Every investor's dream is to make enough passive income to achieve financial independence. One excellent source of passive income is dividend-paying stocks.
Not any dividend stock will do. The best dividend stocks have sound businesses and a good history of managing their money. Companies with a long history of dividend increases have a proven track record and are an excellent place to look.
Dividend Kings are companies that have raised dividends for 50 consecutive years. To say they have been battle-tested is an understatement. For a company to be a Dividend King, it has had to traverse seven recessions in the U.S. since 1972. If you have $2,000 to invest and are looking to build passive income, here are the four top dividend stocks you should consider buying today.
1. Cincinnati Financial generates steady cash flows and has raised its dividend for 62 years straight
Insurance companies aren't the most exciting businesses to invest in, but that shouldn't stop you from adding some to your portfolio. Insurers can be solid companies that consistently generate positive cash flows and quickly adapt to inflationary pressures.
Cincinnati Financial (CINF -0.76%) writes policies for automotive, homeowners, and property insurance. It has done a solid job of managing its balance sheet through the ups and downs of the economy and has raised its annual dividend for 62 years in a row.
One example of the company coping with challenges was during the financial crisis. From 2008 to 2011, the insurer's combined ratio, a measure of how well it writes policies, was 104% -- meaning it spent 4% more on expenses and claims than it collected in premiums. Despite this lackluster business performance, strong capital management helped it raise its dividend yearly.
In 2011, Steve Johnston took over as chief executive officer and its combined ratio improved -- averaging 95% since then while beating the industry average of 99%.
With its history of dividend increases and a 2.8% yield, Cincinnati Financial looks to be a solid dividend stock you can add today.
2. Commerce Bancshares' capital management has allowed it to increase dividends for 54 years in a row
Commerce Bancshares (CBSH 0.72%) has been in business for over 150 years and is ranked as the 41st largest bank in the U.S. based on asset size. The bank has done an excellent job of managing its capital, allowing it to raise its dividend payment for 54 years in a row.
The key to its long-term success is its excellent risk management. Commerce Bancshares has a relatively conservative balance sheet that has helped it perform well across different credit cycles.
One measure of risk you'll see in the banking industry is the tier 1 common risk-based capital ratio, which tells you how much capital a bank has to weather an economic downturn. Commerce Bancshares' ratio is 13.9% -- which ranks as the third-highest among banks among the top 50 in the U.S. based on asset size.
Another crucial metric banks use is the return on average common equity, which shows how efficiently banks generate profits. Commerce Bancshares delivered investors a return on average common equity of 12.4% during the last 15 years, beating its peer average of 8.3%.
The bank currently yields a little more than1.5% and is another solid dividend stock for income-seeking investors.
3. Federal Realty Investment Trust's key real estate locations have allowed it to increase its payout 55 years in a row
Federal Realty Investment Trust (FRT -0.14%) is a real estate investment trust (REIT) that specializes in acquiring, developing, and leasing retail and mixed-use properties. Its properties include open-air shopping centers, offices, and apartment buildings.
Federal Realty has raised dividends for 55 consecutive years because of its focus on top-notch real estate locations.
The company has strategically selected first-ring suburbs, or communities close to city centers, in nine major metro markets with high barriers to entry. These selected communities have two key features: a high population density averaging about 177,000 within three miles of its properties and high average household incomes of $151,000.
Federal Realty can better withstand economic downturns by focusing on highly populated, affluent regions. That's because higher-income households can better absorb the shocks from recessions and inflation. With its history of dividend increases and 4.5% dividend yield, this stock is another stellar dividend payer worth adding to your portfolio today.
4. S&P Global's competitive advantage has helped it raise dividends for 49 years straight
It isn't a Dividend King yet, but S&P Global (SPGI -0.09%) is one year away from coronation. The company provides credit ratings for companies looking to issue debt and is an essential part of the fixed-income markets. The company and Moody's Corp. dominate the credit rating industry, with a combined market share of 80%.
High barriers to entry make it difficult for companies to go into the credit rating space and disrupt these legacy companies, giving them a distinct competitive advantage.
This year, fewer companies have gone to the market to raise funds. According to the Securities Industry and Financial Markets Association (SIFMA), U.S. corporate bond issuance was down more than 28% through the first nine months of this year. As a result, S&P Global's rating business revenue dropped 20% in the year's first half.
The good thing is that it has a robust research and analytics business, accounting for the other half of its revenue. This segment's revenue rose 83% in the first half of this year on strong demand for its analytics, while its total revenue has grown by 31%.
With a stellar payout history, strong competitive advantage, and diverse income sources, this is one solid dividend stock you don't want to miss out on.
