Forever Dividend Stocks

 

Forever Dividend Stocks are stocks you’ll likely want to hold forever. When you reinvest the dividends, you will generate enormous and safe returns thanks to compounding. And when it’s time to collect the income, you’ll have more than you thought possible from a one-time investment (of course, if you continue to invest, you’ll have even more income).

In this report, I’ll uncover my six favorite dividend stocks that have been hand-selected from my Compound Income Portfolio – a foundational portfolio of The Oxford Income Letter.

The Compound Income Portfolio is designed for wealth seekers. This portfolio uses the immense power of dividend reinvestment plans (DRIPs) to compound dividends and grow wealth in a conservative manner.

The concept is very simple…

If you buy 1,000 shares of a $10 stock and receive a 4% yield, and that $400 (4% of $10,000) is reinvested… at the end of one year, you’ll have 1,040 shares (if the price of the stock stayed the same at $10). Those extra 40 shares will also generate dividends.

If the dividend grows 10% per year, after five years, you’ll have 1,275 shares.

After 10 years, you’ll own 1,881 shares. Keep in mind that all those shares will generate more and more dividends every year as the dividend goes higher.

Check out the compounding math. It’s mind-blowing.

If you achieve just the average market return, after 10 years, your original $10,000 will be worth $34,606. The annual yield on your DRIP will be 13.2%.

After 15 years, you’ll have $65,674 (and a yield of 28.4% on your original investment).

In 20 years, you’re looking at $126,446… and an astounding annual yield of 58.3%!

The easiest way to reinvest your dividends is to simply tell your broker you want your dividends reinvested. Most brokers offer this service free of charge. So you can buy a stock once, pay one (or no) commission and hold the stock for years without paying another dime as your nest egg grows.

One thing to remember: If the stocks are in a taxable account, you will owe taxes on the dividends even if you are reinvesting them and not collecting the cash. So be sure to have enough cash set aside to pay your taxes every year.

Now that I have covered the power of compounding, let’s get to the picks…

Forever Dividend Stock No. 1: Enterprise Products Partners LP (NYSE: EPD)

My first pick is a leading North American provider of midstream energy services. It is an integrated provider of processing and transportation services to producers of natural gas liquids (NGLs) and consumers of NGL products.

Enterprise Products Partners generates most of its revenue from connecting producers of natural gas and NGL products with domestic and international consumers. And that revenue has been growing. In Q2 2024 it topped $13.48 billion, up 26.6% over Q2 2023. Net income grew 12.1% over the same time period to $1.4 billion.  That sort of growth and financial health is good for its dividend. Speakiing of… It has increased its annual payout every year since it began paying a distribution in 1998 (partnerships pay distributions, not dividends). The annual distribution amount has grown every year since 2000 The current quarterly distribution is $2.10.

The company has consistently grown its distributable cash flow (DCF) over the last six years – from $4.0 billion in 2016 to $7.6 billion in 2023.

Its ability to generate increasing DCF is a good sign for investors looking to earn growing dividends.

It has a payout ratio of 78.35%, and it currently has an annual distribution yield of 7.2%.

Note that a distribution is not exactly the same as a dividend, especially when it comes to taxes. A distribution often consists of return of capital, which is not taxed as a dividend. In fact, it is not taxed at all in the year it is received. Instead, it lowers your cost basis and you pay capital gains tax when you sell the stock (assuming you sell for a profit).

Partnerships like Enterprise Products Partners send K-1 tax documents instead of 1099-DIV forms like other dividend payers. These K-1s can sometimes be a hassle, and your accountant may charge you more to handle them.

Forever Dividend Stock No. 2: Gilead Sciences (Nasdaq: GILD)

Our second pick is a pharmaceutical company that pays a 3.5% yield and has a decade-long history of annual dividend increases.

