When it comes to dividend stocks, investors can fall into the trap of focusing on dividend yield over all else. That can be a dangerous strategy, as high-yield stocks almost always are higher-risk.
But the issue isn’t just the risk in high-yield stocks. It’s the opportunity cost of ignoring lower current yields from companies with better prospects to grow their profits – and their dividends.
After all, the best dividend stocks over time have been the ones that have posted years, and often decades, of dividend increases. One famous example is the investment by Warren Buffett’s Berkshire Hathaway (NYSE:BRK.A,NYSE:BRK.B) into Coca-Cola (NYSE:KO). As Buffett pointed out in last year’s shareholder letter, Berkshire now receives just more than 50% of its original investment every year in Coke dividends.
But KO also shows a potential risk in dividend growth names: as the boilerplate investment disclaimer goes, past performance is not a guarantee of future results. General Electric (NYSE:GE) was a Dividend Aristocrat until 2017, when it halved its dividend. GE stock has fallen 63%, and its dividend was slashed again to just a penny per quarter.
Yield favorite AT&T (NYSE:T) last month held its dividend flat for a fifth consecutive quarter after years of minimal growth. Financials like Bank of America (NYSE:BAC) ended dividend growth streaks during the financial crisis. A track record of dividend growth helps a bull case. It doesn’t alone create a bull case.
These eight dividend stocks, however, have a solid history, and a strong outlook to match. They should be on the list of every dividend growth investor.
Dividend Stocks: Johnson & Johnson (JNJ)
J&J has one of the longest streaksof dividend increases in the entire market: some 59 years, according to Dividend.com. The 60th should be announced in May.
Even six decades in, the increases remain healthy, with an average hike of 6.1% over the past five years. Admittedly, JNJ stock has lagged the market over that stretch (total return of 89% versus 120% for the S&P 500), but that’s not necessarily bad news. As a defensive stock, JNJ should trail in a bull market. That’s the trade-off for the downside protection provided when equities turn south.
The good news is that J&J at the moment looks well-positioned to weather any environment in the coming years. The medical devices business doesn’t get all that much in the way of attention, but it continues to perform well. Trends are improving in both the consumer and pharmaceutical segments. Legal issues are in the rearview mirror.
Meanwhile, even with a sharp rally of late, valuation remains reasonable. JNJ trades at just 19x forward earnings, while yielding a healthy 2.4%. This still looks like a long-term, set-it-and-forget-it play.
Broadcom just barely makes this list. The company only initiated its dividend toward the end of 2010. But it’s been a hugely impressive decade.
See the rest of the picks on InvestorPlace.com