2 Dividend Stocks to Hold for the Next 5 Years

Investing in dividend-paying stocks has been a popular strategy. There are sound reasons, and it certainly has benefits for long-term investors seeking attractive total returns.

That's because you'll receive regular income in addition to capital appreciation. Of course, picking the stocks that can afford the payouts and offer potential upside remains the key. You'll want companies with strong and sustainable businesses that produce strong cash flow to invest in future growth and pay higher dividends.

For investors with a five-year time horizon, these two stocks have attractive total return potential. It's time to look into each one.

Image source: Getty Images.

1. Domino's Pizza

You'll likely recognize Domino's Pizza (NASDAQ: DPZ) due to its numerous locations. In fact, after operating for more than six decades, it's become the world's largest pizza company, with more than 21,000 restaurants that offer pickup and delivery. It's also expanded its menu options beyond pizza to include items like pasta, chicken, salad, and sandwiches.

With 99% of its stores owned by franchisees, Domino's primarily operates as a franchisor. That means that it doesn't own the restaurants but instead sells licenses, collecting royalties and fees. This allows the company to expand in a capital-efficient way. It opened 214 restaurants in the third quarter, and 748 over the past year.

The business, with its quick, convenient, and inexpensive food, continues to resonate with customers. Domino's Q3 same-store sales (comps) increased 5.2% at its U.S. locations and 1.7% internationally.

The higher sales have led to profit growth and strong free cash flow (FCF) generation. For the first three quarters of the year, Domino's produced FCF of $495.6 million. That easily supported the $119.5 million in dividends.

Domino's started paying dividends in 2004 and subsequently raised them annually. The stock has more than a 1.7% dividend yield, besting the S&P 500 index's 1.1%.

2. TJX Companies

TJX Companies (NYSE: TJX) sells off-price merchandise through its stores and websites under brands like TJ Maxx, Marshalls, and HomeGoods. It buys merchandise, such as apparel, accessories, and furniture, at low prices. The company seeks buying opportunities, particularly when manufacturers have excess inventory. That's why it can charge customers low prices.

A retailer selling discounted goods always appeals to consumers. However, that's particularly true during challenging economic periods. TJX Companies thrives during these times, since it's able to buy merchandise at very attractive prices and pass those savings on to bargain-hunting shoppers.

The company's results show it has been executing its strategy well. While many retailers have struggled in the current economic environment, TJX Companies' fiscal second-quarter comps increased across all of its brands. Companywide, quarterly comps grew 4%. This was for the period that ended Aug. 2. Management expects comps to increase 3% for the year.

Despite higher tariffs, TJX Companies' gross margin expanded from 30.4% to 30.7%. The higher sales and margin helped drive diluted earnings per share 15% higher to $1.10.

The company had FCF of $1.2 billion in the first half of the year, easily supporting the $898 million in dividends.

TJX Companies' board of directors also has a strong commitment to rewarding investors by regularly raising the quarterly payout. Earlier this year, the company increased the dividend by a sharp 13% to $0.425 a quarter. It has boosted the payments in 28 of the last 29 years.

The shares have a 1.2% dividend yield, slightly higher than the stock market's, as measured by the S&P 500.

Lawrence Rothman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Domino's Pizza and TJX Companies. The Motley Fool has a disclosure policy.