3 High-Quality Dividend Stocks to Buy and Hold for Life
Dividend stocks to buy and hold for decades aren’t quite as sexy as the latest growth stock trend. But they make up an important part of a balanced portfolio, particularly for those investors who don’t want to take on much risk. In the current environment, finding high-quality dividend stocks is a challenge — everyone’s scrapping for cash, and that can mean dividend payouts are at risk of making their way to the chopping block. But the handful of great buys out there can be a good way to ride out the economic turmoil that could be ahead.
So how can you find these diamonds in the rough? The first place to start is yield. Growth stocks tend not to pay a dividend because management foresees a higher return by reinvesting that cash into the business. Some companies fall somewhere in the middle, reinvesting a large proportion of their cash into the business but also sharing some of it with investors.
These companies tend to offer a yield somewhere between 1-3%, and they can be a great investment. I’m looking at you, Microsoft (NASDAQ:MSFT).
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But a true-blue dividend stock is one that delivers a yield upwards of 4%. Given inflation, higher than that is desirable, but a higher yield isn’t always a great sign. Remember that yield is dividend payouts compared to share price — so a lower share price can artificially inflate the yield. Plus, a company that’s sending the bulk of its profits back to investors isn’t going to be a sustainable business. Some of that cash needs to go toward building out the business and solidifying its place in the future.
A sustainable yield is a key factor if you’re looking for dividend stocks to buy and hold long-term. One way to decide if the current rate of payouts can be maintained is to look at the payout ratio, which compares dividends to net income. This can vary from industry to industry, but a general rule of thumb is to look for companies that payout 40-50% of their earnings as dividends. This leaves plenty of breathing room in case things turn sour and also opens the door for future hikes.
Dividend Stocks to Buy and Hold: Lloyds Banking Group (LYG)
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Lloyds (NYSE:LYG) is a British bank boasting a yield of roughly 5%, making it a good pick among dividend stocks to buy and hold. The group’s operations are skewed toward traditional banking, meaning the current interest rate environment has benefitted them. While they’ve probably already peaked as far as net interest margins are concerned, management expects margins to remain above 3% this year, which is good.
The group’s got a strong balance sheet and toes the line of being over-capitalized — not a bad place to be as economic conditions waver. Last we heard, they were issuing a £2 billion buyback, which juices shareholder returns while making future dividend payouts more manageable. Plus, management says they aim to return even more over the next two years.
All told, Lloyds is a relatively safe pair of hands for dividend investors. The group is well positioned, and turmoil in the sector’s sentiment is lower than usual, marking an attractive entry point.
Brookfield Infrastructure Partners (BIP)
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When it comes to choosing dividend stocks to buy and hold, it’s always worth looking to essentials like utilities, transportation, or healthcare. That’s because these industries tend to be somewhat insulated from economic turmoil, and they also tend to have relatively predictable revenue streams. Brookfield Infrastructure Partners (NYSE:BIP) checks most of those boxes as a global infrastructure business that has fingers in a multitude of industries across the globe.
These businesses operate in sectors like utilities, transport, and communication— so they’re relatively safe places to be. What’s more, they come with predictable cash flow, supporting BIP’s 4.3% dividend yield. 70% of the group’s funds from operations (FFO) have no price or volume exposure, meaning they’re just about as reliable as you can get.
That allows the group to push its payout ratio a bit higher than the norm — at present, management’s targeting somewhere between 60-70% of FFO.
Brookfield has a lot of flexibility, particularly in the current climate, which makes it one of the best-quality dividend stocks to buy and hold.
Clearway Energy (CWEN)
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It’s rare to find a renewables company on a list of dividend stocks to buy and hold, but Clearway Energy (NYSE:CWEN) fits the bill. The group owns and invests in solar and wind, putting it in a very strong position as the push toward net zero intensifies. The group currently boasts a yield just shy of 5%, and that’s expected to grow in the years ahead.
Management’s targeting a yield of 5-8% through 2026, so we’re likely to see the distributions upped as the group moves to hit that aim. It sold its thermal business last year, leaving it with a pile of cash to invest in higher-return renewables projects. These investments will underpin it’s dividend aspirations, with many of them already in progress.
The group’s rock-solid finances should put it in a good position to continue making strategic acquisitions even if the economy is shaky. That makes it a worthwhile pick on our list of dividend stocks to buy and hold.
On the date of publication, Marie Brodbeck held shares in Lloyds and Microsoft. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Marie Brodbeck has a Finance degree from Duquesne University and has been a financial journalist for more than a decade. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN.
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