As a long-term dividend growth investor, I know that timing the market is a generally terrible idea. But investing in quality income growers with strong growth catalysts is always a good idea. In fact, many of the holdings in our Top 20 Dividend Stocks portfolio have solid long-term growth outlooks.
These dividend stocks aren’t just income-paying investments for the New Year, but they’re actually growing at an excellent clip, with each boasting multiple catalysts that are sure to drive share prices, and thus yields, further into the stratosphere.
Let’s take a look at 10 great long-term dividend growth stocks that have solid Dividend Safety Scores and could be good fits for building a diversified income portfolio.
These stocks not only pay dividends you can take to the bank, but they’re also setting up to outperform the broader market in 2017 and beyond.
Dividend Stocks to Buy: NetEase (NTES)
Dividend Yield: 1.3%
2017 Earnings Growth: 18.1%
NetEase Inc (ADR) (NASDAQ:NTES) is one of China’s most popular internet portals, operating in several rapidly growing sectors, such as online gaming, email and e-commerce. Considering the size of China’s population, and the decades long growth runway represented by hundreds of millions in the middle class going online and participating in its industry leading products, the growth case for NetEase is obvious. Yet, NTES stock trades at an undervalued 14 times forward earnings, less than half that of its industry peers.
With the company reporting 38% sales growth in its most recent quarter (higher than its 10-year sales growth of 30%), now could be a great time to buy into this classic “Growth At A Reasonable Price” or GARP dividend growth stock. This is especially true given management’s strong focus on investing in R&D to develop more games in house, which results in higher margins than when just licensing games from partners such as Activision Blizzard, Inc. (NASDAQ:ATVI).
And speaking of dividends, while the 1.3% yield isn’t exactly something to get excited about, the pace of dividend growth certainly is. While NetEase’s dividend history is still young, (it started paying a dividend in 2013), over the past three years the payout has grown at 33.2% CAGR.
Better yet, with a free cash flow, or FCF payout ratio of just 19%, NetEase’s dividend is not just safe, it’s growing aggressively. And that growth should last for many years to come.
Dividend Stocks to Buy: Bank of America (BAC)
Dividend Yield: 1.5%
2017 Earnings Growth: 8.2%
Bank of America Corp (NYSE:BAC) is the third largest U.S. megabank, and was nearly destroyed along with Citigroup Inc (NYSE:C) by terrible risk management during the financial crisis. Under the inspired leadership of new CEO Brian Moynihan, however, BofA has done a complete 180. It’s sold off risky and underperforming divisions, cutting costs by billions per year in the process.
Better yet, along with this conservative corporate culture, comes a fortress like balance sheet, which has so impressed banking regulators that they have signed off on Bank of America returning massive amounts of cash to shareholders. This includes a dividend that has grown 650% in the last two years, and is likely to continue soaring in the future.
That’s due to three likely growth catalysts. First, management continues to work hard to make the bank as lean as possible. In fact, Bank of America expects to cut costs by another $3 billion over the next two years. Second, Bank of America is better situated than any other bank when it comes to profiting from rising interest rates. For example, each 1% rates rise will mean $5.3 billion in additional net income, representing more than a 30% increase over the bank’s trailing 12-month profit. And thanks to President-elect Donald Trump’s call for fiscal stimulus in the form of massive tax cuts and up to $1 trillion in infrastructure spending, interest rates have already soared by over 50 basis points since Nov. 8 (learn more about Trump’s impact on dividend stocks here).
This is because the markets are pricing in the likely higher economic growth, as well as higher inflation such stimulus will likely cause. This, along with the Federal Reserve’s planned three rate hikes through the end of 2017, should really help turbocharge Bank of America’s profits. Finally, the potential for a repeal of certain onerous aspects to the Dodd-Frank banking regulations passed after the financial crisis has the potential to help Bank of America’s bottom line even more. Now, keep in mind that this doesn’t mean that management is suddenly going to return to the highly levered, casino gambling days of the past.
Mr. Moynihan’s dedication to solid, safe, core banking will see to that. However, the combined tailwinds of rising rates, lower regulatory costs, and a stronger economy (which will help increase loan demand, and keep default rates low), could make 2017 a banner year for most banks, but Bank Of America in particular.
