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It can be reassuring to own shares of strong companies that regularly pay out passive income to shareholders. By selecting the good dividend stocksan investor can easily put together a portfolio that yields approximately 3% in dividend income annually. As the companies you select grow their earnings, they also increase the dividend payout and return on your original investment.
To help you get started, three Motley Fool contributors were asked to come up with their best stock picks that will help you earn passive income for the rest of your life. This is why they chose Coca-cola (NYSE: KO), Philip Morris International (NYSE:PM)And Home Depot (NYSE:HD).
Invest in Warren Buffett’s favorite
Johannes Ballard (Coca-cola): Investing in companies with strong competitive advantages can protect and grow your money for decades. Coca-Cola’s global brand power and high annual sales volume would certainly fit this bill. That’s why Warren Buffett has had a large position in stocks for more than thirty years.
People consume 2.2 billion servings of cola products every day or approximately 800 billion servings per year. This includes the more than 200 brands it owns, including Fanta, Sprite, Minute Maid juices, Dasani water, Costa Coffee, Fuze Tea, Powerade and Simply. A large product portfolio offers many opportunities to stimulate sales.
All of these portions generated $10 billion in profits on $46 billion in revenue over the past four quarters. The company paid out three-quarters of its profits in dividends last year, or $0.485 per share, bringing the expected dividend yield to 2.71%.
Coca-Cola has raised its dividend for 62 years in a row and earlier this year increased its quarterly payment by 5%. Management continues to allocate capital wisely and remove costs from operations to expand margins, all of which goes towards supporting growing profits and dividends to shareholders.
Investors have rewarded the company for its ability to continue double-digit earnings growth despite a challenging retail environment. Wall Street analysts expect the company’s adjusted earnings to rise 14% this year. That’s why the stock is hitting new highs, but the above-average dividend yield suggests the stock is still reasonably priced for new investors to start a position.
A transformative tobacco supply
Jeremy Bowman (Philip Morris International): PMI may seem like an odd recommendation for a dividend stock to buy and hold forever. After all, the number of smokers has been declining for generations. But that hasn’t stopped PMI, which operates in international markets where smoking rates are higher than in the US, from continuing to grow and deliver strong results.
In fact, today this is much more than a traditional tobacco company. About 40% of its sales come from next-generation smokeless products such as its iQOS heat-not-burn devices and Zyn chewable nicotine pouches, which it acquired through its 2023 acquisition of Swedish Match.
Now Philip Morris International is on the attack. For example:
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The company recently acquired the rights to sell iQOS in the US Altria and is ramping up plans for a product launch later this year.
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Likewise, the company just announced it is investing $232 million to expand a Zyn manufacturing plant in Kentucky.
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Last month it said it would spend $600 million to build a Zyn facility in Colorado.
PMI’s recent numbers also show that the company is posting strong growth for a dividend stock. Organic revenue rose 9.6% year over year to $9.5 billion in the second quarter. Sales growth from the smokeless business was even stronger at 18.3%, while combustible fuels grew by a respectable 4.8%. Adjusted earnings per share also rose 11% to $1.77.
As a dividend payer, PMI currently offers a yield of 4.3%, which should keep investors happy, especially given the company’s strong growth. Given the mix of growth and returns, Philip Morris International deserves a place in every dividend investor’s portfolio.
Jennifer Saibil (home depot): Home Depot is a market-beating stock that also pays a growing dividend with an attractive yield. In other words, it’s an excellent dividend stock.
This is not the best time for Home Depot. Customers everywhere in retail are moving to cheaper products, and Home Depot’s larger and more expensive products are not essential products that customers are going to enjoy right now. The company is further under pressure from a real estate sector that remains underwater.
But Home Depot is the largest home improvement chain in the world and has become an industry leader by providing a great experience to shoppers with an omnichannel focus. Comparable sales fell 3.3% year-over-year in the second fiscal quarter of 2024 (ended July 28), but total sales increased slightly (0.6%).
Management isn’t expecting magic right now. It does what it does best: give customers what they need, wait out inflation, and at the same time strengthen the company’s position. The company still expects a decline in comparable sales and a lower operating margin for the full year.
In the meantime, the company pays out a top dividend. Home Depot has been paying dividends for almost 40 years and has increased its payout by more than 4,500% since inception. The dividend has added tremendous value to the share price. Even without the dividend, shareholders would have beaten the market over the past decade, but with the dividend the gain goes from 306% to 412%.
Shares of Home Depot are tracking the market this year, but are up 8%. Business should recover easily under better macroeconomic conditions and return to outperforming the market in the long term. It’s highly profitable, with $4.60 in earnings per share (EPS) in the second quarter and $4.7 billion in free cash flow, enough to fund the dividend.
At today’s price, Home Depot’s dividend yields 2.3%. The company has paid it forward under a variety of circumstances, and shareholders can benefit from market-beating potential and passive income.
Should You Invest $1,000 in Coca-Cola Now?
Before you buy Coca-Cola stock, consider the following:
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Jennifer Saibil has no position in any of the stocks mentioned. Jeremy Bowman has no position in any of the stocks mentioned. Johannes Ballard has no position in any of the stocks mentioned. The Motley Fool holds and recommends positions in Home Depot. The Motley Fool recommends Philip Morris International. The Motley Fool has one disclosure policy.
3 Dividend Stocks to Buy Now and Hold Forever was originally published by The Motley Fool