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7 Dividend Growth Stocks to Buy, Including Disney

Double-digit annual dividend growth is a must-have

By Will Ashworth, InvestorPlace Contributor

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Source: Shutterstock

A funny thing happened between Aug. 16, 2012, when Apple (NASDAQ:AAPL) initiated a $2.65 quarterly dividend, its first since 1995, and today — Apple became a dividend stock.

Since the company paid that first dividend, Apple’s stock shot up 233% and its dividend has grown by 115%, an annualized growth rate of 14%.

A big reason Apple initiated its capital allocation program in the first place was to appease investors who felt its growth was slowing and it wasn’t returning enough money to shareholders through dividends and share repurchases. In December 2012, Bernstein Research analyst Toni Sacconaghi predicted Apple’s revenue would grow by 22% in fiscal 2013, followed by annual growth rates of 15% and 8% in the subsequent two years.

How much growth did it produce in that three-year stretch?

9.2% in 2013, 7.0% in 2014, and 27.8% in 2015. Interestingly, its actual overall growth and the analyst’s predictions were almost identical except the biggest year of growth got flipped from 2013 to 2015.

It’s fair to say that if you’re putting a list together of large-cap dividend growth stocks to buy now, other than Apple, these seven dividend stocks ought to be on the list.

Dividend Growth Stocks to Buy: Starbucks (SBUX)

starbucks stock
Source: Shutterstock

5-Year Dividend Growth Rate: 24%
5-Year Free Cash Flow Growth Rate: 24%

If you’ve been reading the company’s press clippings in recent months, you probably won’t put Starbucks (NASDAQ:SBUX) on a list of dividend growth stocks to buy, but that’s precisely what I’m going to do.

In June the company announced its long-term strategic plan, which includes returning $25 billion to shareholders by September 2020 through dividends and share repurchases. In addition, it announced that it was boosting its quarterly dividend payment by 20% to 36 cents a share.

“While certain demand headwinds are transitory, and some of our cost increases are appropriate investments for the future, our recent performance does not reflect the potential of our exceptional brand and is not acceptable,” CEO Kevin Johnson said at the time. “We must move faster to address the more rapidly changing preferences and needs of our customers.”

Starbucks, like all good businesses, slows down from time to time. Until things pick up again — which I’m confident they will — enjoy the 2.7% dividend yield.

Dividend Growth Stocks to Buy: Lowe’s (LOW)

A New Lowe’s Companies, Inc. CEO Could Be Just Enough of a Tweak
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5-Year Dividend Growth Rate: 21%
5-Year Free Cash Flow Growth Rate: 9%

I know what you’re thinking.

Why put Lowe’s (NYSE:LOW) on this kind of list when the more obvious choice would be Home Depot (NYSE:HD), who’s grown dividends and free cash flow by 25% and 12%, respectively, over the same period?

That’s a fair question. The answer: Lowe’s CEO Marvin Ellison.

Sure, the former Home Depot executive didn’t bring JCPenney (NYSE:JCP) back to its heyday, but I’m not sure anyone could have given the struggles department stores have experienced in recent years.

Back in familiar surroundings, I see Ellison taking the fight to Big Orange, and unless the economy drives off a cliff, there’s more than enough business for both home improvement retailers.

“Mr. Ellison is off to a fast start assembling a new senior executive team to organize the Lowe’s turnaround,” Ackman stated Aug. 9. “We look forward to watching him perform.”

Ackman’s investment returns are starting to turn positive. With a $1 billion bet on Lowe’s, I see them getting even better in the final months of 2018 and into 2019, thanks in large part to Ellison’s leadership since taking the top job in July.

Dividend Growth Stocks to Buy: Honeywell (HON)

5-Year Dividend Growth Rate: 12%
5-Year Free Cash Flow Growth Rate: 13%

Honeywell (NYSE:HON) is probably the dividend growth stock on my list I’m most skeptical about primarily because it’s so busy spinning off two of its operating segments that you have to wonder if management’s getting any real work done.

Last October, it announced that it would spin off two of its non-core businesses so that it could focus on its aerospace and performance materials and technologies operating segments.

“The strengths within these two segments will only shine brighter once the company spins out [Home and Building Technologies],” Deutsche Bank Securities analyst Nicole DeBlase wrote in a note to clients after Honeywell’s earnings were released in late July. “We like this name more and more as we get closer to the spinoff completion dates.”

Whenever a company announces a spinoff, often prompted by activist investors pushing for change, its stock gets an initial bump but then settles in until the spinoff is completed at which point both stocks often move higher.

In the case of Honeywell, once its two spinoffs are completed, it becomes an even better pure-play industrial stock.

