Dividends are more than immediate returns for investors; they represent excellence in a business. When a company can pay and raise its dividend, it's as if the business makes so much profit that it has nothing better to do with the money than to share it with investors.
You could say the same for companies in the S&P 500 index, an exclusive club of 500 prominent U.S. companies that must meet specific criteria for inclusion. That makes S&P 500 dividend-paying companies a fantastic starting point for investors who want to buy and hold quality stocks.
But even blue chip dividend stocks stumble from time to time. Here are three magnificent examples, currently down 19% to 32%, that investors can buy and hold forever.
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1. Alphabet (Google)
Google's parent company, Alphabet(NASDAQ: GOOGL) (NASDAQ: GOOG), probably isn't the first dividend name you would think of, but the company has the makings of a dividend superstar over the coming years. It just started paying a dividend last year and recently raised it for the first time.
The stock has fallen 20% from its high due to worries over ChatGPT's competition with Google Search. Regulators also successfully sued Alphabet for anticompetitive practices, which could force a partial breakup. These concerns are legitimate, but Alphabet is far more than its search engine. Its footprint spans cloud computing, autonomous driving, quantum computing, and consumer software.
Alphabet may feel some heat, but should endure and continue to thrive. Analysts still estimate the company will grow earnings by over 15% annually over the next three to five years, and artificial intelligence could drive growth well beyond that time frame. That growth should produce capital gains and higher dividends over time.
2. NextEra Energy
Technology is creating substantial electricity demand; some estimates project U.S. electricity consumption will rise by 50% by 2050. That positions NextEra Energy(NYSE: NEE) as a potential winner over the coming decades. The energy company operates the largest electric utility, Florida Power & Light, in America, and its subsidiary, NextEra Energy Resources, is the world's largest producer of wind and solar energy, with additional assets in nuclear and gas.
NextEra Energy is well known among the dividend investing crowd. The company has paid and raised its dividend for 30 consecutive years, and the stock yields a solid 3% at its current price. A healthy 61% dividend payout ratio and high-single-digit anticipated earnings growth should continue powering dividend increases.
Yet, the stock has tumbled nearly 20% from its highs. This is likely due to higher interest rates, which make debt more expensive for NextEra. The company plans to invest over $120 billion over the next four years to expand and grow to meet the country's energy needs. Investors should focus on the big picture, which points to a bright future for this dividend powerhouse.
3. PepsiCo
Food and beverages have been safe investments for generations. Look no further than PepsiCo(NASDAQ: PEP), a Dividend King with a staggering 52 years of uninterrupted dividend growth. Today, the company is in unfamiliar territory. The stock has fallen over 32% from its high, its worst decline since 2008-2009. Why? PepsiCo's growth has slowed.
Some blame struggling consumers who are shying away from name-brand food and beverages. Others point to weight loss drugs, which could be suppressing consumer appetites for processed foods and sodas. It's true that PepsiCo, now a massive company, could struggle to grow as it once did. Analysts estimate PepsiCo will grow earnings by just over 4% annually over the next three to five years.
However, to write the company off entirely is nonsense. The dividend yield is 4.1%, its highest ever, compensating investors for the slower short-term growth. Earnings easily fund the dividend, so this likely isn't a dreaded yield trap. PepsiCo has acquired emerging brands aimed at healthier diets and has a vast portfolio of product brands it could shuffle to reinvigorate growth. Investors may need some patience with PepsiCo while it adjusts to a changing business environment. Still, the stock will pay you to wait, and few companies have the proven durability that PepsiCo does.
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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet and NextEra Energy. The Motley Fool has a disclosure policy.
