It's no secret that inflation has caused prices of goods and services to rise in the last few years. The need to spend more just to maintain your current standard of living is a constant worry for many families.
There is an attractive solution to this problem: buying dividend stocks that can supply you with a stream of additional passive income to supplement your earned income. The ideal dividend stock should be a business with a strong competitive edge that possesses a long track record of increasing dividends. It should also generate huge amounts of free cash flow that can sustain its dividend payments.
Such dividend stock candidates should sit well within your portfolio to supply you with the dividends you need to not only beat inflation but also provide you with some extra spending money for the nicer things in life. Here are three attractive dividend stocks that you can consider adding to your income portfolio.
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1. Medtronic
Medtronic(NYSE: MDT) makes medical devices for a wide range of specialities such as cardiovascular, diabetes, respiratory, spinal, and neurological. The company has a stellar track record of increasing its dividend over 47 consecutive years, with its latest being a quarterly dividend of $0.70 per share.
Net sales went from $31.7 billion in fiscal 2022 (ended April 30) to $32.4 billion in 2024. Net income, however, fell from $5 billion to $3.7 billion over the same period because of higher costs of goods sold and interest expenses.
Despite the lower profit, Medtronic continued to generate consistent free cash flow, which averaged around $5.3 billion per fiscal year. With a payment of $3.67 billion in dividends for fiscal 2024, the dividend amounted to 70% of Medtronic's free cash flow and is, therefore, sustainable.
The company reported earnings for the first half of fiscal 2025 as inflation starts to abate. Revenue rose 4% year over year to $16.3 billion, while operating income climbed 10.2% to $2.9 billion. With Medtronic enjoying a lower tax expense for the period, net income surged by 36% to $2.3 billion. Free cash flow for the business jumped 41% to $1 billion, building confidence that Medtronic can continue with its impressive track record of increasing dividends.
The company continued its innovative streak, with close to 120 product approvals in the past 12 months, adding to its burgeoning portfolio of products and devices that cover a wide range of specialities and geographies. Interim CFO Gary Corona mentioned that Medtronic is focused on improving its margins and is increasing productivity through the centralization of operations and the consolidation of factories and suppliers. He also mentioned several promising new product launches that have yet to meaningfully scale up and deliver their full potential.
Finally, Medtronic will focus on tuck-in acquisitions to boost areas that it lacks or need strengthening. These initiatives should help the business to continue growing and paying out higher dividends for the foreseeable future.
2. General Dynamics
General Dynamics(NYSE: GD) is a global aerospace and defense company with a portfolio of products catered for the business aviation, ship construction and repair, and weapon systems sectors, among others.
The company reported steadily increasing revenue and profits, while also generating copious levels of free cash flow. From 2021 to 2023, revenue from products and services increased from $38.5 billion to $42.3 billion. Earnings went from $3.26 billion to $3.32 billion over the same period.
Free cash flow increased from $3.4 billion to $3.8 billion over the three years and averaged $3.55 billion per year, helping to fund General Dynamics' increased dividends. The company has increased its annual dividend without fail for 27 years, with the most recent increase being a 7.6% year-over-year rise to $5.68 per share.
General Dynamics continued to report increased revenue and earnings for the first nine months of 2024. Revenue grew 12.3% year over year to $34.4 billion, while operating income jumped 14% to $3.4 billion. Net income for the engineering company climbed 14% to $2.6 billion. The business also generated a positive free cash flow of $1.4 billion for the period.
General Dynamics continues to snag key contracts with the military. Back in November, one of the company's business units was awarded a contractor logistics support services contract that extends over seven years and provides services to the Air Force, Navy, Marine Corps, Army, and Coast Guard. A month later, General Dynamics was awarded a $5.6 billion contract from the U.S. Air Force to help modernize, integrate, and operate the latter's Mission Partner Environments.
These promising contract wins should solidify the company's status as an essential contractor and help reinforce its reputation as a dependable business that can steadily increase its dividends over the long term.
3. Illinois Tool Works
Illinois Tool Works(NYSE: ITW) is an industrial manufacturing company that produces products for seven verticals, including automotive, construction, and food equipment.
Like General Dynamics, Illinois Tool Works has also demonstrated steady increases in both its revenue and net income over the years. Revenue increased from $14.4 billion in 2021 to $16.1 billion in 2023, while net income went from $2.7 billion to $3 billion over the same period. Free cash flow improved by a larger magnitude, going from $2.3 billion in 2021 to $3.1 billion by 2023 and averaging $2.4 billion per annum.
This consistent free cash flow generation has allowed the company to increase its dividend without fail for close to three decades, going from just $0.16 in 1995 to $5.42 in 2023.
Illinois Tool Works reported a mixed financial performance for the first nine months of 2024. Revenue dipped slightly by 1.3% year over year to $12 billion, but operating income managed to climb close to 6% to $3.2 billion. Net income surged 22% to $2.7 billion. The business also generated a positive free cash flow of $1.8 billion, and management upped the company's annual dividend for the 29th consecutive year to $6 per share.
The company has made bold plans to continue growing and unveiled its strategic priorities during last year's Investor Day event. Illinois Tool Works has a target to grow organically by 4% to 7% from 2023 to 2030.
Acquisitions should help to boost growth further, but these will be undertaken only if they are worth the time and effort and help to advance the company's long-term organic growth target. There will be two main types: bolt-on acquisitions to strengthen existing segments, and the building of new platforms.
By 2030, Illinois Tool Works hopes to deliver between 11% to 13% per annum total shareholder return, comprising both organic growth and a 2% to 3% dividend yield. This can be achieved through a 9% to 10% annual earnings-per-share growth, coupled with a plan to increase the annual dividend by around 7% annually.
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Royston Yang has no position in any of the stocks mentioned. The Motley Fool recommends Illinois Tool Works and Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.
