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Dividend-paying companies often demonstrate financial stability and a commitment to shareholder value, making them a reliable choice for long-term investors seeking income and capital appreciation. Moreover, stocks that consistently pay dividends tend to offer superior returns with reduced volatility compared to their non-dividend counterparts, according to S&P Global.

So, let’s look at three dependable dividend-paying stocks that have crushed the benchmark S&P 500′s total returns over the last five years — and see whether they are worthy of your portfolio.

1. Costco Wholesale

Costco Wholesale (NASDAQ: COST), a membership-only discount retailer with a market capitalization of nearly $250 billion, pays a quarterly dividend of $1.02 per share. The annual yield of 0.73% isn’t impressive on the surface, but the company has raised its dividend annually since 2004.

It also pays a special cash dividend roughly every three years. Given that pattern, shareholders can reasonably anticipate another special dividend in the near future since the last one was paid in December 2020 at $10 per share.

With Costco’s business model, monitoring membership growth is an essential measure of health and future growth with membership price increases. In its last 12 reported months, the company grew its number of cardholders from 116.6 million to 124.7 million, resulting in a roughly 7% increase.

Costco’s annual membership fees generate approximately $4 billion in high-margin revenue. The company’s historical pattern indicates it raises these fees about every five or so years, and the most recent change occurred in June 2017, so it stands to reason that an increase in fees is likely on the horizon, which would boost membership revenue even more.

If there is a downside to investing in Costco, it begins and ends with its valuation. Using the standard valuation metric for mature companies of price-to-earnings (P/E) ratio, the stock trades at a P/E of 41.4, significantly higher than competitors Target and Walmart at a P/E of 16.8 and 31.6, respectively. Costco’s five-year average P/E is 37.4, meaning the stock is currently trading at an even higher valuation than usual.

COST PE ratio data by YCharts.

Despite maintaining a consistently high valuation, Costco’s stock has demonstrated its status as a long-term winner, delivering a total return of 146% over the last five years. When combined with an impressive balance sheet with $7.2 billion more in cash than debt, Costco emerges as an essential holding for long-term dividend-focused investors.

2. The Hershey Company

Halloween is just around the corner, and kids will be eager to fill their bags with candy, including some from one of the world’s largest chocolate manufacturers, The Hershey Company (NYSE: HSY). Despite experiencing a nearly 7% decline in 2023, Hershey’s stock has delivered an impressive total return of 122% over the past five years, far outpacing the S&P 500’s 68% total return.

Management recently raised its quarterly dividend by 15% to $1.192 per share, resulting in an impressive yield of 2.3%. And Hershey has raised its quarterly dividend every year since 1972, except for 2009, during the Great Recession.

In recent years, Hershey has expanded its portfolio into snacks by acquiring SkinnyPop and Dot’s Homestyle Pretzels. As a result, the company’s revenue and net income are hitting record highs. Management recently reaffirmed its guidance for 8% revenue growth for 2023 versus 2022, resulting in net sales of roughly $11.2 billion, compared to $10.4 billion in 2022.

Despite Hershey’s strong projected revenue growth, the stock might be experiencing a sell-off because the source of this growth is primarily price increases rather than increased sales volume. The company’s second-quarter results show an average price increase of 7.7% for its products, coupled with a 2.7% decrease in sales volume from a year ago.

These price hikes are a result of the historically high costs of essential ingredients such as cocoa and sugar. However, Hershey boosted its gross margins by an impressive 3.4% year over year, reaching 45.5%.

This margin expansion could indicate that Hershey is becoming more efficient in managing its cost of goods sold. If cocoa and sugar prices return to normal levels, this efficiency could lead to further margin expansion, resulting in increased profitability for the company.

In summary, Hershey faces notable inflationary pressures and a potential decrease in consumption. Nevertheless, the stock currently looks undervalued when considering its historical P/E, which has averaged 26.3 over the past five years. With a forward P/E of 22.2, Hershey presents a potential investment opportunity at an attractive valuation.

3. Winmark

While many consumers might be unaware of small-cap stock Winmark (NASDAQ: WINA), they are probably aware of its franchise-based retail companies that specialize in buying and selling secondhand goods: Music Go Round, Once Upon a Child, Plato’s Closet, Play It Again Sports, and Style Encore.

Winmark’s stock has demonstrated remarkable performance, surging 53% year to date, and even more impressively, delivering a total return of 145% over the past five years.

Like Costco, Winmark has a relatively low annual dividend yield and frequently pays a special dividend. Its yield is 0.9%, and it has paid a special dividend each of the last three years at an average of $4.97 per share. With the announcement of its special cash dividend typically in October, it is possible another one could be soon.

As a franchise business, Winmark is incentivized to expand its network because its revenue is primarily derived from franchise fees and royalties. Prospective franchisees must make an initial franchise payment of approximately $25,000 in the United States and contribute 4% to 5% of their weekly gross sales. CEO Brett Heffes believes there are 2,800 open territories for franchises, with only 1,303 locations as of July 1, 2023.

Image source: Getty Images.

If there is a negative for Winmark, the recent stock run-up has made its valuation expensive, with a current P/E of 32.7. For comparison, Winmark averaged a P/E of 23.2 over the past five years. Nonetheless, with record revenue of $83.2 million and near-record net income of $39.9 million over the trailing 12 months, the market might finally be taking notice of the resale company valued at a market capitalization of $1.3 billion.

WINA revenue (TTM) data by YCharts; TTM = trailing 12 months.

Are these top dividend stocks buys?

During periods of market uncertainty, dividend stocks can offer reassurance with regular income in your portfolio each quarter. And when shareholders expect annual dividend growth, management tends to adopt more-conservative approaches to capital allocation, which can lead to fewer mistakes.

These three stocks in particular have solid track records of consistently outperforming the S&P 500. Moreover, as industry leaders, the companies are well-positioned to maintain and grow their dividends — an attractive benefit for patient, income-seeking investors.

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Collin Brantmeyer has positions in Costco Wholesale, SPDR S&P 500 ETF Trust, and Target. The Motley Fool has positions in and recommends Costco Wholesale, Target, Walmart, and Winmark. The Motley Fool has a disclosure policy.

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