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Five Reliable Dividend Growers that Yield More than the U.S. Treasury

Thanks to the Fed, U.S. Treasury bonds only yield 2% right now. Here are five reliable dividend growers that offer much better yields.

While the Federal Reserve continues to waffle about whether it will raise short-term interest rates, U.S. Treasuries are tumbling again.

Yields on the 10-Year U.S. Treasury Note have fallen to 2%, down from 2.5% in June. It’s the lowest 10-Year Treasuries have been since April. If you’re an income investor, 2% isn’t much to get excited about. With bonds, CDs and money-market accounts also yielding next to nothing, the only logical alternative is dividend stocks. But even with dividend stocks, you have to choose wisely.

Dividend stocks aren’t exactly a novelty, especially these days. More than 400 of the 500 companies that comprise the S&P 500 now pay a dividend. Many of them started paying a dividend in the last few years to attract income seekers looking to fill the void left by the Fed’s zero-interest-rate policy.

But not all dividend stocks are created equal. Many dividend payers aren’t reliable. Some are supported by flimsy cash flow, and thus aren’t sustainable. Others fluctuate from quarter to quarter depending on earnings. And then there are the companies that pay such modest dividends—less than one percent yields, in some cases—that they don’t offer much of a cushion should their share prices tank.

What you need are dividend growers—companies that have been regularly upping their dividends for years, and project to continue doing so for the foreseeable future. Of course, you don’t just want reliable dividend growth; you want yield too, or at least more yield than U.S. Treasuries and bonds can offer.

The following five dividend growers not only yield more than the U.S. Treasury, but also more than the S&P 500 average of 2.1%. Plus, they’ve all increased their dividends every year for the past few decades.

I’ll start with two that are cornerstones of our subscription Cabot Dividend Investor advisory.

1. Reynolds American (RAI)

Current Yield: 3.1%

Consecutive Years of Dividend Growth: 5

The second-largest tobacco company in the U.S., Reynolds American has increased its dividend every year since 2010. The stock has performed incredibly well in its own right, up 47% year to date. Despite that huge run-up, the dividend is strong enough to yield a healthy 3.1%. With earnings per share improving a whopping 291% last quarter, chances are Reynolds will continue to reward shareholders.

RAI has been rewarding Cabot Dividend Investor subscribers for the past 16 months. Since editor Chloe Lutts Jensen added it to the portfolio on July 2, 2014, RAI has earned a total return of 59% with a yield on cost of 4.4%, making it the best performer in the CDI portfolio during that time.

2. Target (TGT)

Current Yield: 3.0%

Consecutive Years of Dividend Growth: 47

Nearly five decades of dividend growth is the first thing that stands out. That qualifies as reliable. And as the second-largest retailer in America—one that’s been gaining ground on Wal-Mart (WMT) in recent years—it’s showing no signs of slowing down.

Target was one of the first stocks added when Cabot Dividend Investor launched in February 2014. Since then, it has earned a total return of 44% with a yield on cost of 4%.

3. McDonald’s (MCD)

Current Yield: 3.2%

Consecutive Years of Dividend Growth: 38

Sales and earnings at this fast-food giant have actually slowed the last few years. What hasn’t slowed is the dividend growth.

Like clockwork, McDonald’s raises its quarterly dividend (now $0.81) by four cents every year. A global recession, a strong dollar watering down overseas revenues, increased competition in the fast-food space, Americans trying to get healthier by eating better—none of it has slowed McDonald’s unstoppable dividend.

Meanwhile, the stock has rebounded nicely after a down 2014, advancing 11% year-to-date. Sprinkle in the 3.2% dividend, and that’s a hefty 14.2% return in a down year for the market so far.

4. Coca-Cola (KO)

Current Yield: 3.1%

Consecutive Years of Dividend Growth: 58

Coca-Cola is another waistline-expanding blue chip that is a dividend stalwart. For more than half-a-century, Coke has been raising its dividend annually. Only 11 stocks have been raising their dividends longer, and few of them can match Coca-Cola’s return.

Like McDonald’s—and for many of the same reasons—Coke’s sales and earnings growth has slowed the last few years. But it hasn’t put too much of a damper on the stock: KO shares are back to even for the year after a big jump from 38 to 42 in the last month, and they’re up 4% in the last 12 months. Those aren’t MCD’s returns, but then again, KO has scarcely had an extended down period over the last few years.

The reliability of the company’s dividend growth keeps it from ever falling too far. In this volatile environment, that kind of reliability is a good thing. Plus, it’s always smart to buy a stock—dividend grower or otherwise—when it’s on the upswing.

5. Universal Corporation (UVV)

Current Yield: 3.9%

Consecutive Years of Dividend Growth: 43

No, this isn’t the company that owns the movie theme park in Orlando, Florida. It’s another tobacco company, and one that has increased its dividend payout for more than four decades.

What stands out is the yield, which is nearly double that of Treasury bonds and the S&P 500. And unlike many longtime dividend growers, UVV has been rising fast of late, up 22% year-to-date despite a big drop (20%) in August and September. It’s no Reynolds American, but Universal’s total return in 2015 has been impressive.

Bottom Line

Yield is out there, and you don’t have to go chasing risky tech stocks or eurozone government bonds to find it. They’re staring you right in the face—Coca-Cola, McDonald’s and Target aren’t exactly hidden.

It’s not complicated: the biggest companies make the most money, and thus have the most cash on hand to keep their growing their dividends year after year. And in a low-interest-rate environment like this one, the yields on some of those consistent dividend growers are looking particularly attractive these days.

And if you want to find more dividend growth and high-yield stock picks, you can subscribe to Chloe’s Cabot Dividend Investor advisory by clicking here.


Chris Preston is Cabot Wealth Network’s Vice President of Content and Chief Analyst of Cabot Stock of the Week.