3 Underrated Dividend Stocks That Could Generate Reliable Cash Flow for Your Portfolio for Decades

A common mistake many investors make when looking for dividend stocks is to focus mainly on the yield. A high yield can be enticing, but if it proves unsustainable, it could turn out to be a costly decision. Not only might the dividend get cut or suspended, but the stock may also crash if that happens.

Three dividend stocks that may be underrated due to their low yields but that could be incredibly reliable income investments to hang on to in the future are Microsoft (NASDAQ: MSFT), Eli Lilly (NYSE: LLY), and Mastercard (NYSE: MA). Here's why you should consider buying these stocks for their payouts, even though their yields may look minimal.

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Microsoft

Most investors probably aren't buying Microsoft for its dividend; it yields just 0.9%, which is below the S&P 500 average of only 1.1%. But while the yield may look unimpressive, consider that Microsoft has actually been a top dividend growth stock for years.

Currently, it pays $0.91 per share per quarter. A decade ago, however, it was paying just $0.36 -- the dividend has risen by 153% since then, averaging a compounded annual growth rate (CAGR) of just under 10%. Meanwhile, the tech giant's payout ratio remains fairly low at around 21% of earnings. There's still considerable room for it to grow its dividend in the future.

The added bonus for investors is that they can also benefit from the tech company's future growth and possible gains from simply holding onto the stock. With many high-yielding stocks, dividends are the main reason to invest. With Microsoft, however, it's just one of the reasons it's a strong all-around investment.

Eli Lilly

Healthcare company Eli Lilly is another dividend stock that investors might gloss over. The company, which has become popular of late for its GLP-1 drugs, Zepbound and Mounjaro, is the only one in the healthcare sector that has topped a $1 trillion valuation. And if not for the stock's impressive gains over the years, its yield would be a lot higher than 0.6%.

Eli Lilly, for its part, has been doing quite a lot to make the dividend more attractive. Its current quarterly payout of $1.73 has more than doubled in just five years; back in 2021, the company was paying $0.85 per share. And prior to the Great Recession, it had a streak of increases that spanned more than 40 years. The stock also has an incredibly low payout ratio of 22%, suggesting its generous dividend increases will likely continue.

Overall, Eli Lilly is a solid healthcare stock to buy, offering exposure to opportunities in the fast-growing GLP-1 market while also providing investors with reliable and recurring dividend income.

Mastercard

Mastercard is yet another low-yielding stock that may be more valuable to dividend investors than it looks to be at first glance. At 0.7%, its yield is well below the S&P 500 average. However, its current quarterly dividend of $0.87 is also more than four times the $0.19 it was paying its shareholders a decade ago. That amounts to an increase of 358%, representing a CAGR of more than 16%.

Despite the generous increases, Mastercard has the lowest payout ratio on this list at around 18%. Given the strength of its business and the growth it has achieved in recent years, there's plenty of reason to remain optimistic that its dividend increases will continue for the foreseeable future. The credit card company's sales have risen by 47% from 2022 through to last year, when its top line came in at just under $33 billion.

Mastercard's business looks rock-solid, with strong fundamentals and room for further growth. This is the type of stock you can buy and forget about, given its leadership position in the payment card industry.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Eli Lilly, Mastercard, and Microsoft. The Motley Fool has a disclosure policy.