Forever Dividend Stocks
If you love dividends, then you need to consider forever dividend stocks for your portfolio. These are stocks we believe you can buy and hold for the long haul.
In this report, we’ll uncover our six favorite dividend stocks that have been hand-selected from our Compound Income Portfolio – a foundational portfolio of The Oxford Income Letter. (We have more details on this income-focused newsletter below.)
The Compound Income Portfolio is a perfect retirement portfolio.
It’s designed for wealth seekers and those looking to collect oversized income. 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% on $10,000) is reinvested… at the end of one year, you’ll have 1,040 shares. Those extra 40 shares also generate dividends.
- If the dividend grows 10% per year, after five years you’ll have 1,227 shares.
- After 10 years you’ll own 1,544 shares. Keep in mind that all those shares are generating more and more dividends every year as the dividend goes higher. After that, the compounding math is a wonder to behold…
- After 10 years (presuming average market returns), your original $10,000 is worth $31,777. The annual yield on your DRIP is 14.1%.
- After 15 years, you have $58,993 (and a yield of 29.3%).
- In 20 years, you’re looking at $113,019… and an astounding annual yield of 62.9%!
- If the dividend grows 10% per year, after five years you’ll have 1,227 shares.
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 commission and hold it for years without paying another dime as the 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 we have covered the power of compounding, let’s get to the picks…
Forever Dividend Stock No. 1: Brookfield Infrastructure Partners (NYSE: BIP)
Our first pick is a Master Limited Partnership (MLP).
Most MLPs are energy-related. However, this one is a play on global infrastructure.
Brookfield Infrastructure Partners owns and operates electricity transmission lines in South America, timberland in North America, ports in Europe and railroads in Australia.
It pays a 4.93% yield and has raised the dividend an average of 10.39% over the past five years. Management has lifted the dividend every year for seven years. Compared to last year, funds from operations (FFO) – a measure of cash flow for MLPs – grew 29.03%. Recently commissioned capital projects helped boost FFO. And they will continue to do so going forward.
Over the last four quarters, Brookfield paid 54% of FFO in the form of dividends. It is committed to paying 60% to 70% in the future.
Forever Dividend Stock No. 2: Lazard (NYSE: LAZ)
Our second pick is a company that pays a 4.74% yield, raises its dividend every year and has been thriving since James Polk was president.
Lazard (NYSE: LAZ) is an asset manager and an investment bank that’s been around since 1848. It operates in 43 cities within 27 countries. Lazard is widely considered the top boutique investment bank. It even generates more investment banking revenue than some of its larger peers.
Lazard has been in the asset management business since 1953. It has $226 billion under management. Lazard operates 33 mutual funds and two closed-end funds, and offers alternative investments.
Lazard has raised its dividend every year since 2011. It currently pays $0.44 per share quarterly, which comes out to $1.76 per year
That gives us a yield of 4.74%. That’s not bad considering the company has boosted its dividend by an average of 21.38% per year over the last five years.
Forever Dividend Stock No. 3: Texas Instruments (Nasdaq: TXN)
Our next pick is one of the world’s leading chipmakers.
Founded in 1930, and headquartered in Dallas, Texas, Texas Instruments designs, manufactures and sells semiconductors to electronics designers and manufacturers worldwide.
The company has a 3.20% yield, but has been growing the dividend at more than 19.70% per year over the past five years. Though it recently raised the dividend 24.05%, we’re going with a slightly lower growth forecast of 16.4%.
In the last twelve months, it only paid out 35% of its free cash flow in dividends, so it has plenty of room to continue to send more cash to shareholders.
Forever Dividend Stock No. 4: AbbVie (NYSE: ABBV)
AbbVie is another long-term dividend pick.
The company is a worldwide pharmaceutical developer and manufacturer. Two of its most promising drugs are Imbruvica and Humira.
Imbruvia treats chronic lymphocytic leukemia, mantle cell lymphoma and Waldenström’s macroglobulinemia, another form of lymphoma. Imbruvica is also being studied in other cancers and is expected to become one of the biggest-selling cancer drugs ever.
By 2020, Imbruvica is projected to generate between $4 billion and $5 billion in revenue annually.
And Humira is already one of most lucrative medicines on the market.
Humira, which treats rheumatoid arthritis, psoriasis and Crohn’s disease, logged $18 billion in sales last year and should do about $20 billion this year.
