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2 Top Dividend Stocks You Can Buy and Hold Forever

Motley Fool - Sun May 14, 8:45AM CDT

Long-term investors tend to flock to dividend stocks for their ability to provide a steady source of income, and the often-proven track records of their businesses. Better yet, most dividend-paying stocks tend to grow their dividends over time.

To see how a growing dividend can transform a portfolio, look no further than Berkshire Hathaway's investment in Coca-Cola. In 1994, Berkshire completed its seven-year purchase of Coca-Cola at a total cost of $1.3 billion. Fast forward to 2022, and Coca-Cola paid $704 million in dividends on those shares, now worth roughly $25 billion.

It's a good idea for investors to start with reliable dividend payers when considering which stocks they might buy and hold forever. Here are two dividend-paying stocks that might be the next Coca-Cola for your portfolio.

1. Costco Wholesale

Costco Wholesale's (NASDAQ: COST) membership-only model has propelled it to become one of the most successful wholesale retailers and stocks over the past decade. The company has rewarded investors handsomely during that time, with a total return (change in stock price plus dividends) of 459%, outperforming the S&P500 benchmark by over 250%.

On the surface, Costco's quarterly dividend of $1.02 per share, equating to an annual dividend yield of 0.81%, won't excite many investors. The good news is that the dividend will likely grow over time as management has raised it annually since 2004. Also, Costco is known for its regular special cash dividends, which it typically pays out once every three years or so. With that timeline in mind, Costco shareholders should expect another special cash dividend soon, as the previous one came in December 2020 for $10 per share.

Beyond Costco stock's past performance and dividends, the company has one of the best balance sheets in the public markets, with a net debt (long-term debt minus cash and short-term investments) of -$7.1 billion. For comparison, competitors Target and Walmart have net debts of $14.4 billion and $30.6 billion, respectively.

A shopping cart sits in an aisle at Costco.

Image source: Getty Images.

For future growth, Costco will rely on expanding locations -- it plans to open approximately 29 additional new warehouses in 2023. That would be a roughly 3% increase from its 848 sites as of February 12, 2023. Additionally, Costco will likely increase annual membership fees soon, which generated approximately $4.2 billion in 2022. Management last raised membership fees in June 2017, averaging an increase roughly every five-and-a-half years.

For many investors, Costco stock's high valuation -- its price-to-earnings (P/E) ratio is 36.7 -- is a reason not to invest. For comparison, Target and Walmart trade at P/E ratios of 26.5 and 35.8, respectively. However, if you consider that over the past five years Costco's stock has had an average P/E ratio of 36.8 and generated a total return of 173%, there may be a good reason for its consistently high valuation.

2. Waste Management

For many Americans and Canadians, Waste Management(NYSE: WM) is the company that takes away their trash and recycling. The stock has produced a total return of roughly 125% over the past five years, doubling the total return of the S&P500.

Waste Management currently pays a quarterly dividend of $0.70 per share, representing an annual dividend yield of 1.6%. North America's leading waste services company has paid and raised its dividend for 20 consecutive years.

Moreover, the company is consistently free-cash-flow positive, signifying it can continue to pay its dividend and repurchase shares, which both return capital to shareholders. For 2023, management expects $2.6 billion to $2.7 billion in free cash flow, representing more than a 25% increase from its roughly $2 billion free cash flow in 2022.

Waste Management is investing roughly $1 billion in 2023 for growth projects in its recycling and renewable energy businesses. While this investment, combined with dividends and share repurchases, will hamper the company's balance sheet in the near term, as the company will likely be spending above its free cash flow in 2023, management expects it will lead to an additional $630 million in annual free cash flow by 2026.

So even with Waste Management's growing net debt of $15 billion, leadership could start paying it down with its reliable free cash flow if interest expenses become a nuisance. However, at this time management prefers reinvesting in the business and returning capital to shareholders. Both are positive for any long-term investor.

Are these top dividend stocks buys?

Historically, dividend stocks tend to be less volatile than growth stocks, providing the added benefit of a regular and reliable income stream. These two stocks in particular not only offer growing dividends, but are the leaders in their respective industries, with plans to expand their business to provide future growth. That makes Costco and Waste Management great additions to any long-term investor's portfolio.

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Collin Brantmeyer has positions in Berkshire Hathaway, Costco Wholesale, SPDR S&P 500 ETF Trust, and Target. The Motley Fool has positions in and recommends Berkshire Hathaway, Costco Wholesale, Target, and Walmart. The Motley Fool recommends Waste Management and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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