The stock market can be a complex field to manipulate if you want to make any money off of your investment. That’s why many individuals choose to invest in dividend growth stocks instead traditional varieties. The concept is simple; buy now, then hold to receive the payout.
Traditional growth investments require you to cross your fingers and hope that their value increases based on a company’s profits or growth. Dividends, the best ones, focus on payouts above all else as they deposit cash into your bank account regularly. Choose the right company, and your payout becomes larger every year.
Choosing the right dividends is essential to creating a steady income and diversifying your portfolio. This article will cover the basics of dividend investing for beginners, then dive into our favorite options on the market.
Understanding the Dividend
Dividend growth stocks break down into two categories; the yield and the payout ratio. Understanding the two is very simple. If you already have a diversified portfolio of dividends, feel free to skip to the next section.
The dividend yield is how much a company pays per stock. If you purchased a share of stock for $50 and they paid you an annual dividend of $2, then the yield would be 4%. All you have to do is divide the annual dividend by the current stock price to find this number.
The payout ratio is the total amount paid to shareholders relative to the net income of the company, or the percentage of their earnings they pay back to their investors. Looking at these two numbers can tell you how much you stand to earn each year as well as whether or not the company is worth investing in.
Jumping back to the hypothetical $50 share, let’s say the yield increases in a few years to 6%. That would mean you now earn $3 instead of $2 on each share owned. Owning just 25 shares of that one company means you’re making a steady $75 every year.
You can imagine how owning multiple shares of several companies could help pad your retirement fund or savings account. That’s why so many individuals choose dividend growth stocks. They provide stable, steadily increasing returns while remaining less volatile than traditional stocks thanks to the well-established companies that offer them.
How We Chose Our Ratings
Unlike most products, stocks cannot accurately rely on customer reviews or testimonies. It never hurts to hear a friend’s success with a particular dividend, but there’s more to it than a recommendation.
We started by looking at the brand for this list. The company had to be around for a minimum of 10 years and show a healthy dividend growth percentage during that time. While nothing in the stock market is set in stone, this shows that the company is not only established but continues to increase its payouts to investors.
Coinciding with the brand, a company needed to show potential for continued growth and development. You won’t find anything stagnant or depreciating here. The company also needed to commit to larger dividends in the future.
Next, we looked at the current yield. In general, most companies offer anywhere between 0.5% and 3.5% to investors. This provides a current base for what you can earn while helping to estimate what increases might occur as time goes on.
For instance, CVS currently pays a 2.8% yield. Given their 10-year dividend growth of 733%, there’s a high possibility that your yearly earnings will increase over time. That is, of course, combined with the companies 1 million patients per year and steady ties to the healthcare industry.
Taking all of this data into consideration, we pulled out the top 10 performers and created our rating system. We hope our hard work shines through and that you start reaping the benefits of a diversified dividends portfolio.
Top 10 Best Dividend Growth Stocks
Here they are, our favorite dividend growth stocks. We’ve ordered them from the best of the best to the least of the best using a five-star rating system.
CVS Health Corp. (NYSE: CVS)
Many people view CVS Pharmacy as just another drug store filling prescriptions and selling convenience goods. That couldn’t be further from the truth, though. Outside of its 9,000 plus retail locations, CVS also operates over 1,000 walk-in healthcare clinics and services roughly 1 million patients in its pharmacies each year. They also offer the heavy profit-making Medicare Part D prescription drug plan.
Their pharmacy benefit management solutions comprise nearly 60% of their total revenue, which only stands to increase with their rumored buyout of the diversified healthcare benefits company Aetna Inc. Their client base is also never-ending since we’ll all need prescription care as we grow older.
Unlike other industries, healthcare remains nearly immune to fluctuations in the economy. This provides investors with a stable stock that offers reliable dividend growth. Over the past ten years, their growth has been 733%. As of now, their yield stands at 2.8%.
Cisco Systems Inc. (NASDAQ: CSCO)
With 380% dividend growth in the past ten years and a current yield of 3%, Cisco Systems Inc. is an impressive stock to help diversify your portfolio while receiving a yearly payout. Unlike other companies on this list, they haven’t been paying out for ten years…at least not yet.
Their initial payout in 2011 was six cents per quarter. In 2017, investors saw that number rise to 29 cents a share. This tech giant has and continues to increase its yield, showing its commitment to that continuing trend.
Investors tend to overlook the tech sector altogether, but Cisco remains one of the most reliable and profitable across all industries. The business is money-smart, too, paying out less than half of its profits in dividends. That means they have financial room to grow and develop, potentially increasing your yield even further.
Home Depot Inc. (NYSE: HD)
Home Depot has dominated their industry for nearly four decades now, showing they can handle the rough seas of our economy. All the while, they’ve continued to provide powerful dividend growth to their investors (10-year: 295%). Their 2% yield isn’t as flashy as others, but the steady growth of a well-established company is worth holding on to.
While some argue that stores like Lowe’s and Home Depot can’t compete with online retailers, this company has proven that home maintenance stores aren’t going anywhere anytime soon. Their growing digital operations, expanding locations, and reliable branding shows that the company is only headed upwards in net profits.
Home Depot has increased its payout by 25% per year for the past 29 years. So, while 2% isn’t much to speak of currently, you know exactly how your yield will grow from one year to the next. That kind of stability is what dividend growth stocks are all about.
