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.
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.