Top 10 High-Quality Dividend Stocks for Long-Term Investors

Editors' pick: Originally published Feb. 23.

High-quality dividend stocks are some of the best investments long-term investors can make.

These are some of the top blue-chip stocks because they play major roles in the economy, dominate their markets and have proven track records of rewarding shareholders with higher dividend payments over long periods of time.

As long-term dividend investors, we look for durable businesses that generate consistent free cash flow, maintain healthy balance sheets, operate in slow-changing markets and have numerous opportunities for long-term earnings and dividend growth.

We own several of the following high-quality dividend stocks in our Top 20 Dividend Stocks portfolio, which invests with a minimum expected holding period of five years and owns the best dividend stocks with enduring competitive advantages.

Let's take a closer look at these wonderful dividend stocks that are most appropriate for long-term investors.

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1. General Mills (GIS)

General Mills is the company behind well-known consumer brands including Cheerios, Yoplait, Totino's, Pillsbury, Annie's, FiberOne and Nature Valley. Cereal is the company's largest product category at roughly 20% of sales last year, followed by snacks (18%), yogurt (16%), and convenient meals (15%). Slightly more than 71% of General Mills' sales are in the U.S.

General Mills has operations dating back more than 100 years, which has helped it build strong brand equity and numerous distribution relationships. The company spent more than $800 million on advertising last year alone and has invested billions over the last few decades to increase the brand value of its products. As a result, General Mills has locked down prime shelf space and strong market share positions in its key categories. Consumers are becoming increasingly aware of what they are eating and are developing more of a preference for natural and organic offerings, and General Mills is the third largest organic food manufacturer in the country. The company plans to double this business over the next five years as it takes advantage of its massive distribution channels and well-known brands.

General Mills has increased its dividend for 12 consecutive years and grown its dividend at a 10.4% compound annual growth rate over the last decade. With a payout ratio of roughly 55%, the company has flexibility to continue its dividend growth, which we expect will follow earnings growth in the mid to high single digits going forward.

General Mills stock trades at a forward price-to-earnings ratio of 20.5 and has a dividend yield of 3.0%, which is roughly in line with its five-year average dividend yield of 2.9%. Management believes the company can grow earnings at a high-single-digit rate, which would result in total return potential of 9%-11% per year. The stock appears to be reasonably priced, and it is one of the holdings we own in our Conservative Retirees dividend portfolio.

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2. Cummins (CMI)

Cummins manufactures diesel and natural gas engines, electric power generation systems and a variety of components used in engines. It also owns distributors that provide support to its dealer network in the form of aftermarket services. Some of the company's key customers include Chrysler, Daimler, Volvo, Navistar, Komatsu, PACCAR and Ford. Its major end markets include highway and heavy-duty vehicles, construction, and general industrial markets, and roughly 40% of sales are in international markets.

The company is a high-quality dividend stock for long-term investors because it has a strong portfolio of patented engine technologies, maintains dominant market share positions, and has an unrivaled dealer network with more than 7,200 locations across more than 190 countries around the world. Large customers especially value suppliers with extensive dealer networks because it ensures their multimillion-dollar investments can be serviced quickly if repairs need to be made in order to minimize their downtime. It's also worth noting that Cummins has long-term supply agreements with many key customers that further raise barriers to entry.

Cummins has increased its dividend by 27.9% over the last decade, and dividend growth has remained about as strong in recent years. The company last hiked its dividend by 24% during the fall of 2015, and its sub-50% payout ratios and net cash on the balance sheet support strong future dividend growth, especially once its weak markets recover.

Cummins stock trades at a forward P/E of 12.4 and has a dividend yield of 4.0%, which is nearly twice as high as five-year average dividend yield of 2.1%. Fears about the cyclical truck market rolling over and weakness in commodity markets have hurt the stock, but we believe it is attractively priced for long-term investors.

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3. Coca-Cola (KO)

Coca-Cola owns some of the most famous consumer beverage brands of all time and is one of Warren Buffett's largest dividend stocks. The company has 20 brands that generate over $1 billion in annual sales each, including Coca-Cola, Sprite, Fanta, Minute Maid, Dasani, Schweppes, and Powerade. However, over 70% of its global case volume is sparking beverages.

Coca-Cola's key competitive advantages that make it a great dividend stock for long term investors are its portfolio of leading brands and global distribution system. The company has spent billions of dollars on branding to keep its products in good standing with consumers, and no other business can replicate the taste of Coca-Cola. While consumer tastes are evolving towards healthier beverages, this is a very gradual evolution. Coca-Cola is also able to develop or acquire beverage brands in these categories and quickly grow them using its massive distribution channels to stay relevant.

The company has raised its dividend in each of the last 54 years and is one of the exclusive dividend kings, companies with at least 50 consecutive years of dividend increases. Coca-Cola's most recent dividend increase was 6% earlier this year, which represents slower growth compared to the company's 10-year dividend growth rate of 9% per year. With a payout ratio near 70%, Coca-Cola's future dividend growth rate will likely track its earnings, which we expect to grow at a mid-single-digit rate.

