3 Reasons Why I Invest In Dividend-Paying Stocks

|
 |  Includes: JNJ, KO, LOW, MCD, MDT, MSFT, TGT, XOM
by: Pey Shadzi

My day today began in a nearly identical fashion to most other weekdays. I followed my regular routine by hopping out of bed, walking to the kitchen to put the hot water on for coffee and opening my laptop for direct access to my brokerage account. What can I say? A guy's got his priorities straight, am I right?

If you really want to know, the reason I log into my account every morning is to see if another glorious dividend payout has been deposited by one of my most favorite, most reliable dividend-paying companies. Some days the dividends roll in, most days they don't, but the process continues and I've been lucky to monitor the building of my wealth day by day.

Despite only being 29 years old, I feel buying up shares of companies with consistent histories of paying dividends and reinvesting those distributed shareholder earnings is one of the most steadfast and reliable ways of building wealth and preparing for retirement.

Why dividend-paying stocks, you ask? Here's why:

1. Good, solid companies consistently raise dividends

Mature, well-established companies that faithfully provide earnings to shareholders have a reputation to keep up. When a company makes a commitment to provide profits to shareholders on an ongoing and consistent basis, it builds character and that commitment to being friendly to shareholders is one very few companies like to break. Last month Johnson & Johnson (NYSE:JNJ) approved a dividend hike of 7% which extends its streak of raising dividend payouts to its shareholders to 50 long years. How many companies can stake claim to being this shareholder friendly? It's truly amazing when you stop to think about it.

2. Consistent dividend payments compound over time

This point will hit home to older investors who have been faithfully contributing to their dividend-heavy investment accounts for decades. It doesn't take a brain surgeon to realize, however, that dividend distributions that buy more shares will, in turn, continue to compound and purchase more and more shares of their favorite companies. It happened to all of us when we opened up our first bank account - perhaps at a much slower or faster pace depending when you grew up - and it surely happens with dividend investing. Despite just starting out in this game, I've already begin to see the power of compounding and every time I use an online investment calculator, I have a renewed sense of excitement about receiving those faithful dividend payments from solid, well-positioned companies.

3. Companies that pay dividends often raise those payouts every year

According to my idol, David Fish, a dividend champion like Medtronic Inc. (NYSE:MDT) has been raising its dividend for 35 years and others like Lowe's Companies, Inc. (NYSE:LOW) and Target Corporation (NYSE:TGT) are well on their way with dividend-hike streaks that are close to that 50-year mark. Sure, had you jumped in and purchased shares of these stocks many decades ago, you would have been able to capitalize on a rapidly growing dividend (along with reasonable capital gains), but with decade-long histories of rewarding individuals who hold the stock, these streaks are unlikely to stop anytime soon. Buy them at attractive valuations and hold on for dear life, monitoring for any speed bumps along the way.

Here are a few dividend growth companies I particularly like:

ExxonMobil Corporation (NYSE:XOM). With $442 billion in revenue, $18.7 billion in cash on hand, $15.6 billion in debt, a forward P/E of 9.5 and a dividend yield of 2.8%, I think XOM is looking more reasonably priced than it has in some time. I feel comfortable adding to my position at this time, based on the recent weakness and I believe XOM has a mighty bright future as an energy provider. I truly believe we will see a greater mixture of technologies to meet our growing energy demands and XOM will be there to help us transition to whatever the future has in store.

The Coca-Cola Company (NYSE:KO) is one of the world's most iconic brands and has raised its dividend consecutively for around 50 full years. Despite trading at a P/E ratio just under 17, which many consider to be a bit rich, KO has been able to grow revenue, maintain a consistent cash flow, grow its EPS and also increase net income. KO currently sports a 2.8% yield with a 51% payout ratio and has what many consider to be a wide economic moat, despite considerable competition from Pepsico, Inc. (NYSE:PEP). I've been looking to pick up shares of KO for some time and I feel comfortable initiating a position at these current levels, though I certainly would welcome a pullback.

McDonald's Corp. (NYSE:MCD) may very well rival Coca-Cola in terms of brand awareness. MCD currently sports a forward P/E of 14.5, a dividend yield of 3.1% and a payout ratio of 49%. Along with KO, this is another company I have been looking to buy into for some time, but have been hesitant due to its seemingly rich growth-like valuation. Despite over a 10% run up in the share price over the last year or so - roughly a 12% positive alpha over SPY - the shares still look relatively cheap and an argument could be made for buying in at these levels. One thing is for sure, MCDonald's economic moat is strong and its ability to consistently outperform the overall market shouldn't be ignored.

Lastly, in my opinion, Microsoft Corporation (NASDAQ:MSFT) is looking like a long-term winner. With a forward P/E under 10, $58 billion in cash on hand, only $13 billion in debt, a dividend yield of 2.7% and a payout ratio of 26%, I think the software giant looks reasonably priced. Microsoft continues to consistently grow revenue, keep debt levels reasonable and dish out dividends for its shareholders, doubling its dividend over the last five years alone. Recently, Forbes named MSFT one of the top dividend stocks of the Nasdaq 100 and I can't help but agree.

I certainly advocate beginning to save for retirement as early as possible and I also think it's important for young professionals to realize using dividends to help fund investment accounts is a sound strategy. Prominent companies with histories of rewarding shareholders are usually more reputable companies with bright futures. Additionally, just as a snowball becomes larger as it rolls down a hill, the compounding of dividends is likely to significantly increase account balances over the long term, while strong corporations like ExxonMobil and Microsoft will continue to raise payouts for many years to come.

Best of luck to you out there and I'll be thinking about you all when I gladly accept my next dividend payment from one of my favorite companies listed below. Press onward, my friends!

Disclosure: I am long JNJ, XOM, TGT, MSFT.

Additional disclosure: It's always a good idea to conduct research on the stocks you're interested in prior to picking up shares; this article is for informational purposes and is simply just my opinion.