In many ways, you could think of dividend stocks as the financial foundation of your portfolio. The reason is that they bring four unique advantages to the table for investors.
To begin with, historical data shows that dividend stocks handily outperform non-dividend-paying stocks over the long run. This suggests that if you were to buy and hang on to companies that pay a regular dividend, your chances of generating real wealth are considerably better than if you focused on a portfolio of companies that didn't pay a dividend.
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Second, dividend payments serve as a beacon for investors looking for time-tested business models. Think of it this way: A company and its board wouldn't share a percentage of their profits with investors if they didn't expect to remain healthfully profitable.
Another key point is that dividend stocks help hedge against inevitable stock market corrections. Since 1950, according to Yardeni Research, there have been 35 corrections totaling 10% or more, when rounded to the nearest whole number, in the S&P 500. While dividend payments are unlikely to counter the entirety of a stock market correction, they can help take the edge off and keep long-term investors from doing something rash.
Lastly, dividend-paying stocks usually allow you to set up a dividend reinvestment plan, or Drip. A Drip allows you to reinvest your payout into more shares of dividend-paying stock, creating a compounding cycle that allows you to own more shares and receive larger payouts. Drips are a commonly used strategy by top money managers to increase the wealth of their clients.
Now that's what I call commitment to a dividend!
Of course, not all dividend stocks are created equally. Some pay an embarrassingly low yield, while others aren't consistent with what they share with investors one year to the next. There are, in fact, just a small handful off rock-solid dividend-paying companies throughout history. A quick screen finds just 16 companies that have paid a regular dividend over the past 100 years. Note that this doesn't mean the payout for these 16 companies increased each year, or even stayed the same. It merely means that at some point during the year shareholders received a percentage of company profits as a dividend.
Among these 16 companies, three stand out for having paid a dividend longer than any other public companies, with a streak of at least 135 years (and counting).
York Water: 201 years
You've probably never heard of York Water (NASDAQ: YORW) before, and that's perfectly OK. Even after being in business for 201 years, the oldest investor-owned utility is still relatively small. Today, it covers 48 municipalities within the state of Pennsylvania. Nevertheless, it holds the streak among public companies for having paid the longest recurring dividend at 201 years. That's more than 60 years longer than the second-longest streak that you'll see in a moment.
Two factors, in particular, are responsible for York Water's being rock-solid for income investors over the course of two centuries. First, the company provides basic-needs goods and services: water and wastewater management. Chances are that if you live in a house, apartment, or condo, you need water and sewer service, and York Water is one of just a handful of companies within the region that provides it. Also, because water is a basic-need good, its demand tends to be pretty predictable, which is great news when trying to forecast future cash flow and reinvestment.
The other critical cog working in York Water's favor is that it's regulated by the Pennsylvania Public Utility Commission. Some view regulated utilities as being at a disadvantage, because any rate increases have to be approved by a regulatory commission before being put into effect. However, regulated utilities also avoid wholesale commodity price fluctuations. Once again, certainty begets steady cash flow and a healthy dividend for York Water's shareholders.
Stanley Black & Decker: 140 years
You could rightly say that Stanley Black & Decker (NYSE: SWK) has all the tools necessary to continue making a healthy dividend payment to investors. On top of paying out a dividend in each of the past 140 years, Stanley Black & Decker also has an ongoing streak of increasing its annual payout in each of the past 50 years.
One reason Stanley Black & Decker, a leading producer and retailer of power tools and security monitoring equipment, has continually paid a dividend is its ties to the U.S. economy. This is a company that generally does well when the U.S. economy is expanding, because it means construction is underway and both contractors and retail consumers are looking to buy. The U.S. economy generally spends far more time expanding than it does contracting, which favors a company like Stanley Black & Decker.
Acquisitions have also been something of a secret sauce for the company. One of its more recent moves was to acquire the Craftsman brand from Sears Holdings for about $900 million earlier this year. Craftsman is a well-known consumer-facing brand, and the acquisition should allow Stanley Black & Decker to push the brand into new department stores. This balance of organic growth and acquisitions has laid the foundation for Stanley Black & Decker to be an income hero for its shareholders.
ExxonMobil: 135 years
Last, but not least, integrated oil and gas giant ExxonMobil (NYSE: XOM) has been sharing a portion of its annual profits with investors since 1882.
One aspect that's helped ExxonMobil line the pockets of its shareholders is the company's vertically integrated operations, along with the fact that it's essentially selling a basic-needs good. Oil and gas, in all their forms, are crucial to most of our day-to-day lives. ExxonMobil's chemical, downstream, and upstream operating segments all work cohesively to pick up the slack when one component struggles. This global and operational diversity allows ExxonMobil to remain profitable when many of its peers are struggling to stay cash flow positive.
In addition, the company has an impressive balance sheet for an integrated oil and gas company. Some of its peers are drowning in debt and, as noted above, struggling in some cases to stay cash flow positive. ExxonMobil, on the other hand, has an AA+ credit rating from Standard & Poor's, which is the second-highest rating the agency bestows on public companies, and sports a debt-to-equity of less than 23%. This reasonably low debt relative to its assets allows it exceptionally financial flexibility, as well as the ability to pay a healthy yield, which is currently sitting at 4%.
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