Texas Instruments Inc. (NASDAQ: TXN)
Texas Instruments develops processors and circuits using analog chips that have quickly become the backbone of today’s gadgets and gizmos. Their ability to produce a cheaper chip with the same reliability as more expensive counterparts is something other companies flock to when developing a product.
It’s reliable business relationships with electronic designers and manufacturers across the world makes it a safe investment, as does the 161% 10-year dividend growth. Texas Instruments operates semiconductor facilities in North America, Asia, Japan, and Europe. If that isn’t impressive enough, the company also serves multiple industries from industrial to automotive and personal electronics.
Their revenue stream is reliable, which has allowed TXN to pay out steadily increasing and uninterrupted dividends since 1962. As of now, the yield stands at 2%. Investors can also benefit from one-time hikes, like the 32% increase in 2016 celebrating their 13th consecutive year of more substantial dividends.
Starbucks (NASDAQ: SBUX)
Meta: Dividend growth stocks have given millions the chance to earn a passive income by investing in a company. The trick to netting the highest earning potential is in selecting the right companies from the start. That’s easier said than done, though, which is why we’ve pulled out the best stocks you can buy in 2018.
Starbucks did not start paying out to investors initially. Since 2010, however, their payments increased from 5 cents to 25 cents with the companies mindset of sharing profits in a more direct manner with its shareholders. That makes their 10-year dividend growth 500%. The current yield is 1.8%.
Whether you enjoy coffee or not, you already know that Starbucks is leading name in the industry. Their premium brand of coffee has made the brand a dominating force with reliable revenue, as well as reliable paydays for investors.
While Starbucks is the flagship name, the company also sells products under brands like Teavana and Seattle’s Best Coffee as well. Those multiple streams of revenue help the company to pay out larger amounts while keeping their ratio under 50%. Expected growth also happens to be in the double digits, which should net you a nice return.
Rating: 5 out of 5
6. Proctor & Gamble (NYSE: PG)
If you’re unsure of who this company is, then you might know them better by products like Tide, Bounty, Dawn, and Charmin. They are the king of consumer products, as well as a valuable asset to any dividends portfolio. Their stock yield is 3.1% as of this writing thanks to continual 60 years of increased payouts.
Those increases speak to the company’s strength, especially when so many others reduced or eliminated their payouts during the 2008-09 recession. With dozens of name brand lines we all use daily, it’s easy to see that Proctor & Gamble only stands to grow in the foreseeable future.
Rating: 5 out of 5
7. Lowe’s Companies Inc. (NYSE: LOW)
Home Depot’s main competitor, Lowe’s, offers much of the same regarding investments. They are committed to increasing dividends, have the same home improvement store strength in the market, and have weathered the tides of a fluctuating economy.
Their 10-year dividend growth stands at 412%, which is an impressive display of their commitment. The current yield is 1.8% after a 17% hike in 2017. The company holds 50 consecutive years of increases, making it a worthwhile investment regarding consistency.
Rating: 4 out of 5
8. Hormel Foods Corp (NYSE: HRL)
Hormel is another stable stock with a plethora of consumer products (namely processed meats) that provide the company a steady stream of income. They’ve increased their dividends for 50 consecutive years and adjust their increases for two 2-1 splits. That alone has helped their 10-year dividend growth reach 261%.
Hormel plays hard, often buying out giants in the industry such as Applegate. That adds to their already steady growth, making for a safer investment. As of now, the yield is 2%. Given their rate of growth, you can expect that to increase over time.
Rating: 4 out of 5
9. American States Water Co. (NYSE: AWR)
Utilities have long been a go-to choice for reliable and stable investments. American States Water Co. work in sewage and water infrastructure, which means they work to eliminate droughts or shortages in the Midwest. Given recent concerns towards those problems, the company stands to increase its yearly revenue in a big way.
As a company, they’ve increased their dividends annually for the past 62 years. 10-Year growth stands at 104%, while the yield remains at 1.8%. That shows that, while increases are minimal, your investment is as low-risk as they come.
Rating: 3 out of 5
10. Visa Inc. (NYSE: V)
As one of the core cashless-currency companies, Visa has long dominated the American market. That dominance is rapidly growing in both Asia and South America, too. The brand name is strong, their technology is reliable, and they rapidly adapt to new payment methods such as Square or Apple Pay.
While Visa isn’t going to vanish or decline in value anytime soon, that’s not the only thing that makes them worth investing in. Their 10-year dividend growth is an astonishing 625%, having increased about 25% each year over the past five years.
Unfortunately, the current yield is only 0.7%. If you do the math on the stock price, however, that isn’t a bad return. Add in estimated double-digit growth, and you have a solid choice for your dividend portfolio.
Rating: 3 out of 5
Choosing a stock is up to your interpretation of the market and best guess as to which options will help you see the largest returns. When it comes to dividends, however, your investments are safer than the rest of the market.
While there is no sure-fire way to tell what increases will occur or if a company can continue to grow for the next ten years, there are a few key elements to look for that can help you make an educated decision.
- Are the company’s payouts less than 50% of their yearly revenue?
- Are their 10-year dividend growth rates high?
- How have they weathered the pitfalls of the economy?
- Do they own multiple streams of revenue?
- Where do they stand amongst competitors in their industry?
- How do they adapt to a changing marketplace?
- Do they have growth potential?
- What is their current yield compared to last year’s?