3 Dividend Stocks for Smart Investors

Markets Motley Fool

Buying what you know was one of the themes that investing legend Peter Lynch used throughout his career as a top money manager.  After all, if you were using a product or service, then likely millions of other people were, too. Smart investors know that doesn't mean you should go out and pick up the stock of every product in your pantry or every store you visit, but it's a good place to start looking for investment ideas. And if they pay a dividend, all the better.

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We asked three top Motley Fool contributors to identify a dividend-paying stock that smart investors would likely be familiar with. They highlighted Johnson & Johnson (NYSE: JNJ), CVS Health (NYSE: CVS), and Anheuser-Busch InBev (NYSE: BUD) as their top choices.

Build a healthier income portfolio

Demitri Kalogeropoulos (Johnson & Johnson): Smart investors know that market leadership tends to deliver strong returns for a business. That helps explain why healthcare titan Johnson & Johnson has been such a great long-term investment for its shareholders. The Dividend Aristocrat (with 55 consecutive annual payout raises under its belt) has trounced the market for decades thanks to an unbeatable track record of market-share gains across its core business lines.

Its latest results show the benefits of operating the biggest, most diverse healthcare enterprise on the planet. Its consumer segment, anchored by big brands like Motrin and Tylenol, inched higher by just 1% thanks to a generally weak selling environment. But its medical devices division, which is nearly twice as large, saw more robust growth that helped pull the entire business up to an almost 2% increase.

Johnson & Johnson is on pace to hit its growth targets while boosting its market-thumping profitability this year. Over the long term, its ability to innovate, particularly in the pharmaceutical space, will determine whether it continues delivering those unusually hefty returns to investors. Yes, there's no shortage of competition in the industry. But Johnson & Johnson's entrenched market position -- plus an annual research and development budget that passed $9 billion last year -- suggest this company will still be leading the industry in a decade. That puts income investors in a good position to see solid stock price appreciation in the years ahead, supplemented by a dividend that yields a healthy 2.5% today.

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A prescription for solid dividends

Keith Speights (CVS Health): Smart investors don't just look at a stock's dividend yield -- they realize there's a lot more that goes into the making of a great dividend stock. CVS Health serves as a good example.

The pharmacy services company currently claims a dividend yield of 2.51%. That's not bad at all. More important than where the yield stands now, though, is where it's likely to be in a few years.

If history is a reliable guide, CVS Health's dividend should be a lot higher in the future. Over the past 10 years, the company has hiked its dividend by a whopping 733%. The following chart shows just how consistent CVS Health's dividend increases have been. 

But can CVS Health keep increasing its dividend at historical levels? Probably. The company currently uses only 37% of its earnings to fund the dividend program. That leaves plenty of room for more dividend hikes even if earnings stay at current levels -- which they won't.

CVS Health expects to grow adjusted earnings per share by around 10% annually over the long term. Some of that growth will be achieved through share buybacks, but the company still projects adjusted earnings growth before the impact of stock repurchases of around 5% annually.

There are some challenges for CVS Health. The company sees 2017 as something of a rebuilding year after losing a couple of major contracts to rival Walgreens Boots Alliance (NASDAQ: WBA). E-commerce giant Amazon.com (NASDAQ: AMZN) could enter the pharmacy market, which could prove very disruptive to the market. For now, though, CVS Health appears to be a solid dividend stock pick for smart investors. 

A dividend to raise a glass to

Rich Duprey (Anheuser-Busch InBev): There is no brewer with more depth, breadth, and reach than Anheuser-Busch InBev, which, after its merger with SABMiller last year, virtually owns the U.S. beer market and has considerable sway globally. Its portfolio of beers spans every category and class of beer, from its mass-brewed Budweiser; to craft beer with its latest purchase, Wicked Weed Brewing; and even down into home brewing, as it acquired the biggest supplier to this niche, Northern Brewing. It even owns distributors, brew pubs, and hops farms.

While that dominance of virtually every aspect of the industry raises concerns among some in the craft beer business, as they fear AB InBev will use its market power to squeeze the competition out of existence, an investor should consider what its stock would bring to your portfolio.

The stock is down about 10% or so over the past year, but its dividend of $3.90 per share currently yields 3.4% annually, and despite the slowdown in the domestic beer industry, the global beer market remains healthy and growing, leading analysts to contend it will grow earnings almost 23% a year for the next five years. Although it only began paying a dividend relatively recently, Anheuser-Busch plans to continue raising its payout for the foreseeable future, albeit at a more modest pace than it has in recent periods, suggesting investors may want to toast the King of Beers by adding it to their portfolios.

10 stocks we like better than Johnson & Johnson
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Demitrios Kalogeropoulos has no position in any stocks mentioned. Keith Speights has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon, Anheuser-Busch InBev NV, and Johnson & Johnson. The Motley Fool recommends CVS Health. The Motley Fool has a disclosure policy.