The importance of dividend yield to a buy-and-hold investor cannot be overstated. A strong dividend yield allows you to build income over the long term while also enjoying the capital appreciation on your investment. Beyond dividend yield, I look for companies that have a compelling history of raising their dividend payments. If you’re looking for strong dividend yields, the stocks below will make great investments for your investment portfolio or your tax-advantaged IRA.
The stocks discussed below each sport a strong dividend yield above 3.5%. The stocks have also demonstrated a history of raising their dividends with 5-year dividend growth rates exceeding 20%. For buy-and-hold portfolios, these parameters should be vital to stock selection.
CenturyLink, Inc. (NYSE:CTL)
CenturyLink, Inc. (NYSE:CTL) is an integrated telecommunications company that offers a variety of telephone and Internet services to residential, government and commercial entities. The stock currently has a monster yield of 5.74% and a 5-year dividend growth rate of 51.57%. The company also has a payout ration of 193%. While this number may seem high at first, it is actually right in line with the industry average. The high payout ratio represents the ability of telecommunications companies to take on a high debt load due to the predictable nature of their future cash flows.
The ability of the company to continue to pay and grow its dividend is largely dependent on its ability to grow free cash flow. Free cash flow is the cash available for a company to use after it maintains or grows its assets. This cash is then typically used to service debt or be returned to stockholders in the form of dividends or stock buybacks. CenturyLink, Inc. (NYSE:CTL) has a 5-year cash flow growth rate of 42.39%. The company’s ability to generate cash flow in the future will allow for further dividend increases.
Seagate Technology PLC (NASDAQ:STX)
Seagate Technology PLC (NASDAQ:STX) designs, manufactures, markets, and sells hard disk drives for consumers, enterprise storage and cloud computing services. The company offers a dividend yield of 3.75% and a 5-year dividend growth rate of 29.34%. The current payout ratio is 19.72%, so there is room for the company to return even more cash to stockholders.
The company trades at a low trailing twelve month (TTM) P/E ratio of 6.51 versus the company’s 5-year average P/E of 8.14, and well below the computer peripheral industry average P/E of 13.51. Seagate Technology PLC (NASDAQ:STX) has made investments in the solid-state drive (SSD) memory space, the successor to hard drives for smaller computing needs. The company also stands to benefit from the growth of cloud computing since the large cloud servers will require significant hard drive space.
Lockheed Martin Corporation (NYSE:LMT)
Lockheed Martin Corporation (NYSE:LMT) is a defense and aerospace company that provides an array of services for both government and private clients. The company currently has a dividend yield of 4.51% and has a 5-year dividend growth rate of 22.32%. It also has a strong payout ratio of 48.92%.
Lockheed Martin Corporation (NYSE:LMT) currently trades at a TTM P/E ratio of 11.78 versus an industry average of 15.50. The lower P/E likely reflects the company’s reliance on US defense spending and the potential impact of looming spending cuts. These cuts have been widely talked about for some time, however, and barring any further surprises in government spending are likely priced-in to the stock. Lockheed Martin Corporation (NYSE:LMT) also has nearly $2 billion of cash, so the current dividend yield should be secure.