Gilead Sciences (Nasdaq: GILD) is the pharmaceutical giant behind HIV drug Biktarvy. That drug’s sales rose 10% to $2.9 billion in the first quarter of 2024. What’s more, the company’s portfolio of liver disease drugs saw revenue grow 9% year over year. And, Trodelvy, a breast cancer drug, saw its sales leap 39% to $309 million.

In all, the company tallied up revenues of $6.95 billion for the latest quarter, Q2 2024. That’s up 5.4% over Q2 2023. Net income for Q2 2024 grew 54.4% year over year to $1.6 billion. In addition, the company holds $3.78 billion in cash…

But back to Biktarvy for a moment. It’s Gilead’s top HIV drug, has a 49% share of the HIV treatment market and has posted 23 straight quarters of year-over-year market share gains. Six out of 10 new HIV patients starting therapy are put on Biktarvy.

But Gilead hasn’t just weakened the effects of HIV. It’s also developed medications to prevent it − including Sunlenca, the only twice-a-year subcutaneous preventive HIV drug, and Descovy, which claims 40% of the HIV prevention market (a market that’s growing by about 11% per year).

There are still 1.2 million people in the U.S. living with HIV today, but barring other health issues, they can now expect to live just as long as people who don’t have HIV − thanks in large part to Gilead. But that’s just one drug and one disease. The company has also done something similar with the hepatitis C virus.

In all, the company has 27 drugs on the market and 54 more in development. Those drugs fuel the company’s $0.77 per share quarterly dividend which yields 4.9% at current prices.

Gilead is the perfect example of why I love investing in healthcare companies. While it’s important not to fall in love with a stock and abandon your investing discipline, it feels good to invest in companies that are saving lives.

And thanks to its drug pipeline, its track record of dividend growth and its current valuation, Gilead is a healthy addition to any income investor’s portfolio.

Forever Dividend Stock No. 3: Innovative Industrial Properties (NYSE: IIPR)

Up next is Innovative Industrial Properties (NYSE: IIPR).

Innovative Industrial Properties is a real estate investment trust, or REIT, that leases its 108 properties to 30 state-licensed cannabis operators in 19 states. Its top three tenants are Ascend Wellness Holdings (OTC: AAWH), a New York-based grower and retailer; Green Thumb Industries (OTC: GTBIF), which is headquartered in Chicago and operates nearly 100 dispensaries in 14 states; and PharmaCann, a privately owned cultivator and dispensary operator.

Since PharmaCann is privately held, its financial data is not available, but Innovative Industrial’s top three publicly traded tenants are all free cash flow positive.

As of the end of second quarter 2024, 104 of the company’s 108 properties were being rented – an impressive 96% occupancy rate – with an average of 14.4 years remaining on the leases. Innovative Industrial’s initial leases generally last 15 to 20 years (versus just five years for traditional industrial leases), and they have built-in annual increases, which provide opportunities for long-term cash flow growth.

In June, Innovative Industrial Properties raised its quarterly dividend to $1.90 per share. At current prices, that equates to a 5.6% yield.

The company initiated the dividend in 2017 and has increased it every year since − at a compound annual growth rate of 44%.

Next year, I expect the annual dividend to rise to around $7.90.

The board is targeting a payout ratio of 75% to 85% of the company’s AFFO. The payout ratio was right in the middle of that range at 80% last year, and it came in at 83% in the second quarter.

Keep in mind that REITs must pay out 90% of their earnings in dividends. Earnings are not the same as AFFO, but that legal requirement often pushes REITs’ payout ratios above my normal threshold of 75%. For that reason, I raised the threshold from 75% to 100% for REITs. Innovative Industrial Properties is comfortably below that level.

Innovative Industrial Properties is a low-risk way to play the marijuana space, which is gaining momentum as it becomes more widely accepted by citizens and governments alike. The company is generating more and more cash each year and returning it to shareholders in the form of a strong and growing dividend.