Dividend Stocks to Buy: Starbucks (SBUX)
Dividend Yield: 1.7%
2017 Earnings Growth: 15.4%
Starbucks Corporation (NASDAQ:SBUX) is one of those blue-chip dividend growers that continues to fire on all cylinders, and yet the market has sent shares down about 9% over the past year. That’s despite the company reporting a record breaking year in sales, earnings and margins, including FCF/share that soared 30%.
This allowed the company to reward shareholders with a second straight year of 25% dividend growth, yet still lowering its forward FCF payout ratio to a highly secure 47%. And thanks to founder and CEO Howard Schultz’s visionary growth plans for the company, long-term dividend growth investors can likely expect many more years of similarly excellent results. In other words, Starbucks is hands down one of the best dividend growth stocks, and a true “buy and hold” stock.
The keys to Starbucks’ future growth stem from three things. First, management continues to focus strongly on innovation, both in terms of incorporating technology such as its massively successful loyalty rewards app, as well as partnerships with other tech innovators such as Uber. Second, the company continues to offer new, and higher-end concepts, such as Teavana and its new Roastery upscale stores, which serve as laboratories for new product ideas that can be rolled out across its more than 25,000 (and growing at around 10% a year) locations in 75 nations across the globe.
This combination of new products, and better customer service (via its app that allows customers to order online and pick up at the store, avoiding lines entirely), helps to improve customer satisfaction and drive some of the highest same store sales, or comps, growth in the industry. And Starbucks is expanding both its revenues and margins at double-digit rates through a combination of international expansion (doubling its China store count to 5,000 over the next five years) and via growth in its channel development segment.
This is Starbucks’ highly successful and fast growing push into sales of K-cups and premium coffees via grocery channels, and the gross margins are double that of its stores. Combined with a stronger emphasis on franchising future store openings, (which is a lower capital costing, and higher FCF margin business model), Starbucks should be able to continue boosting its FCF margin over time.
Add to this an accelerating rate of buybacks (due to the stock’s undervaluation), and you have the perfect formula for continued FCF/share growth that should allow exceptional dividend growth for decades to come. With shares now offering the highest dividend yield in the company’s history, today could be a great time to consider a position in this dominant coffee shop blue chip.
Dividend Stocks to Buy: Home Depot (HD)
Dividend Yield: 2.1%
2017 Earnings Growth: 13.1%
Home Depot Inc (NYSE:HD) is another name that everyone knows, and that has made countless long-term investors massively rich (see my thesis here). But what many don’t realize is that Home Depot has all the makings of a dividend growth champion, and true “buy and hold forever” core holding. The secret to the company’s ongoing success stems from three things. First, it has focused on building massive brand equity by becoming the one stop shop for all of a consumer’s home improvement needs, including best in industry customer service and educational outreach. This has allowed it to develop a wide moat with commensurate pricing power.
Thanks to its enormous economies of scale, however, and a corporate culture obsessed with innovation and efficiency, the company’s massive distribution network has been honed to an ultra-efficient edge allowing for incredible returns on invested capital (while still passing on savings to consumers to maintain market share and loyalty) of 19% over the past five years.
The second growth catalyst is Home Depot’s huge potential tailwinds from two big factors. First the U.S. housing market, though having turned a corner after the financial crisis, is still far from recovering, especially when it comes to new home construction. In other words, due to the shock of the Great Recession, many young people who would be starting households and buying new homes (thus increasing demand for new construction) are choosing to rent.
This has led to rent prices soaring far faster than inflation and — if the economy continues to recover in 2017 and 2018 — should eventually reverse itself as more prosperous millennials end up eventually starting new households and buying homes. In other words, the housing recovery is still early and represents a megatrend that could spur strong Home Depot sales growth for years to come. That’s especially true since the company recently purchased Interline in order to break into the $50 billion professional construction market, of which is has less than 5% market share.
