3 Dividend Stocks to Buy Now and Hold Forever

It can be comforting to own shares of strong companies that regularly pay passive income to shareholders. By selecting the right dividend stocks, an investor can easily build a portfolio that generates around 3% each year in dividend income. If the companies you select increase their earnings, they will also increase their dividend payout and return on your initial investment.

To get you started, three Motley Fool contributors were asked to come up with the best stock picks that can pay you passive income for the rest of your life. Here’s why they chose Coca cola (K.O 0.58%), Philip Morris International (P.M 0.60%)and Home Depot (HD 0.39%).

Invest in Warren Buffett’s favorite

John Ballard (Coca-Cola): Investing in companies with strong competitive advantages can protect and grow your money for decades. Coca-Cola’s global brand power and high annual sales volume would certainly fit the bill. This is why Warren Buffett has held a large position in stocks for over 30 years.

People consume 2.2 billion servings of Coca-Cola products every day, or approximately 800 billion servings annually. This includes the more than 200 brands it owns, including Fanta juices, Sprite, Minute Maid, Dasani water, Costa Coffee, Fuze Tea, Powerade and Simply. A large product portfolio offers many ways to drive sales.

All those portions generated $10 billion in profit on $46 billion in revenue over the past four quarters. The company paid out three-quarters of its earnings in dividends over the past year, or $0.485 per share, bringing the forward dividend yield to 2.71%.

Coca-Cola has raised its dividend for 62 consecutive years and raised its quarterly payout by 5% earlier this year. Management continues to wisely allocate capital and eliminate costs from operations to increase margins, all of which are intended to support growing earnings and dividends for shareholders.

Investors have rewarded the company for its ability to continue to grow revenue at double-digit rates despite a challenging retail environment. Wall Street analysts expect the company’s adjusted earnings to rise 14% this year. That’s why the stock is hitting new highs, but the above-average dividend yield suggests the stock is still reasonably priced for new investors to start a position.

A stock of transforming tobacco

Jeremy Bowman (Philip Morris International): PMI might seem like an odd recommendation for a dividend stock to buy and hold forever. After all, smoking rates have been falling for generations. But that hasn’t stopped PMI, which operates in international markets where smoking rates are higher than in the U.S., from continuing to grow and deliver strong results.

In fact, this is much more than a traditional tobacco company today. About 40 percent of its revenue comes from high-end, smoke-free products such as its iQOS heat and smoke devices and Zyn chewable nicotine pouches, which it gained through its 2023 acquisition of Swedish Match.

Now, Philip Morris International is playing the offensive. For example:

• The company recently acquired the rights to sell iQOS in the US from Altria and is ramping up its plans to launch the product later this year.
• Similarly, the company just announced it is investing $232 million to expand a Zyn manufacturing plant in Kentucky.
• Last month, it said it would spend $600 million to build a Zyn facility in Colorado.

Recent PMI numbers also show that the company offers strong growth for a dividend stock. Organic revenue rose 9.6% year over year in the second quarter to $9.5 billion. Revenue growth in its smokeless business was even stronger at 18.3%, while fuels rose 4.8%. Adjusted earnings per share also rose 11% to $1.77.

As a dividend payer, PMI currently yields 4.3%, which should please investors, especially given the strong growth in the business. Given its combination of growth and yield, Philip Morris International deserves a place in any dividend investor’s portfolio.

A stock that beats the market with an excellent dividend

Jennifer Saibil (Home Depot): Home Depot is a market-beating stock that also pays a growing dividend with an attractive yield. In other words, it’s an excellent dividend stock.

This is not the best time for Home Depot. Customers are moving to cheaper products everywhere in retail, and Home Depot’s larger, more expensive products are not essential items that customers will consume right now. The company is further pressured by a real estate industry that is still underwater.

But Home Depot is the largest home improvement chain in the world and has become an industry leader by providing a great shopper experience with an omnichannel focus. Comparable sales fell 3.3 percent year-over-year in the second fiscal quarter of 2024 (ended July 28), but total sales rose slightly (0.6 percent).

Management is not expecting any magic at this point. It’s doing what it does best: providing customers with what they need and expect to emerge from the inflationary environment while strengthening the business’s position. It still expects a decline in comparable sales and a lower operating margin for the full year.

Meanwhile, it pays a top dividend. Home Depot has paid a dividend for nearly 40 years and has grown its payout more than 4,500% since inception. The dividend has added tremendous value to the share price. Even without the dividend, shareholders would have beaten the market over the past 10 years, but with the dividend, the gain moves from 306% to 412%.

Shares of Home Depot have lagged the market this year, but are up 8%. Its business should easily bounce back under better macroeconomic conditions and should return to beating the market in the long run. It’s very profitable, with $4.60 in second-quarter earnings per share (EPS) and $4.7 billion in free cash flow, plenty to fund the dividend.

At current prices, Home Depot’s dividend yields 2.3%. The company has paid it in all sorts of circumstances, and shareholders can benefit from the market-beating potential and passive income.