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Few dispute that dividend growth investing is back en vogue, but not everyone seems to know exactly why dividend investing is one of the most well-documented ways to beat the market when deftly executed.
So, why does dividend growth investing garner so much respect among seasoned investors?
Perhaps it seems obvious, but dividend growth investing is beloved because it flat-out works -- especially when dividends are reinvested to buy additional shares. As just one of the many examples, a study from asset manager BlackRock found that a selected basket of dividend growth stocks outperformed an equally weighted basket of all stocks by roughly 30% from 1979 through 2004.
Especially when combined with a strategy to reinvest all dividend payments to buy more shares, the results can be truly astounding, while requiring little additional time. Here's a quick snapshot of a few of what I see as the best long-term dividend stocks on the market today.
Data sources: Google Finance and Dividend.com.
What makes these long-term dividend stocks so special?
For starters, each has an enviable track record of growing their dividend payments each year. If our strategy is to beat the market by buying great dividend growth stocks and reinvesting their proceeds, these seem like relatively safe bets based on the multidecade history of annual dividend increases alone. However, the sectors in which the above names operate -- consumer staples and healthcare -- also provide a stable foundation for continued success for many years to come.
Johnson & Johnson
The aging Baby Boomer population should serve as a long-term tailwind for the entire healthcare sector, and Johnson & Johnson's (NYSE: JNJ) formidable competitive position within the industry makes it a fantastic option for long-term dividend investors.
All three of J&J's core business segments -- consumer, medical devices, and pharmaceutical -- are all relatively stable, producing consistent revenues and profits from which it can fund its dividend. The pharmaceutical segment continues to act as the straw that stirs J&J's financial drink, accounting for the greatest percentage of the company's sales and profits. It is also the fastest-growing segment in Johnson & Johnson's business, increasing nearly 9% in the company's most recent quarter versus a 0.8% increase in medical devices and a 1.8% decline in consumer sales.
Segment-specific vicissitudes aside, Johnson & Johnson remains a hugely profitable enterprise by virtually any metric. Its 56% dividend payout ratio seems sustainable for a business of its size, profitability, and capex requirements. Trading at around 22 times its past-12-months' earnings values, the company's stock is below that of the overall market, which also doesn't seem particularly out of line for a company of its quality and maturity. At the end of the day, Johnson & Johnson remains a fantastic option for investors looking to fund their retirements through long-term dividend investing.
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Much like Johnson & Johnson above, Abbott Labs' (NYSE: ABT) place as a diversified healthcare products company makes it a dividend dynamo capable of standing the test of time. After spinning out its biotech business into the publicly traded AbbVie in 2013, Abbott Labs appears focused and ready to seize the considerable opportunities provided by its market. In the company's most recently reported quarter, three of Abbot Labs' four reporting segments produced sales growth in the mid to high single digits, and its nutrition segment -- the long "disappointment" in the report -- still saw sales rise 4.3%.
Like many large U.S. multinationals, the outsized strength of the U.S. dollar has served as a moderate headwind to Abbott's results, though the company remains quite profitable all the same. Furthermore, analysts see Abbott Labs producing double-digit profit growth in each of the next two full fiscal years, making its valuation discount relative to its peers seem likely to disappear if the company continues to execute.
Also like Johnson & Johnson, Abbott Labs' streak of 43 consecutive annual dividend increases make it a fairly safe bet that its continued dividend growth will proceed for years to come. With a 2.5% current dividend yieldand hugely favorable demographics to underpin its long-term growth, Abbott Labs also seems like a fantastic option for dividend investors today.
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Procter & Gamble
Though I could easily continue to sing the praises of the other healthcare name on the list above -- Medtronic -- I'll instead make the case for consumer staples powerhouse Procter & Gamble(NYSE: PG)as a slam-dunk long-term dividend growth play. To see what makes P&G such a fantastic business, it helps to understand what has led its stock price to slightly underperform the market over the last two years.
The company behind such well-known everyday brands including Tide, Bounty, Pampers, and many morehas been hammered by negative foreign exchange impacts in recent quarters. Procter & Gamble has also faced increased competition from a host in insurgent products that have adroitly leveraged the lower barriers to entry provided by technology; Dollar Shave Club's challenge to Gillette is perhaps the most obvious example, though others abound. For whatever reason, P&G's management had been slow to respond, though the company's more recent plan to reduce costs and reinvest in brand growthhas been warmly received by analysts, which brings me to my overarching point in this investing thesis: P&G's ability to endure.
As the largest consumer goods company in the world with leading market share across the bulk of its product segments, P&G's fortress-like competitive position should give it the ability to withstand and adapt to whatever changes will inevitably come its way. The company is an institution, one that consistently produces robust profits come rain, snow, sleet, or shine. Some years will be better than others, but its leading brands and distribution virtually guarantee consumers will continue to use Procter & Gamble's products for generations to come.
The same holds true with P&G's cash dividends. Case in point: Procter & Gamble's amazing history of dividend growth dates back to the Eisenhower administration. Especially given its current 3% dividend, Procter & Gamble remains arguably the best dividend stock on the market for long-term payout growth.
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Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. The Motley Fool owns shares of Medtronic. The Motley Fool recommends Kimberly-Clark and Procter and Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.