3 Dividend Stocks for Those Moving Up in the World

Companies, like investors, are not satisfied with simply remaining where they are, but look for opportunities to advance and move up in the world. One of the best ways for investors to achieve that goal is by buying dividend stocks, so we asked a trio of Motley Fool investors to come up with three solid picks for income-seeking investors looking to better their lot in life. They picked Sherwin-Williams (NYSE: SHW), Apple (NASDAQ: AAPL), and Sturm, Ruger (NYSE: RGR). Here's why.

There's lots of room to grow in paint

Brian Stoffel (Sherwin-Williams): When I think about dividend stocks for those moving up in the world, I immediately think of dividend growth. Too often, investors overlook a company's history of dividend growth and sustainability, and simply just examine the current yield.

If you did that with paint giant Sherwin-Williams, you'd be making a big mistake. Currently, the company's dividend offers a measly 1% yield. But that small number leaves out three very powerful pieces of information:

  1. The dividend has increased every year for 37 consecutive years.
  2. Over the past five years, it has grown by an average of 18% per year.
  3. Over the past year, only 23% of free cash flow was needed to make this dividend payment.

The first two mean that management is serious about returning cash to shareholders. The last means that there's no reason to believe this isn't a sustainable policy. The merger of Sherwin-Williams with Valspar made it the No. 1 "coverings" company in the world.

And if smaller-than-desired dividend payout has you worried, think about this: investors who bought shares of Sherwin-Williams back in 2006 were getting an initial yield of 2.4%. Fast-forward to today, however, and they are collecting an 8.1% return on their initial investment every year in the form of dividends -- thanks to strong and growing free cash flows at the company.

Forrest Gump's fruit company stock

Keith Speights (Apple): If you've ever seen the movie Forrest Gump, you might remember that Tom Hanks in the lead role saying, "Lieutenant Dan got me invested in some kind of fruit company. So then I got a call from him, saying we don't have to worry about money no more." The "fruit company" that Forrest Gump referred to, of course, was Apple. Forrest was moving up in the world at the time -- and Apple stock helped him not have to worry about money.

The Apple of today isn't the Apple of back then, but it's still a great dividend stock for young people moving up in their careers. Many people might not think of Apple as a dividend stock. However, the technology company currently pays a dividend yielding 1.75%. That's decent, but not spectacular. Investors in earlier phases of life, though, don't need to rely on dividends for income. The best thing to do with Apple stock is to reinvest the dividends and buy even more shares.

Wall Street analysts project that Apple will grow its earnings by 11% annually over the next five years. Combining that level of growth with the dividend gives a nice overall return. More important, though, is that Apple should thrive for a long time beyond that.

A study earlier this year found that Apple topped all others in customer loyalty for the smartphone, tablet, and laptop computer markets. In addition, Apple is investing in several key new technologies, including artificial intelligence (reportedly even its own AI chip) and driverless cars. Look for this "fruit company" to keep the produce coming.

Still on target for growth

Rich Duprey (Sturm, Ruger): Look at a chart of Sturm, Ruger's dividend history and you might be concerned the payout is in danger. In the first quarter of the current year, the gunmaker declared a dividend of $0.48 per share, which was higher than the $0.44 it paid in the fourth quarter, yet flat from what it paid in the prior year's first quarter. Yet within the past year the payout has been as low as $0.35 per share and as high as $0.49. What gives?

Unlike most companies that pay dividends at a set rate, Ruger fixes its payout as a percentage of its earnings. Since 2012, the gunslinger has set it at approximately 40% of net income, so a chart of that result is going to look fairly chaotic compared to a typical company's dividend history.

But there's good reason to believe Ruger's dividend is not only secure, but will grow. The firearms industry is in the midst of a gun sales boom. Although sales are down from last year, 2016 was also the biggest year for gun sales since the FBI started keeping track of background checks. This year's sales are tracking somewhat lower than last year, but they're still about 20% ahead of 2015, the previous record year.

In short, demand has abated, but it's just normalizing and the long-term trend is high sales and profits. Ruger is the biggest gunmaker in the country, ahead of even the storied Smith & Wesson brand, and with rifle sales on the upswing (Ruger's also the second-biggest rifle manufacturer), there's plenty of room for further growth.

Its dividend that annualizes at $1.92 per share currently yields 3.2%, making it and its stock an attractive addition for any income-seeking investor.

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Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Sherwin-Williams. The Motley Fool has a disclosure policy.