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Replacing one's income remains one of the most important factors when it comes to preparing for retirement. Living off of the proceeds of one's own capital often demands a proper investment strategy and the foresight to put it to work as early as possible. Yet while saving money in a bank often entails an element of a fixed principal amount, the same can not be said about the stock market. Equity investments will inevitably fluctuate in value, as can their income components, which are found in dividend payments. This is often a risk that must be mitigated.

For this reason, owning companies that have proven their ability to steadily increase their dividends over the course of decades can often serve as a convincing indicator of their overall stability. Not only does this factor help the investor in a practical manner by protecting them against the woes of inflation, but such a trend also demonstrates that the company can perform over the course of an extended period of time. As a result, these companies themselves also tend to trade with a steady incline.

The following companies represent a diversified selection of five such names that have exhibited dividend growth over the past two decades and longer. They were chosen based on the following criteria. Each of these companies carries a market capitalization in excess of $15 billion. Each of these companies also has a reputation as a leader in its respective industry. Above all, each of these companies has exhibited a strong historical basis for dividend growth to which they can be held accountable. While I have chosen these five companies below in order to provide a well-rounded basis for any given income portfolio, it is by no means a comprehensive list. All values were taken from Yahoo! Finance as of April 3, 2013.

(click to enlarge)

  • Pepsico, Inc. (PEP). Pepsico was founded in 1898 and has since grown to be one of the largest providers of beverages and snack foods. The company has operations around the world and supports some of the more recognizable brands under its wings. Some of these names include Lays, Ruffles, Doritos, Cheetos, Fritos, Quaker, Rice-A-Roni, Pepsi, Gatorade, Mountain Dew, 7Up, and Tropicana. PepsiCo currently supports a market capitalization of $121.8 billion and an above-average forward price-to-earnings ratio of 16.55. The company offers a forward annual dividend of 2.7% with a quarterly rate of $0.5375. The company maintains a feasible payout ratio of 54% and has been raising its dividend since 1973.
  • Johnson & Johnson (JNJ). Johnson & Johnson has also operated as a business for 126 years, having been founded in 1886. The company has come to be known as a comprehensive global leader in its numerous healthcare businesses. The company engages in the research and development, manufacture, and sale of its various products, which address segments such as consumer products, pharmaceutical products and medical devices. Some of the company's well known brands include Neutrogena, Johnson, Tylenol, Zyrtec and Pepcid AC. The company currently supports a market capitalization of $229.4 billion and a discounted forward P/E ratio of 14.25. The company offers a forward annual dividend of 3.0% with a quarterly rate of $0.61. The company maintains an above-average payout ratio of 62% and has been raising its dividend since 1963.
  • 3M Co. (MMM). 3M is a global innovation company with operations in more than 65 counties. The company is a conglomerate operating in five business segments including Consumer & Office, Electronics and Energy, Healthcare, Industrial, and Safety & Graphics. Through these segments, 3M has created products varying from tapes, to abrasives, to medical tools, to stationery, to personal protection devices, to optical film solutions, and even to coolant fluids for computers. 3M currently supports a market capitalization of $72.9 billion and a reasonable forward P/E ratio of 14.13. The company offers a forward annual dividend of 2.4% with a quarterly rate of $0.635. The company maintains a comfortable payout ratio of 37% and has been raising its dividend since 1959.
  • Chevron (CVX) has major oil and natural gas operations in many of the world's most abundantly rich regions when it comes to natural resources. The company is a leading conglomerate in a broad range of petrochemical services ranging from exploration, refining, distribution, and marketing. Chevron currently supports a $228.8 billion market capitalization and yet trades with a forward price-to-earnings ratio of 9.49. Having consecutively raised its dividend yield since 1988, Chevron trades with a 3.0% annual dividend and offers a quarterly rate of $0.90 per share.
  • Air Products and Chemicals (APD) is a company that specializes in the sales of atmospheric gases, equipment, materials, and services around the world. The company has over 20,000 employees and operations in more than 50 countries. Customers across a wide spectrum of industries including energy, healthcare, transportation, and food all use products derived from Air Products. The company trades with a respectable market capitalization of $17.5 billion and trades with a forward price-to-earnings ratio of 13.15. Having increased its dividend consecutively since 1983, the company currently offers a respectable 3.3% yield with a quarterly payment of $0.71 per share.

Historical Comparisons

No dividend portfolio can be constructed without the confidence of knowing that the portfolio is beating the market average. As a stock index that follows the common stock prices of 500 publicly traded American companies, the S&P 500 is often referred to as a benchmark measure of the market itself. The current average dividend yield of the S&P 500 now sits at 2.01% as of April 3, as seen in the graphic below. For investors capable of obtaining a similar yield or greater, they are able to maintain an income stream that stands a head above the market as a whole.

PEP Dividend Yield Chart

PEP Dividend Yield data by YCharts

A look at the chart above shows that over the last five years, this portfolio of companies has relatively outperformed the average dividend yield of the market. Being well aware that these dividends have also been growing consistently tells us that their respective share prices have been growing as well in order to keep the range of these yields relatively tight. As seen in the chart below, we see this to be true as investors have not only received increasing dividend payments but their initial investments have also continued to grow with time.

PEP Chart

PEP data by YCharts

Following dividend growth can often be an enduring game of patience, and yet the results speak for themselves. These five established companies have continued to reward their investors historically through both increasing income and through a rising valuation. Ironically, it's through these consistently rising share prices that the real worth of these dividends often remains masked. Despite portraying a relatively tight yield range, the effective yield for a long-term investor can often be significantly higher when compared against the original purchase price. Such stability in the increasing return on investment should remain the objective of most retiring investors looking to replace their income.

Source: 5 Stock Leaders Growing Their Dividends To Replace Your Income