AbbVie’s current portfolio of drugs and its pipeline are expected to generate the second-fastest growth rate in the industry – not bad for a $157 billion company (that’s big, by the way). Among the large cap pharma dividend payers, it is first.
The tremendous growth from Humira, Imbruvica and the rest of AbbVie’s portfolio is projected to raise earnings by more than 35% over the next three years. Free cash flow is forecast to grow over 10% in 2019. The company recently hiked its dividend by 12%.
It pays a solid 4.82% yield that is growing by more than 40.23% per year.
Forever Dividend Stock No. 5: Raytheon Technologies (NYSE: RTX)
Raytheon provides a wide range of defense products and services, from electronics systems to missile systems. It manufactures the same kind of FLIR (forward-looking infrared) imaging technology that Boston authorities used to target the Boston Marathon bombers.
Raytheon’s biggest customer by far is the United States government. But it has been increasing its international business. The company has a $2.4 billion contract to provide Qatar with Patriot Air and Missile Defense Systems.
Sequestration or a smaller defense budget could cause revenue growth to slow. But with increased international business and the plethora of lunatics parading as leaders of nations, Raytheon’s business should have no problem remaining strong enough to continue to generate gobs of cash.
And as income investors, that’s what we’re most interested in.
In the last twelve months, Raytheon generated $2.61 billion in cash flow from continuing operations. Free cash flow – a more conservative gauge of cash flow because it takes into account capital expenditures – was $1.85 billion. The company paid out $959 million in dividends for a payout ratio of 52%.
That means even if free cash flow slips, Raytheon has plenty of room to not only pay the dividend but to raise it, like it has for the past nine years.
And those raises have been substantial. Over the past five years, Raytheon has increased the dividend an average of 9.59% per year.
With a yield of 8.93%, it fits in perfectly within the forever dividend stock system.
Forever Dividend Stock No. 6: Eaton Corp. (NYSE: ETN)
With a 3.64% dividend yield that we expect to grow 12% over the next several years, Eaton Corp. (NYSE: ETN) is the perfect setup for income seekers. Eaton produces equipment that helps customers manage power more efficiently. It’s a huge business with more than 96,000 employees in 60 countries and customers in 175 countries.
It makes flight control systems, beverage distribution tubing, switches for keypads and thousands of other products.
Over the last twelve months, Eaton generated $1.85 billion in free cash flow. Over that same period of time, it paid out $959 million in dividends, for a payout ratio of 51%.
That payout ratio is well below our target of 75%. And free cash flow is expected to improve substantially in the future.
Over the next two years, free cash flow is projected to grow an average of 9.79% year over year.
It should be more than enough to pay the rising dividend each year.
The company has raised the dividend 14 times in the past 16 years, and annually since 2010. It has paid a dividend every year since 1923.
Considering the company’s cash flow growth estimates, we expect Eaton to increase its dividend for the next several years.
And there is special tax treatment concerning its dividend…
Eaton is based in Dublin, Ireland. Typically, U.S. investors would have foreign taxes withheld from their dividend payments and then apply for the foreign tax credit with the Internal Revenue Service (IRS).
However, Eaton’s dividend does not have foreign tax withheld if you live in the U.S.
Additionally – and this is a very attractive feature – Eaton’s dividend is mostly considered return of capital, despite the fact that it is not a partnership like a master limited partnership.
Because the dividend is considered a return of capital, most investors will not be taxed on the dividend. Instead, it will lower their tax basis.
Because the dividend is not taxed, we suggest you keep Eaton in your taxable accounts. That way you’re not taking up room in your tax-deferred accounts.
You can reinvest the dividend and let it grow tax-deferred for many years, or until your cost basis is zero.
Then you’ll have to start paying taxes on it. But we’re likely looking at 12 years before that happens.
The Cure for Stock Market Volatility
We believe forever dividend stocks are the cure for stock market fear and volatility. While most investors bite their nails worrying what the market will do days, weeks, or months from now, you can sit back and collect your dividends with little worry except what you are going to do with all this income (a problem anyone would like to have).
The six stocks mentioned above have an average yield over 5%, average dividend growth rate of 18.88%, and have raised their dividends every year for an average of 10 years. And as we 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 Dividends Stocks will help you create the wealthy retirement you’ve always dreamed of.
Chief Income Strategist, The Oxford Club
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