Combined these two major factors (massive, and improving pricing power driving ever higher margins and a recovery in housing), with the company’s impressive capital return program, and you have the makings of continued market crushing total returns. Specifically, Home Depot has been one of the most aggressive share count reducers in the market, buying back 6.1% of shares annually for the past five years. This has helped to drive FCF/share growth of 22.8% CAGR since the great recession.
Better yet, management has shown itself committed to converting that FCF/share growth into some of the best dividend growth of any U.S. company. For example, Home Depot’s 20-year dividend growth has been an astonishing 22.6% CAGR. In recent years this has actually accelerated, with one- and three-year payout growth of 25.5% and 26.7%, respectively.
And with a FCF payout ratio over the past year in the mid-30% range, Home Depot still has a long dividend growth runway to help drive impressive income growth and market thumping total returns for many years to come.
Dividend Stocks to Buy: ADP (ADP)
Dividend Yield: 2.4%
2017 Earnings Growth: 11.2%
With more than 650,000 clients, Automatic Data Processing (NASDAQ:ADP) is America’s largest payroll servicer and benefits administrator. In other words, ADP is the largest, and often the most cost effective way of outsourcing many of a company’s HR needs. And since Automatic Data earns net interest income on the short-term cash it hold before paying out wages to a client’s employees (the equivalent of an insurance company’s float), ADP stands to benefit very handsomely from rising interest rates.
That’s because the business model requires it to invest its float into risk free bonds, ie U.S. Treasury bonds. As the yields on those bonds rise over time, ADP’s growing client base (due to a stronger job market) will mean exponentially more net interest income that will fall directly to the bottom line.
That in turn will mean strong growth in free cash flow for this dividend aristocrat, which combined with the company’s historic net buyback rate of 1.9%, should mean continued 7% to 8% dividend growth. Which should convert to long-term total returns of 9.5% to 10.5% and risk-adjusted total returns of about 12.7% CAGR.
Given that the market’s historical total return has been 9.1% CAGR since 1871, you can see that ADP represents a low-risk, blue-chip name that can still deliver very solid income growth and superior returns over time — especially in a rising interest rate environment.
Dividend Stocks to Buy: Prudential (PRU)
Dividend Yield: 2.8%
2017 Earnings Growth: 14.7%
Prudential Financial Inc (NYSE:PRU) is America’s second largest diversified insurance provider, with a presence in numerous countries. However, the majority of its sales come from offering annuities, life insurance, retirement planning and asset management services in the U.S. and Japan.
Like all insurance companies, Prudential invests its float (premiums paid upfront but not yet paid out as claims) into low-risk investments. In a low-rate environment such as we’ve had since the financial crisis this has resulted in a challenging growth environment.
Management has managed to do a good job growing through expanding its non-insurance product lines and disciplined acquisitions. In fact, sales have doubled since the financial crisis, and the gross margin is up 150%. Prudential has been a solid dividend grower, with 12.1% CAGR payout growth over the past decade. The most recent increase of 12.4%, along with a low payout ratio of 26% indicates that there is plenty of dividend growth runway left, especially thanks to two beneficial potential tailwinds.
First, rising interest rates, again a result of the Fed’s tightening policy and the likely Trump stimulus, would be immensely accretive to per-share earnings. Second, Trump’s transition team has indicated that it wants to roll back certain Dodd-Frank provisions, including those that specify which non-banking companies are considered Strategically Important Financial Institutions, or SIFIs.
Such regulatory changes, while not necessary to make a strong bullish case for Prudential, would certainly help boost overall profitability, due to lower minimum capital requirements that currently act as a competitive disadvantage for the company. Combined with management’s slow and steady dividend buyback policy, a gradual shift into higher growth international markets, Prudential should have no problem delivering double digit dividend growth for many years to come. That could result in strong 12% to 15% total returns, and perhaps much higher in 2017 and 2018 as the market may start to give shares a premium to tangible book value, rather than the current 25% discount.
Dividend Stocks to Buy: Shell Midstream Partners (SHLX)
Dividend Yield: 3.9%
2017 Earnings Growth: 22.2%
Shell Midstream Partners LP (NYSE:SHLX) is one of my favorite midstream Master Limited Partnerships, or MLPs. The specific investment opportunity is twofold. Shell Midstream’s business model is cash rich, and largely independent of oil prices. Royal Dutch Shell plc (ADR) (NYSE:RDS.A), which serves as sponsor, general partner and management for the MLP, sells it pipelines it needs to operate its business.
