2 Monster Dividend Stocks to Buy and Hold in 2022 (and Beyond)

Broadly speaking, companies that choose to pay a dividend tend to be financially stable — especially those that consistently raise the payout over time. And that stability often translates into outperformance. In fact, between 1972 and 2018, S&P 500 dividend payers saw annualized share price appreciation of 8.8%, while nonpayers posted annualized returns of 2.4%, according to research from RMB Capital.

On that note, Texas Instruments (NASDAQ:TXN) and Union Pacific (NYSE:UNP) have long histories of raising their dividends, and both currently have a dividend yield that exceeds the 1.27% payout of the S&P 500. Better yet: Each stock has outperformed the broader market over the last five years, generating monster returns for shareholders, and both could make you richer in the years ahead.

Here’s why.

1. Texas Instruments

Texas Instruments is a semiconductor company that specializes in analog chips and embedded processors. Analog chips amplify or convert real-world signals (e.g., sound, pressure) to digital signals, and they are used in all electronic devices. Embedded processors are chips designed for a specific task, such as powering smart building hardware or motor control in electric vehicles, and they are present in most electronic devices.

More importantly, Texas Instruments is the industry leader in both cases, and that’s unlikely to change in the future. The company handles most manufacturing, testing, and assembly in house, which creates cost efficiencies and improves supply chain control.

Of particular note, Texas Instruments owns several wafer fabrication plants that use a 300-millimeter production process — a term that describes the diameter of the silicon wafer on which chips are made. That technology makes production 40% cheaper (per unpackaged chip) than the 200-millimeter process used by most rivals.

Last year, semiconductor shortages were tailwind for the company, and Texas Instruments turned in a fantastic financial performance. Revenue rose 27% to $18.3 billion, and earnings skyrocketed 38% to $8.26 per diluted share, outpacing top-line growth as efficiencies from the company’s manufacturing process continued to drive profitability.

Here’s the big picture for income investors: Texas Instruments has grown its dividend 25% per year since 2004. The quarterly payout currently sits at $1.15 per share, which equates to an above-average yield of 2.78%, and in light of the company’s strong competitive position, that figure is likely to rise in the future.

Going forward, the world will only become more digital, driving demand for analog chips and embedded processors. And Texas Instruments has a broad portfolio of 80,000 products and serves 100,000 customers diversified across several end markets, including industrials, automotive, and personal electronics. That’s why this stock could make you richer in the long run.

2. Union Pacific

Union Pacific is North America’s second-largest railroad company in terms of revenue. It operates 32,400 route miles of track in the western two-thirds of the United States, connecting ports in the Gulf Coast and Pacific Coast, with rail systems in Canada, Mexico, and the Atlantic Coast.

To that end, the company is a critical link in the global supply chain, as it facilitates imports, exports, and domestic shipments of everything from finished automobiles and electronics to food products and raw materials for construction.

More importantly, Union Pacific has an ironclad competitive position. It enjoys an effective duopoly in conjunction with Berkshire Hathaway‘s BNSF Railway, and any would-be rival would have to spend billions to build competing infrastructure. In the meantime, Union Pacific could lower its prices. Additionally, a single train has the freight capacity of hundreds of trucks, and trains are three to four times more fuel-efficient than trucks, according the Association of American Railroads.

Building on that value proposition, management introduced its Precisions Scheduled Railroading (PSR) strategy in 2018. PSR aims to boost efficiency by moving freight more quickly, so Union Pacific has been spending money to modernize its locomotive fleet, increase train length, and reduce time spent in terminals.

And those efforts are paying off. In 2021, revenue jumped 12% to 21.8%, but operating income jumped 19% to $9.3 billion, while profits soared 26% to $9.95 per diluted share.

Here’s the big picture for income investors: Union Pacific has grown its dividend at 9.3% per year since 2002, and the company’s solid competitive edge and strong financial results have made that possible. Currently, the quarterly payout sits at $1.18 per share, which equates to an above-average dividend yield of 1.98%. But that figure is likely to rise in the future.

Going forward, economic growth should be a tailwind for Union Pacific, driving revenue growth by boosting freight volume. And management believes its PSR initiatives will translate into an industry-leading operating ratio by 2023 or 2024, meaning the company should become more profitable over time, increasing its capacity to pay a dividend. That’s why this stock looks like a smart long-term investment.

Originally published on Fool.com

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway (B shares) and Texas Instruments. The Motley Fool recommends Union Pacific and recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.

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