KO's stock trades at 22.5x forward earnings estimates and has a dividend yield of 3.2%, which is somewhat higher than its five-year average dividend yield of 2.8%. Given our expectations for mid-single digit earnings growth, KO's stock appears to offer 7-9% annual total return potential and be fairly priced today.

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4. Intel (INTC)

Intel is one of the largest semiconductor companies in the world and supplies chips that power electronic devices such as computers that are produced by original equipment manufacturers. The company's integrated technology platforms include notebooks, desktops, servers, tablets and smartphones.

The company's primary competitive advantages are its brand, manufacturing scale and proprietary technology. Intel spends billions of dollars each year on advertising to maintain a strong reputation and strong pricing power. Excellent brand recognition should help the business expand deeper into higher growth markets outside of personal computers. The company's scale has also helped it invest in expensive but extremely cost-efficient manufacturing techniques to keep it ahead of competitors on the technology curve.

Intel has paid uninterrupted dividends since the early 1990s and most recently boosted its dividend by 8% earlier this year. The company has increased its dividend by 11.6% per year over the last decade and should enjoy strong dividend growth going forward given its 40% payout ratio, net cash on the balance sheet and excellent free cash flow generation.

Intel's stock trades at a forward P/E of 12.5 and has a dividend yield of 3.6%, which is slightly higher than its five-year average dividend yield of 3.2%. We expect the company to grow its earnings at a mid-single-digit rate, which would result in total return potential of 8%-10% per year for the stock.

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5. Cisco (CSCO)

Cisco is one of the largest information technology companies in the world with a market cap exceeding $130 billion. The company sells a wide range of routers, switching products and network systems that help connect people and businesses to the Internet and communicate more effectively.

The company's strong brand reputation and broad range of products serve as competitive advantages and make the company appealing for long-term investors. Cisco is able to bundle together its hardware and software offerings into a more integrated solution that saves customers money and results in higher margins for Cisco. Cisco is also perceived to be one of the more reliable and higher-quality vendors as well.

Cisco's management has grown the company's dividend by more than 300% since 2011 and most recently increased the dividend by 24% in early 2016. With mid-single-digit earnings growth and a very healthy payout ratio near 40%, we believe Cisco can continue generating above average dividend growth for its shareholders.

Cisco stock trades at a forward P/E of 11.6 and has a dividend yield of 3.9%, which is significantly higher than its five-year average dividend yield of 2.1%. With a mid-single-digit earnings growth profile, the stock appears to have total return potential of 8%-10% per year.

You see Jim Cramer on TV. Now, see where he invests his money and why Cisco stock is a core holding of his multimillion-dollar portfolio. Want to be alerted before Jim Cramer buys or sells CSCO? Learn more now.

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6. Walmart (WMT)

Walmart's retail stores and e-commerce operations sell hundreds of thousands of different consumer products to more than 260 million customers each week around the world. With nearly $500 billion in sales volume last fiscal year, Walmart has unrivaled bargaining power with suppliers in the bricks-and-mortar retailer world. This allows the company to price its merchandise lower than its competitors while still turning a profit. The company is also working on further developing its e-commerce platform to better compete in an increasingly digital world.

Walmart is a dividend aristocrats, which means it has had more than 25 consecutive years of dividend increases. You can view all of the dividend aristocrats here. The company's dividend growth has decelerated from 12.6% per year over the last 10 years to a low-single-digit growth rate more recently, reflecting some of the growth challenges a business of this size must deal with. Despite the reduction in dividend growth, Walmart still has a low payout ratio near 40% that provides plenty of dividend safety and potential for future increases.

Walmart stock trades at a forward P/E of 15.6 and has a dividend yield of 3.1%, which is meaningfully higher than its five-year average dividend yield of 2.3%. We expect earnings to grow at a low-single-digit rate over the next few years as the company combats rising wages and increased e-commerce competition, resulting in total annual return potential of 6%-8% per year.

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7. Paychex (PAYX)

Paychex has been in business since 1971 and provides services that include payroll processing, retirement plan management, and outsourced human resources. The company serves as a valuable partner for more than 590,000 small and medium-sized businesses that outsource their noncore administrative services.

Paychex is a strong business for several reasons. The company provides mission-critical services that its customers must have to stay compliant. This results in a relatively stable base of recurring revenue and a client retention rate in excess of 80%. Paychex's long operating history is another advantage. The company has a very large direct sales force and has built up an impressive number of indirect sales channels including certified public accountants, client referrals and banks. Indirect channels now generate roughly 50% of the company's new core payroll clients and have helped Paychex establish No. 1 and No. 2 market share positions in payroll services for small and medium-sized businesses, respectively.

