Which stocks should you buy and hold when starting to build your retirement portfolio? In this search, you should find companies that provide income through regular payouts, and are less likely to slash or suspend dividend payments during market volatility.
One way to identify the best buy-and-hold dividend stocks is to look for the industry leaders with a defendable “economic moat,” a term coined by famed investor and Berkshire Hathaway (NYSE:BRKa) CEO Warren Buffett to identify quality stocks with a vast competitive advantage.
Keeping these factors in mind, below we have short-listed two top quality stocks that income investors could consider buying now:
1. Nike
When the economy is going strong and consumers have more money to spend on discretionary items, that’s when consumer stocks outperform. The post-pandemic economy is presenting us with a similar set-up, where consumers have a lot of cash to spend with huge pent-up demand. In this group we particularly like Nike (NYSE:NKE).
The Oregon-based sportswear giant's powerful comeback since the pandemic-induced plunge in March last year shows that the company hasn’t lost its allure for income investors. Nike’s strong global brand provides a solid hedge against a slowdown in any one region. But so far, the company doesn’t see any sign that consumers—no matter where they're located—will put the brakes on their spending.
In addition, the company’s successful e-commerce strategy has helped to weather the disruption from COVID-19. Digital sales of Nike brand soared 59% last quarter, the company said, citing strong growth in every region.
Said Chief Financial Officer Matt Friend in a statement in March:
“We continue to see the value of a more direct, digitally enabled strategy, fueling even greater potential for Nike over the long term.”
This positive momentum really bodes well for Nike’s faithful investors. They've relied on the company’s dividend payments and understand the cyclical nature of its business. Nike stock currently pays $0.275 per share on a quarterly basis, translating to an annual dividend yield of 1%.
That yield obviously doesn’t look attractive when compared to higher-yielding stocks in the market. But analyzing stocks just based on their yields isn’t a good approach. The best dividend stocks are the ones whose payouts are raised regularly.
On this metric, Nike has done a great job. It has hiked its payout for 19 consecutive years, meaning Nike has the financial power to successfully ride through downturns and recessions like the one seen during the pandemic that forced many other consumer cyclicals to suspend their payouts.
2. Apple
Many investors view Apple (NASDAQ:AAPL) as a technology stock with little income appeal. But the maker of iPhones is one of the most cash-rich companies in the world, providing the company with the ability to satisfy income-seeking investors for years to come.
Don’t be disappointed by Apple’s current, tiny 0.70% dividend yield. The Cupertino, California-based tech giant is offering a powerful combination of efforts to boost the total return for its investors, via increasing dividends and a massive share buyback plan.
Share buybacks are another way to reward long-term investors. As a company repurchases its stock, there will be fewer shares outstanding and a higher proportion of earnings being distributed among a smaller number of shareholders.
While announcing it planned to hike its dividend by 7% last month, Apple also increased its share buyback program by another $90 billion.
Said Luca Maestri, Apple’s chief financial officer, during a recent conference call:
“These results allowed us to generate operating cash flow of $24 billion and return nearly $23 billion to shareholders during the quarter. We are confident in our future and continue to make significant investments to support our long-term plans and enrich our customers’ lives.”
Apple generated $3.28 in EPS for fiscal 2020. With it's current, annual payout of $0.88, this is just 27% of its earnings, showing that it has plenty of room to hike its dividend each year.
With more than $204 billion in cash on hand, Apple is also in an enviable position to further increase its share repurchase program in order to support its shares.