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3 Unknown but Amazing Dividend Stocks

Great dividend stocks have a few things in common: a long-standing commitment to reliable payout increases, enough free cash flow to keep the quarterly checks coming, and a core business with staying power for the long run.

A few companies are hitting all of these marks without becoming obvious choices for income investors. We asked three of The Motley Fool's top investors to share their favorite unsung dividend heroes. Read on to see why they selected Lazard (NYSE: LAZ)Cintas (NASDAQ: CTAS), and NetEase (NASDAQ: NTES).

Image source: Getty Images.

The forgotten investment bank

Jordan Wathen (Lazard): It may be a global investment bank that many pass over, but Lazard sits comfortably in fourth place on the league tables, below household-name firms like Goldman Sachs, Morgan Stanley, and JPMorgan. While its core investment banking business is inherently cyclical -- investment banks earn advisory fees that ebb and flow with mergers and acquisitions and capital-raising activity -- the company has a fast-growing asset management business that has diversified and de-risked its revenue mix.

The asset management arm, which now manages approximately $215 billion of client capital, generates about 43% of total revenue. Advisory services contribute most of the remainder, or more than 55% of revenue each year.

Investment banking and asset management are attractive businesses because they require little capital investment to grow. Instead, growth comes by way of hiring new people, growing headcount to increase the volume of business that Lazard can complete each year. Thus, Lazard can send virtually all of its earnings out to shareholders in the form of share repurchases and dividends. In 2016, the company paid regular and special dividends that gave it a yield of 7.5%. Including repurchases, total capital returns added up to roughly 10% of the company's market cap last year.

Shares trade at about 14 times last year's earnings, an attractive multiple for a company that should be able to reliably pay out a total yield above 5% for a very long time to come.

Restroom cleaning services and uniform rentals (did I put you to sleep yet?)

Anders Bylund (Cintas): Some of the greatest stocks out there are connected to utterly boring businesses. That's exactly what you get from Cintas.

The company specializes in corporate uniform rentals and so-called facility services, a term that includes restroom cleaning operations and weekly shipments of freshly sanitized mops. It's the kind of business that nobody really wants to do but needs to be done, so Cintas steps up like a champ.

The boredom doesn't stop there. This mundane business has generated annual sales growth of 5.2% over the last five years while earnings rose 19.5% on average. Here's a chart to illustrate those fundamental growth trends:

CTAS Revenue (TTM) data by YCharts.

Cintas generates $366 million of annual free cash flows on sales of $5.1 billion these days, and 39% of that spendable cash is returned to shareholders in the form of dividend checks. Don't let me bore you with stories of Cintas' equally generous share buyback policies, which absorb most of the remaining cash flows every year. Cintas has reduced its total share count by 17% over the last five years, or 34% in a decade.

No, you're really here to learn more about Cintas' dividend habits. There, the company has increased its annual payouts without fail in every year since 1984, come what may. Sure, the current yield stands at a skimpy 1.1%, but that's only because share prices have skyrocketed in recent years. It's hard to maintain a generous dividend yield when share prices have tripled in five years. The payouts only doubled over the same period, after all.

Uninspiring business operations, totally predictable dividend boosts, solid-as-a-rock growth on both the top and bottom lines...Cintas is the walking definition of a boring stock.

And sometimes, that's exactly what you're looking for.

A Chinese video game company

Keith Noonan (NetEase): On American shores, the name NetEase might be familiar to hardcore video game fans or investors who keep a close eye on the technology sector, but it's still relatively unknown compared to other companies operating in the video game and online services spaces. Much of that likely has to do with the fact that the company is based out of and mostly operates in China, but its stock packs a combination of growth potential and returned income that deserves attention from stateside investors. 

NetEase is partnered with American companies including Activision Blizzard and Microsoft for the distribution of hugely popular games like Overwatch and Minecraft, but it also releases popular domestic video game properties and runs social and e-commerce platforms. Last quarter saw the company grow sales roughly 72% year over year thanks to surging online game services sales, while net income increased 59% over the prior-year period, and it looks like the company is poised to continue delivering substantial top- and bottom-line growth.

Turning to the income side of things, NetEase's roughly 1.1% yield probably won't wow anyone, but it does have big dividend growth potential. The company only began distributing dividends in 2014, but it's delivered payout increases in each subsequent year, and the annualized cost of distributing its current quarterly dividend represents just 25% of trailing free cash flow -- indicating that it has plenty of room to continue payout increases down the line. 

Trading at roughly 17 times forward earnings estimates, NetEase looks like a worthwhile stock for investing in Chinese internet and video game growth, and the fact that it will pay you to own it further sweetens the pot.

10 stocks we like even better than NetEase
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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Anders Bylund has no position in any stocks mentioned. Jordan Wathen has no position in any stocks mentioned. Keith Noonan owns shares of ATVI. The Motley Fool owns shares of and recommends ATVI. The Motley Fool also recommends Cintas and NetEase. The Motley Fool has a disclosure policy.