The company has increased its dividend by 11.5% per year over the last 10 years, although dividend growth slowed to 6.2% per year during the last three years. Paychex most recently raised its dividend by 10.5% in 2015, but we expect the company's 80% payout ratio to keep dividend growth in line with earnings growth. Going forward, we expect Paychex's earnings to grow at a mid- to upper-single-digit rate with its dividend keeping pace.

Paychex's stock trades at a forward P/E of 25.2 and has a dividend yield of 3.3%, which is somewhat lower than its five-year average dividend yield of 3.6%. Given our earnings growth expectations, this blue-chip dividend stock seems poised to deliver total annual returns of 9%-12% per year but looks fully valued at the moment.

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8. T. Rowe Price (TROW)

T. Rowe Price is one of the largest asset managers in the world and offers a wide variety of mutual funds to retail and institutional investors. The company manages more than $700 billion with roughly 80% invested in stock and blended asset portfolios and the remainder in fixed income and money market portfolios. Most of the business is focused in the U.S. with international investors accounting for less than 10% of the company's total assets under management.

The company's primary competitive advantages are its strong brand name, excellent long-term investment performance relative to peers, global distribution network for its funds and economies of scale. While many actively managed funds are losing market share to low-cost index funds, the biggest players such as T. Rowe Price can afford to offer lower fees and help consolidate the industry. T. Rowe Price should also benefit over the coming years as more Baby Boomers retire and drive higher demand for its retirement products, which account for more than 65% of the firm's assets under management.

T. Rowe Price has increased its dividend by 15% per year over the last decade but most recently raised its dividend by 4%. However, the company rewarded investors with generous special dividends in 2015 and 2012. With a normalized payout ratio of roughly 40% and more than $1 billion in cash on the balance sheet, dividend growth investors will continue seeing dividend increases for many years to come.

T. Rowe Price's stock trades at a forward P/E of 15.6 and has a dividend yield of 3.1%, which is higher than its five-year average dividend yield of 2.2%. We believe this business can grow earnings per share by 6%-8% per year over the long term, which results in a total return potential of 9%-11% per year.

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9. Flowers Foods (FLO)

Flowers Foods was founded in 1919 and has grown into one of the largest bakeries in the country. The company sells a wide variety of fresh bakery foods that include breads, rolls, snack cakes and buns. The company's top brands include Nature's Own, Wonder, Tastykake and Whitewheat. Flowers Foods' products are available to more than 80% of the country primarily through retailers and food service companies.

The company has established many brands that stand for quality and have been a favorite of consumers for many decades, securing valuable shelf space at retailers. Demand for Flowers Foods' products is also nondiscretionary; sales fell by only 1% during the financial crisis. The company can develop or acquire new products and food categories to drive growth through its large distribution network as well.

Management has increased the company's dividend for 13 consecutive years, recording a 17.5% compound annual growth rate over the last decade. We anticipate high-single-digit to low-double digit dividend growth rate going forward given the company's 60% payout ratio and dependable earnings, which have grown by 6.2% per year over the last five years.

Flowers Foods stock trades at a forward P/E of 16.5 and has a dividend yield of 3.6%, which is meaningfully higher than its five-year average dividend yield of 2.6% and attractive for investors living off dividends in retirement. If the company can continue growing its earnings per share at a mid- to high-single-digit rate, Flowers Food's stock appears to offer total return potential of 9%-12% per year.

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10. Boeing (BA)

Boeing is the biggest aerospace company in the world and manufactures a lineup of commercial airplanes and defense and security systems. Commercial planes accounted for roughly 66% of Boeing's sales last fiscal year, and its remaining revenue came from its Defense, Space & Security business, which generates most of its sales from the U.S. Department of Defense. By geography, customers outside of the U.S. account for approximately 40% of the company's sales.

Developing large commercial aircraft costs billions of dollars and can take as long as 10 years. Few companies have the financial resources, manufacturing scale and existing customer base to participate in this business, resulting in a duopoly between Boeing and Airbus. With high barriers to entry, Boeing should enjoy strong growth as the world becomes increasingly global, driving passenger air traffic higher and requiring more planes. While some investors are concerned about the sustainability of Boeing's huge backlog of orders, the company believes 40%-50% of airplane demand over the next 20 years will result from replacement needs, which are less discretionary in nature.

Boeing most recently increased its dividend by 20% and has grown its dividend by a 13.8% compound annual growth rate over the last decade. With a free cash flow payout ratio of less than 50%, net cash on its balance sheet and a massive backlog that will generate rising free cash flow for years to come, we believe Boeing will continue its double-digit dividend growth and continue its track record of uninterrupted dividends dating back more than 30 years.

Boeing's stock trades at a forward P/E of 13.6 and has a dividend yield of 3.8%, which is significantly higher than its five-year average dividend yield of 2.2%. Assuming the company can grow its earnings per share at a mid- to high-single-digit rate like it has historically, the stock appears to offer total return potential of 9%-11% per year.

This article is commentary by an independent contributor. At the time of publication, the author held long positions in BA, INTC, GIS, TROW, CMI, and PAYX.

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