Dividend Growth Stocks to Buy: Texas Instruments (TXN)

5-Year Dividend Growth Rate: 24%
5-Year Free Cash Flow Growth Rate: 10%

The good news at Texas Instruments (NASDAQ:TXN) is that its latest earnings — Q2 2018 saw revenues increase by 9% to $4.02 billion beating analyst estimates by $52 million while earnings grew 4.5% over last year, seven cents higher than the consensus — were better than expected, pushing its stock price higher.

The bad news is that its CEO, Brian Crutcher, was forced to resign in July a week before earnings due to violating the company’s code of conduct. In the role for only six months, after spending two decades at the company, it wasn’t great timing, but former CEO Richard Templeton has stepped back into the top job, a role he held for 14 years before becoming chairman.

Templeton is the person behind the company’s policy of returning all free cash flow to shareholders through dividends and stock repurchases. Although it’s unlikely that Crutcher would have deviated from that focus; he wasn’t in the job long enough to find out.

As semiconductor companies go, Texas Instruments is a stock that flies under the radar of a lot of investors. Delivering a five-year annualized total return of 25% through Aug. 14, TXN is a dividend growth stock you best not ignore.

Dividend Growth Stocks to Buy: Penske Automotive (PAG)

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5-Year Dividend Growth Rate: 22%
5-Year Free Cash Flow Growth Rate: 18%

It’s hard to believe that Roger Penske, founder, CEO, and owner of 41% of the Penske Automotive Group (NYSE:PAG), is 81 years old and still heading to the office each day — but he is, and that’s a testament to the man’s passion for cars.

Remember, before Penske became a billionaire businessman, he was a racecar driver in his 20s and then an owner of a racecar team that went on to win many Indy 500s, his latest win coming this past Memorial Day weekend.

“I hope I’m like him at his age,” said Simon Pagenaud, one of Team Penske’s racecar drivers in March. “I think he found a magic pill. When I ask him, ‘Are you going to take some rest?’ He says, ‘No. I’ve got to keep on going.’ He’s a force of nature.”

While Penske cares about racing, he’s equally committed to the employees of his business. Recently, the Automotive News named 24 Penske dealerships the best dealerships to work for in the U.S., a real testament to the man’s understanding of what makes a business successful: happy employees.

Penske’s always been a winner, his company continues to grow, and its 2.8% dividend yield isn’t hard to take either.

Dividend Growth Stocks to Buy: Packaging Corp. of America (PKG)

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5-Year Dividend Growth Rate: 20%
5-Year Free Cash Flow Growth Rate: 13%

Packaging isn’t a very sexy business, but sometimes the best dividend growth stocks aren’t always the most obvious.

This is undoubtedly the case with Packaging Corp. of America (NYSE:PKG) who’s delivered a five-year annualized total return of 18% manufacturing corrugated and containerboard packaging as well as paper.

The paper part I don’t see because aren’t we supposed to be using less of it thanks to technology. However, with the growth of e-commerce, it’s easy to see how the corrugated packaging’s taken off — I’ve got a load of it to go out each week with the recycling.

Paying a dividend yield of 2.9% at the moment, PKG stock has taken a step back in 2018, down 9$ year to date through Aug. 15, giving investors an opportunity to buy on the dip.

On July 27, the company released its second-quarter earnings, and they were very healthy with revenue up 12% year over year to $1.77 billion with adjusted earnings up 37% to $2.08 a share, 11 cents higher than the consensus estimate.

As long as e-commerce continues to grow, PKG is a great way to play this secular trend.

Dividend Growth Stocks to Buy: Walt Disney (DIS)

The Walt Disney Company Has Become the New Battlefield Stock
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5-Year Dividend Growth Rate: 21%
5-Year Free Cash Flow Growth Rate: 16%

Naturally, the big headline news for Walt Disney (NYSE:DIS) is the acquisition of 21st Century Fox’s (NASDAQ:FOX) entertainment assets which it will use to compete with Netflix (NASDAQ:NFLX) for online streaming dominance.

Not everyone is convinced that Disney’s going to be successful.

“While Disney can squeeze theaters, squeeze producers, and even squeeze leagues selling broadcast rights, it lacks key assets for internet distribution,” InvestorPlace’s Dana Blankenhorn recently stated. “Rivals Comcast (NASDAQ:CMCSA) and AT&T (NYSE:T), which have their own programming assets, including movie studios, control the last mile of the internet.”

It’s true that the cable guys do hold the keys to the kingdom, but content still matters. With the Fox assets in the house, Disney towers over everyone else.

Should Disney’s direct-to-consumer plan include bundling all of its streaming assets — Hulu, ESPN+, and its new Disney-branded service coming in 2019 — I have no doubt that many consumers will opt for that kind of smaller package.

Disney might have missed analyst estimates in its third-quarter report but long-term the Disney brand will continue to deliver for shareholders as it always has. That said, the ride for DIS stock is going to be a little bumpier in the weeks and months ahead than Disney shareholders are typically accustomed.

Fasten your seatbelts.

As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2018/08/7-dividend-growth-stocks-to-buy-including-disney/.

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