When it comes to selecting an appropriate dividend stock for a portfolio, the dividend yield is just one piece of the puzzle. The financial strength of the company issuing the dividend is the most important factor. If a company's financial situation weakens, the dividend could be reduced or eliminated altogether. Since an equity investment is required to receive the dividend, a loss on the investment itself would also be likely.

Companies that have a strong history of dividend growth, along with the commitment and wherewithal to continue growing their dividends, make ideal investments for income-seeking investors. Cash-intensive businesses that experience steady demand often reward their shareholders with a dividend increase on a consistent annual basis.


Visa Inc. (NYSE: V), the global payment solutions provider, may have a small dividend yield, but it is big on growth potential. The stock's 0.7% yield, as of May 12, 2016, may have been well below the 2.1% yield of the S&P 500, but its dividend payout ratio of just 18% indicates that the company should be able to raise the dividend in the future.

Visa generated over $9.5 billion in earnings before interest, taxes, depreciation and amortization (EBITDA) in 2015. Carrying no long-term debt on its balance sheet, Visa has no interest payments related to debt, allowing it more flexibility in increasing dividend payments to shareholders. A free cash flow (FCF) yield of 2.4% suggests that the company is generating more than enough cash to support a higher dividend. Visa trades roughly 8 million shares daily.


Athletic footwear and apparel maker Nike Inc. (NYSE: NKE) has a comparatively unimpressive dividend yield of just 1.1%, but the company's financial situation continues to strengthen as revenue has doubled in the past 10 years. A net debt-to-EBITDA ratio of 0.3 is a little high, but a free cash flow yield of 3.1% indicates that Nike has generated more than enough cash to support the dividend. A payout ratio of 26%, as of May 13, 2016, was well below levels that would suggest the current dividend is unsustainable. On average, Nike trades over 9 million shares every day.

Hormel Foods

Consumer staples businesses aren't necessarily exciting, but many of them benefit from conservative growth and steady demand through all economic environments. Without the need for rapid growth, consumer staples are often able to pay out much of their earnings and cash flow in the form of dividends to shareholders. Hormel Foods Corporation (NYSE: HRL), a producer of meat and food products, has demonstrated a commitment to growing its quarterly dividend.

Hormel's 2016 quarterly dividend is nearly 50% higher than its dividend in 2014. Its debt-to-EBITDA ratio of 0.4 is on the higher side, but the company committed just $4 million to interest expense on debt in the fourth quarter of 2015 compared to $66 million in dividend payments. The stock's dividend yield of 1.4% is less than half of the company's 3.2% free cash flow yield. The stock trades roughly 3 million shares a day.

Automatic Data Processing

Automatic Data Processing Inc. (NASDAQ: ADP) has one of the strongest dividend histories of any company in the United States. ADP, which provides workplace solutions such as payroll, benefits and human resources, has raised its quarterly dividend for 41 consecutive years. While its dividend growth rate could be considered low, ADP's consistent record of raising its dividend makes future dividend growth likely.

Strengthening the case for future dividend growth, the company carries almost zero long-term debt on its balance sheet. The stock's dividend yield of 2.5% compares favorably to the S&P 500's yield of 2.1%. Much of ADP's 2015 EBITDA translated into free cash flow ($1.6 billion in FCF of $2.4 billion EBITDA), providing the company additional flexibility to further grow the dividend. ADP trades 2 million shares daily.

Ross Stores

Shareholders of retail apparel and home fashion store operator Ross Stores Inc. (NASDAQ: ROST) have enjoyed steady growth in their dividend payments. A quarterly dividend of under 3 cents per share at the end of 2009 has grown to 13.5 cents per share in the first quarter of 2016. The dividend yield on the stock, as of May 13, 2016, was 1%.

Ross Stores has nearly doubled its free cash flow in the past two years, pushing the company's free cash flow yield up to 3.4%. The company's debt-to-EBITDA ratio of 0.2, coupled with a payout ratio of just 18%, indicates that Ross has plenty of room to continue growing the dividend without stretching itself too thin. The stock trades almost 3 million shares on an average day.

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