Over the last 50 years, stocks that consistently increase their dividends from one year to the next have outperformed the S&P 500 index by 2.5 percentage points annually.
Similarly, businesses with high and rising returns on invested capital (ROICs) — a measure of a stock’s profitability compared to its debt and equity — have also outperformed their lower-ranked peers over most of the last two decades.
By combining these two traits, investors are left with a stocked pond to fish from. Costco Wholesale (COST 0.46%), Cintas (CTAS 2.09%), Otis Worldwide (OTIS 2.17%), and Tractor Supply (TSCO -0.11%) are four companies that not only exhibit these traits, but also maintain leadership positions in their niches.
With this in mind, let’s explore what makes these S&P 500 stocks intriguing for buy-and-hold-forever investors.
1. Costco Wholesale
Costco offers its 123 million cardholding members a slimmed-down assortment of products in bulk quantities, and it has built a wide moat with the outsize cost advantages it has developed.
Thanks to the $4.3 billion in membership fees generated over the last year, the world’s third-largest retailer has a ROIC of 22%, eighth best (out of 37 stocks) in the S&P 500’s consumer defensive sector.
This cost-leadership positioning and strong profitability helped Costco more than triple the returns of the S&P 500 over the last five years.
Trading with a price-to-earnings (P/E) ratio of 36, the stock is not cheap. However, the company increased its dividend (currently yielding 0.7%) for 16 consecutive years — yet still only uses 26% of its net income to fund these payments, leaving ample room for growth over the long term.
Furthermore, of Costco’s 848 stores, only 117 are outside the U.S., Canada, and Mexico, leaving a long international growth runway ahead.
Why does this matter to investors? During its last earnings call, chief financial officer Richard Galanti explained that some of its foreign countries already generate higher profit margins than its U.S. stores. So investors would be wise to add to Costco over time as the company eyes new foreign markets.
Cintas has grown sales and adjusted earnings per share (EPS) in 51 of the last 53 years by providing its 1 million business customers with uniforms, restroom supplies, first aid and safety equipment, safety training, and fire extinguishers.
As wildly unexciting as this sounds, Cintas stock rose 1,000% over the last decade.
Powering this incredible performance is the company’s ROIC of 21%, 16th best of the 69 industrial stocks in the S&P 500. Operating in a highly fragmented niche, Cintas uses a strategy of making tuck-in acquisitions to complement its organic growth in the mid to high single digits, delivering results that might be hard to believe.
Across the last decade, the company’s sales, net income, and dividends grew annually by 7%, 20%, and 26%, respectively. Cintas has a payout ratio of only 35%, showing that it should easily be able to continue increasing its dividend (currently yielding 1%), just as it has since 1983.
Although the company trades at a premium P/E of 35, it only counts 6% of the total businesses in North America as customers, leaving a massive runway for growth.
Opportunistic investors might want to take advantage of any short-term dips in the share price to build a position in this operations-crucial business over time.
3. Otis Worldwide
Following its 2018 spinoff from conglomerate United Technologies, elevator and escalator manufacturer Otis Worldwide has nearly doubled its share price.
It generates 55% of its sales from services — like maintenance, repair, and modernization — and has the second-best ROIC (45%) among the S&P 500’s industrial stocks. These service sales account for nearly 80% of the company’s adjusted operating profit and drive an impressive 94% retention rate for its customers.
These higher-margin sales helped Otis deliver an 11% free cash flow (FCF) margin in 2022, arming the company with excess cash for debt repayments, share repurchases, bolt-on acquisitions, and dividend increases. Buoyed by this FCF, management expects to spend between $600 million and $800 million on share repurchases in 2023, as it will try to hit the high end of its earnings per share (EPS) guidance of double-digit growth for the year.
Otis is the market leader in its niche and looks poised to continue streamlining its operations as a stand-alone company. At 23 times FCF, Otis’ growing 1.5% dividend and impressive ROIC make it an excellent choice for investors looking for a high-performing, steady-as-it-goes investment.
4. Tractor Supply
This rural-lifestyle retailer is the best performer of these four stocks over the last five years, with a total return of around 280%.
Its incredible fourth-quarter report saw sales, same-store sales, and EPS rise by 21%, 9%, and 26%, respectively, proving that its growth in 2021 was more than just a pandemic-aided bump. In fact, the company has reported 31 consecutive years of sales growth, with revenue doubling again in the last six years alone.
Tractor Supply has 28 million members in its Neighbor’s Club rewards program, thanks in part to its 25% market share in animal feed. These recurring purchases are crucial for the company’s customers, and they help fuel Tractor Supply’s stellar ROIC of 37%.
The company’s 8% net income margin — robust for a retailer — helps to fund its dividend (with a 1.6% yield) and a stock buyback program that has lowered its share count by 20% in the last decade.
On top of this, Tractor Supply trades at a reasonable P/E of 24, making its predictable growth very enticing for investors focused on the long term.