive for Air Products - with a consensus among 23 analysts rating APD stock a “Moderate Buy”. The high target for APD is $375 per share, which suggests as much as 29% potential upside for investors owning the stock at today's prices.
Abbott Laboratories (ABT)
Next up is Abbott Laboratories, one of the most diversified healthcare companies in the world, dating back to 1888. You’ve probably encountered its products without realizing - it produces everything from medical products to everyday essentials to baby formulas, you name it. Abbott has approximately 115,000 employees worldwide and generates around $40 billion in annual revenue.
Abbot’s dividend profile is commendable. The company has increased its dividend payout for 53 consecutive years, making it both a Dividend King & Aristocrat. Today, the company pays $2.36 per share per year in dividends ($0.59 per quarter), which reflects a forward dividend yield of 1.79%. The payout ratio is around 46% of its earnings, which is also very acceptable.
Unsurprisingly, Wall Street rate Abbott Labs a “Strong Buy” with a score of 4.46 out of 5, and it’s been the same recommendation over the past 3 months. Their highest price target for ABT stock is $159, which could mean as much as 20% upside from today's prices.
Final Thoughts
These three companies have been around for longer than I have, and have been paying and increasing their dividends for years, regardless of market conditions. That said, anything can happen even to the most established names, so it’s always best to keep informed as a shareholder. All things being equal, I think investors would likely be very pleased holding any of these stocks over the next 5 to 10 years.
