Buying dividend stocks has proved itself a superior investing strategy over time. Companies that pay dividends tend to be profitable, well-managed and financially stable. Therefore, they outperform stocks that don’t share their wealth with investors. Research shows dividend payers in the S&P 500 have never had a losing decade going as far back as 1930.
If you want to generate $5,000 in annual income right out of the gate, it will require you to invest a decent amount of money to see that amount in dividends. Less than $100,000 split equally between the following three companies should get you up running.
However, if you don’t have that kind of cash but do have a little time, these same stocks can also get you to our goal. Each of these dividend stocks has a history of increasing their payout at double-digit rates over time. So, you could invest smaller amounts into each of them and use the power of time and compounding to your advantage.
Lowe’s (LOW)
Home improvement center Lowe’s (NYSE:LOW) is one of the top stocks on the market to help you attain your passive income goals. The retailer has paid a dividend every year since going public in 1961, raising its payout every year for nearly 60 years. That makes it a Dividend King of the highest order as few companies have as long of a track record.
Investors might look at Lowe’s yield of 1.9% and think it meager but neglect to look at the DIY center’s dividend history. Over the past decade LOW stock raised its payout at a blistering 20% compounded annual rate. In 2014 the dividend was 82 cents per share but today stands at $4.30 per share.
Shares of Lowe’s returned almost 400% to investors during that time compared to a 177% return of the S&P 500. But add in dividends, and the retailer’s total return balloons to 490% versus 234% for the broad-based index.
With just $3,333, you could buy 14 shares of LOW stock. You would received $61 worth of dividends, which if they grew at just 15% annually for the next 25 years (and you never bought another share), would give you over $2,000 in annual dividend income. That is the reason Lowe’s should be on every dividend investors short list of stocks to buy.
LVMH Moet Hennessy Louis Vuitton (LVMUY)
The second dividend growth stock to consider is luxury retailer LVMH Moet Hennessy Louis Vuitton (OTCMKTS:LVMUY). Like Lowe’s it has excellent long-term stock price appreciation but also an impressive 10-year 13% CAGR of dividend growth. So over the last decade, LVMH has a total return of 390%.
Considering the battering retail has taken over the years, investors might be surprised at the strength the luxury retailer exhibits. That’s because it caters to the ultra wealthy who tend to be hit last by any economic upheavals. LVMH’s core customer is the top 5% of the wealthy. While inflation affects everyone, the well-to-do feel its impact less. LVMH has 75 houses featuring 60 different brands that appeal to the wealthy lifestyle. Among its brands are its namesake Louis Vuitton, Moet champagne, and Hennssey cognac, as well as Dior, Fendi, and Dom Perignon.
The annual payout of $2.73 per share yields 1.5%. Investing $3,333 into LVMUY stock gets you 18 shares. At a 10% dividend CAGR, your would have $530 in annual income after 25 years. Don’t worry, it all adds up, and we’re halfway to our goal.
Bank of America (BAC)
The last dividend stock you should consider putting in your portfolio is Bank of America (NYSE:BAC). Shares of the banking giant were shaken last year following the regional banking crisis that saw several institutions either go bankrupt or get seized by regulators. BAC stock was never at risk, yet a generalized fear about the overall safety of the banking system was palpable.
The market seems to have finally caught on as the stock is up 35% from its October lows. While Bank of America’s latest earnings report was something of a mixed bag, the firm saw strong customer growth of 130,000 new checking account clients while mobile banking users were up 7%. Interest rate cuts later this year will provide a boost to BAC as net income interest is bolstered.
While investors await the development, they can enjoy a dividend of $0.98 per share that yields 2.7%. A $3,333 investment would give your portfolio 98 shares and $96 in income that first year. Now Bank of America has an incredible 10-year CAGR of almost 37%. The payout grew from $0.04 per share in 2014 to its current level. While more recent dividend growth has been lower, if it grew at just a 14% rate, it would give you over $2,500. Therefore, you would achieve your goal of $5,000 with some change left over.
On the date of publication, Rich Duprey held a LONG position in LOW and LVMUY stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.