This stock should “smoke” the market in the years to come

Forever Dividend Stock No. 4: AbbVie (NYSE: ABBV)

AbbVie is another long-term dividend pick.

The company is a global pharmaceuticals maker. Its two bestselling drugs are Imbruvica and Humira.

Imbruvica treats chronic lymphocytic leukemia, mantle cell lymphoma and Waldenström macroglobulinemia, another form of lymphoma. Imbruvica is also being studied in other cancers and is expected to become one of the bestselling cancer drugs ever.

In 2023, Imbruvica generated $3.5 billion in revenue.

The company is currently paying a healthy 3.3% yield and has an 204% payout ratio. Forever Dividend Stock No. 5: RTX (NYSE: RTX)

Formerly known as Raytheon Technologies, RTX provides a wide range of defense products and services, from electronics systems to missile systems. It manufactures the same kind of forward-looking infrared imaging technology that Boston authorities used to apprehend the Boston Marathon bombers.

RTX’s biggest customer by far is the United States government. But its international business has been growing. The company has a $2.4 billion contract to provide Qatar with Patriot air and missile defense systems.

The world isn’t getting any safer, and it’s hard to imagine the United States or any other government cutting back on defense spending. It has led to a revenue tear for RTX this year. In Q1 it grew revenue 12.1% year over year, in Q2 revenue grew 7.7% and in Q3, revenue topped $20 billion, up 49.2% year over year. And that in turn means huge cash flows for RTX…

Last year, RTX generated more than $7.8 billion in cash flow from operations, up 10% year over year. Though it’s not the highest yielder at 2%, it raises its dividend regularly. As a result, it can easily be called a Forever Dividend Stock.

Forever Dividend Stock No. 6: Eaton (NYSE: ETN)

Sporting a 1.1% dividend yield that we expect to grow roughly 4% per year over the next several years, Eaton is the perfect setup for income seekers. Eaton produces equipment that helps customers manage power more efficiently. It’s a huge business that includes more than 94,000 employees across 60 countries and customers in 175 countries.

It makes flight control systems, beverage distribution tubing, switches for keypads and thousands of other products. Business is booming too as the company has been on a steady revenue growth streak since Q3 2022. In the latest quarter, Q2 2024, revenue topped $6.35 billion, up 8.3% over Q2 2023.

The company has increased its quarterly dividend by an average annual rate of roughly 6.5% over the last three years, and it pays out 39.4% of its earnings in dividends, indicating a healthy and sustainable payout ratio.

Eaton has paid a dividend every year since 1923, and considering the company’s cash flow growth estimates, it should continue increasing its dividend for the next several years.

After all, the company has raised its dividend 15 years in a row.

Importantly, its dividend involves a special tax treatment…

Eaton is based in Dublin, Ireland. Typically, U.S. investors would have foreign taxes withheld from their dividend payments and then would apply for the foreign tax credit from the IRS.

However, Eaton’s dividend does not have foreign tax withheld from it if you live in the U.S.

Additionally – and this is a very attractive feature – like a partnership’s distribution, Eaton’s dividend is mostly considered return of capital. That means most investors will not be taxed on it. Instead, it will lower their tax basis.

The Cure for Stock Market Volatility

Dividend stocks are the cure for stock market fear and volatility. While most investors bite their nails fretting about what the market will do in the coming days, weeks and months, you can sit back and collect your dividends with little worry – except what you are going to do with your increasing amount of income (a problem anyone would like to have).

The six stocks mentioned above have an average yield of 4.8% and regularly raise their dividends. And as I mentioned before, the powers of reinvesting your income and compounding dividends will boost your annual dividend yield even higher.

Remember, these are not short-term picks. They are long-term holds, and all of them should be able to maintain high dividend payments over the long haul.

I’m confident that these Forever Dividend Stocks will help you create the wealthy retirement you’ve always dreamed of.

 

Good investing,

Marc Lichtenfeld
Chief Income Strategist, The Oxford Club

 

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