These assets come with long-term, fixed-fee contracts that ensure consistent and safe cash flow, backed by the third largest publicly traded oil company on earth. The cash flow is used to provide a fast growing distribution (tax deferred form of dividend), which is among the fastest growing in the industry; 31.5% CAGR since its IPO in early 2015 including the most recent quarterly payout hike of 28.8%.
Shell Midstream is one of those great, cash rich businesses with a long growth runway, but also comes with a potential extra capital gain kicker. In essence, thanks to surprise dividend cuts from pipeline operators such as Kinder Morgan Inc (NYSE:KMI), whose massive debt loads resulted in it having to divert distributable cash flow (what funds the payout), away from dividends and towards debt repayment, midstream MLPs usually trade along with oil prices.
Now the actual distribution safety isn’t affected by energy prices, and for MLPs like Shell Midstream with strong balance sheets, there is little risk to the distribution. However, should oil prices begin their inevitable, if highly unpredictable recovery in 2017 or 2018, then Shell Midstream’s unit price is likely to move higher.
Even if it doesn’t, its sponsor’s $3 billion in North America midstream infrastructure is more than enough growth runway to keep the highly secure payout (cash flow covers the distribution 1.4 fold, and anything above 1.1 is considered safe) growing at a quick clip.
Which makes the current unit price, with its near-4% yield, and a payout that’s likely to continue growing at 25% or so through 2020, one of the more interesting dividend growth opportunities available today, courtesy of the worst oil crash in more than 50 years.
Dividend Stocks to Buy: Phillips 66 Partners (PSXP)
Dividend Yield: 4.7%
2017 Earnings Growth: 38.3%
Like Shell Midstream Partners, Phillip 66 Partners LP (NYSE:PSXP) is a fast-growing midstream MLP that has been hammered by the collapse of energy prices, despite it having little effect on its cash flow. With Phillips 66 (NYSE:PSX), America’s largest independent refiner and one of Warren Buffett’s largest dividend stocks, acting as its general partner and sponsor, the MLP has meaningful growth runway ahead of it. That’s because Phillips 66 is making a giant push into diversifying its operations, with $20 billion in midstream investment planned over the next few years.
Thanks to the symbiotic relationship with its MLP, Phillips 66 can offset these investment costs by selling, or dropping down, these assets to Phillips 66 Partners. Each sale comes with long-term, fixed fee contracts with minimum volume commitments, guaranteeing the MLP excellent cash flow predictability and a highly secure payout.
And since Phillips 66 owns a majority position in Phillips 66 Partners, as well as the lucrative incentive distribution rights, it gets to keep a large cut of that cash flow, whose upfront investment cost is raised from debt and equity investors. Meanwhile the massive growth in cash rich assets means that the MLP’s distributable cash flow, or DCF ( MLP version of free cash flow) is growing like a weed, up 58% year-over-year in the most recent quarter.
With a forward yield of almost 5%, and a growth runway that will likely take a decade to journey down, even if oil prices don’t recover investors in Phillips 66 Partners are likely to do phenomenally well. However, since oil prices of $46 per barrel are unsustainable in the long-term, when energy prices do finally recover, likely in 2017 or 2018, Phillips 66 Partners is likely to get a major unit price boost as well.
Which makes this high-yield hyper growth (last payout increase was 24% YOY) midstream MLP, like Shell Midstream Partners, one of the potentially more appealing long-term income growth opportunities available in today’s market.
Dividend Stocks to Buy: Brookfield Infrastructure Partners (BIP)
Dividend Yield: 4.8%
2017 Earnings Growth: 56.3%
Brookfield Infrastructure Partners L.P. (NYSE:BIP) is the ultimate in diversified global utilities, owning 40 wide moat cash producing assets spanning six continents, including the following: 17,000 km of natural gas pipelines; 13,900 km of electrical transmission lines in North and South America; 2.6 million electrical and gas connections in the U.K.; 33 ports in North America, the U.K. and Europe; 7,000 cell towers, 5,000 km of fiber optic lines in France; 16 toll roads in South America and India; the largest coal port in Australia; and Australian and South America railroads.
