When it comes to investing in dividend-paying stocks, many investors focus on the yield without considering the larger picture. Two stocks that buck this trend, and offer a compelling investment opportunity, are Alphabet (GOOG) and Caterpillar (CAT). Both companies have a long history of increasing their payouts, and with valuations that appear to be fair, they're undervalued and poised for upside.

One of the key factors that sets Alphabet apart is its consistent growth. Despite concerns about regulation and the rise of competitors, the tech giant has continued to generate impressive revenue and profit numbers. In the first half of 2024, Alphabet reported net sales of $165.3 billion and net income of $47.3 billion, representing year-over-year increases of 14.5% and 41.5%, respectively. This consistent growth has given management confidence to initiate a dividend, which currently yields 0.53%.

But what really sets Alphabet apart is its balance sheet. With a net cash position of $88.9 billion, the company has plenty of room to return capital to shareholders through share repurchases. Management has already initiated a $70 billion share repurchase program, which will continue to prioritize this method for its shareholders in the foreseeable future.

Caterpillar, on the other hand, is a dividend stalwart with a 30-plus year history of increasing its payouts. The company's dividend currently yields 1.7%, and with a payout ratio of 23.7%, investors can reasonably expect management to continue its impressive dividend hike streak in the coming years.

Another factor that sets Caterpillar apart is its focus on innovation. The company is investing heavily in its digital transformation, and has made significant strides in its autonomous equipment offerings. This shift towards precision agriculture and autonomous construction equipment will not only drive growth, but also provide a higher margin.

While both companies appear to be undervalued, there are still concerns that investors need to consider. Alphabet's competitor, Microsoft, has made significant strides in the AI space, and some argue that Alphabet is falling behind. Caterpillar's revenue has been impacted by higher interest rates, and some investors are waiting for rates to ease to get excited about the stock again.

Double Down on Dividends: Why Alphabet and Caterpillar are Smart Buys for Your Portfolio

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