There's a truism among market traders that when the business does well, the stock should eventually follow. And owning stock in strong businesses over the long term will boost an investment portfolio. If that stock also pays a dividend, it's even better as your portfolio will generate steady passive income. The key to reaching that point is to have patience, holding the stock through good times and bad, even when volatility may impact the stock's price.
It's also true that there are certain attributes common to these strong, dividend-paying businesses you are considering for a long-term portfolio. They should have catalysts and strong market positions within an industry that allows them to grow over the years and decades. They should be staffed by competent management teams. They should generate consistent levels of free cash flow. And they should have great track records of paying increasing dividends.
Let's look at two dividend-paying stocks with these characteristics you might consider adding to your investment portfolio.
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1. ResMed
ResMed (RMD +0.96%) is a healthcare company that manufactures equipment and machinery to help patients with sleep apnea as well as some chronic diseases. ResMed also provides a software-as-a-service platform to support medical professionals, patients, and their caregivers.
The company demonstrated encouraging growth in the last five full fiscal years. Annual revenue increased by 52.9% from $2.3 billion to $3.6 billion, while net annual profit more than doubled from $315.6 million to $779.4 million. What's more, ResMed generated a consistent average annual free cash flow of $503.8 million from 2020 to 2022. The healthcare company is a dependable dividend payer, and it increased its dividend with consistency from $0.17 per share in 2012 to $0.44 per share this year.
NYSE: RMD
Key Data Points
ResMed's recently completed fiscal 2023 (ending June 30) shows a continuation of its strong performance. Annual revenue rose 18% to $4.2 billion with net income climbing 15.2% to $897.6 million. Free cash flow also came in at $559.3 million for the fiscal year.
The company's growth path looks assured, as an aging population is likely to result in more people suffering from chronic diseases such as sleep apnea and chronic obstructive pulmonary disease (COPD). ResMed's aim is to not just slow disease progression and improve the quality of life for its patients, but also to reduce overall healthcare system costs by providing software that helps patients recuperate and function well in the comfort of their homes.
CEO Mick Farrell will focus the company on delivering effective therapeutic and digital health solutions for fiscal 2024 and beyond. In the last 12 months, ResMed offered products and/or services to 160 million people, and it intends to increase that total to 250 million by fiscal 2025. In line with this objective, ResMed acquired privately held Somnoware last month. Somnoware is a sleep and respiratory care diagnostics software provider, and its services will complement ResMed's suite of digital solutions to help it deliver improved patient care and achieve better medical outcomes.
The stock did fall sharply after the company's fiscal 2023 earnings release as investors got spooked by a small fall in gross margin, but Farrell has assured that ResMed can overcome these setbacks to do better in the current fiscal year. With the price drop, the stock trades cheaper than at any time in the past five years with a P/E ratio of 29.7. Although the annualized dividend yield is a low 1.06% at the moment, investors should be looking at steady capital appreciation with consistent dividend increases as the bonus when deciding whether to buy the stock.
2. Parker-Hannifin
Parker-Hannifin (PH +3.43%) is a leader in motion and control technologies and manufactures a wide range of products for the mobile, industrial, and aerospace markets. The company boasts a solid portfolio of products and has grown steadily from fiscal 2020 to 2022. Annual sales increased from $13.7 billion to $15.9 billion over this period, while net income was $1.2 billion to $1.3 billion. Parker-Hannifin also generated an average annual free cash flow of $2.1 billion from 2020 to 2022. The engineering company is also a solid Dividend King, as it has increased its dividend annually for over 67 consecutive years, with its latest quarterly dividend coming in at $1.48 per share, up 11% from $1.33 paid out per share a year ago.
NYSE: PH
Key Data Points
Fiscal 2023 (ended June 30) saw a continuation of Parker-Hannifin's good performance as sales rose 20% to hit a record high of $19.1 billion. Annual net income surged 58.3% to $2.1 billion, with diluted earnings per share climbing 59% to $16.04. The company also generated free cash flow of $2.6 billion for the fiscal year. Parker-Hannifin's fiscal 2024 guidance calls for a 3% to 6% increase in sales with free cash flow generation of between $2.6 billion and $3 billion. Investors can thus rest assured that the business can continue to increase its dividends for the foreseeable future.
Investors will also be glad to know that management has set ambitious targets through fiscal 2027. The company expects to achieve between 4% to 6% organic growth with contributions from the acquisition of Meggitt, an aerospace and defense technology and product business it acquired last September for approximately 6.3 billion pounds (approximately $8 billion). Parker-Hannifin has also identified secular trends in aerospace, digital, and electrification that could power its growth for many more years. The company aims to grow its adjusted earnings per share from $21.55 in fiscal 2023 to $30 by fiscal 2027. Adjusted segment operating margin is projected to improve from 22.9% to 25% over the same period. With a clear strategy in place, investors can be sure that the company has the capability and innovation to stay ahead of the competition and demonstrate its quality.
Parker-Hannifin's share price is up 35% in the past year, and yet the stock is actually cheaper on a P/E ratio basis because of the increase in its earnings. The price-to-earnings ratio is just 25.8 for a high-quality, growing company compared to 30.4 times a year back. The dividend yield sits at a somewhat mediocre 1.43% but with a low 34% payout ratio, there is plenty of free cash flow available to continue making consistent dividend increases. Parker-Hannifin offers a sweet mix of share price appreciation and dividend growth potential and the total return it offers will help grow a portfolio over the next decade.