The LP’s growth model is simple. Its sponsor, manager and general partner Brookfield Asset Management Inc (NYSE:BAM), which has over 115 years of experience and $250 billion in assets under management, finds it attractively priced global utility, or infrastructure assets to invest in, and BIP raises debt and equity capital from investors to take a stake in the deals.
In just the last quarter BIP closed on three deals totaling $660 million including two dozen Australian ports, Peruvian toll roads and North American gas storage assets. Management expects these investments to generate about 9% annual cash yields, making them highly accretive to adjusted funds from operations per share (what funds the fast growing distribution), which is up 10.5% year-to-date.
Better yet, with another $1.4 billion in new deals currently in the process of closing, and $2.3 billion in organic (existing asset) expansion projects planned, Brookfield Infrastructure Partners is well on its way to hitting its management’s long-term payout growth target of 7% per year, and generating annual total returns of 12% to 15%.
And thanks to its low AFFO payout ratio of just 71.6% YTD, and globally diversified cash flow that are 90% regulated, or supported by long-term contracts, investors can rest assured that Brookfield Infrastructure’s generous payout is reasonably secure.
Dividend Stocks to Buy: 8Point3 (CAFD)
Dividend Yield: 6.3%
Long-Term Earnings Growth: 30%
8Point3 Energy Partners LP (NASDAQ:CAFD) is a yieldCo (a pass-through entity structured like a REIT, BDC or MLP for tax reasons, that must pay out almost all its cash flow to investors as dividends) sponsored by First Solar, Inc. (NASDAQ:FSLR) and SunPower Corporation (NASDAQ:SPWR).
These are the two largest, and more importantly, among the few consistently profitable U.S. solar companies. Like an MLP, both companies finance large, utility scale solar projects, then once they have secured a 20-to-30 year power purchase agreement, or PPA, with some of the largest utilities in America, sell that project to 8Point3 to recoup the construction costs.
In exchange for raising the debt and equity capital to purchase these projects 8Point3 gains cash flow that’s practically guaranteed for decades. This is where the partnership’s cash available for distribution, or CAFD, comes from, and is the equivalent to a REIT’s AFFO, an MLP’s DCF, or a BDC’s NII. 8Point3’s goal is to grow its distribution by 12% to 15% per year, in the form of quarterly 3.5% payout increases.
There are two major bullish catalysts that make 8Point3 Energy Partners (named after how long it takes sunlight to reach earth) one of the more intriguing potential long-term utility investments.
First, thanks to the recent increase in long-term interest rates, as well as the election of a President that many fear will be hostile to the solar industry (possibly an overblown concern given that congress recently extended solar tax credits through 2019), this pure play solar utility has sold off over 20% since Aug. 1 and could be undervalued.
Second, the rise of solar power, both in the U.S. and internationally, (where First Solar and SunPower also operate), is one of the largest megatrends of the 21st century. This could provide a growth runway that is, for all intents and purposes, unlimited.
For example, currently 8Point3 Energy Partners has 637 MW of solar power generating capacity, with another 1,132 MW under construction which the yieldCo has the right of first offer from its sponsors. In other words, 8Point3, which has already increased its assets by 50% since IPO-ing, can potentially double its production capacity, and thus its CAFD over just the next two years. Even without acquiring any new assets, 8Point3 Partners has sufficient excess CAFD coverage (a distribution coverage ratio of 1.13) that it could effectively continue raising its distribution every quarter as planned through the end of 2017.
Of course in reality, the yieldCo, with its $450 million in available liquidity, is likely to continue growing at a sturdy pace. Especially given that First Solar and SunPower are working on 13.7 GW of solar projects (enough to grow its production capacity by 21.5 fold) that could theoretically be dropped down to the yieldCo. This is why 8Point3 Energy Partners could have a bright growth future.
As of this writing, Simply Safe Dividends was long ADP stock.