With the Federal Reserve set to pause once again on interest rates, investors have been given freedom to buy high-yielding assets. Bonds to REITs have seen their stars shine over the last few months. However, investors may want to focus beyond just a large headline yield.
Truth be told, the best dividend stocks are those that have grown their payouts over time. And the proof is the pudding.
According to Ned Davis Research study, in the years 1972 and 2013, dividend growth stocks managed to post an average annual return of 10.07%. That bested the 9.28% return for the entire dividend paying universe and was higher the overall stock market average return as well.
Similarly, Hartford Fund’s research shows that dividends constituted 33% of S&P 500 monthly total return between 1926 and 2015.
Clearly dividend growth investing has been a powerful tool to build wealth. And investors should exploit this fact in the current environment. Having a high yield is good, but getting more income year in and year out is just that much better. And thanks to rising profits, lower corporate taxes and bulging balance sheets, there’s just that much more cash to go around.
Which firms make ideal dividend stocks with growing payouts to bet on? Here are three that make the cut.
Dividend Yield: 0.6%
Visa (NYSE:V) is a prime example of how a headline yield can be deceiving. At first glance, Visa’s 0.6% current dividend yield isn’t exactly something to write home about. That is, until you hear about Visa’s torrid pace of dividend growth.
Since its IPO in 2008, Visa has managed to grow its dividend by a whopping 1040.68%. No, that’s not a typo. That includes last years big 20% jump in its payout.
The reason for that kind of massive dividend growth is simple. Visa is simply a toll-road that throws off plenty of high margined cash flows.
While we may have a Visa card in our wallets or purses, Visa isn’t an issuer of credit itself. It operates a secured payment network that consumers, businesses, banks and merchants all use to move money around. Every time they do, Visa gets a fee. It’s a high margined business that throws tons of free cash flows.
Thanks to its huge moat, Visa is really one of the few games in town offering this service. As a result, it has been able to send plenty of cash back to investors. Adjusted free cash flows clocked in at more than $3.8 billion in the fiscal fourth quarter alone.
But Visa has other avenues for growth as well. New mobile payment operations and online digital wallets will help strengthen its position in the cashless society of the future. Meanwhile, its recent purchase of Plaid gives it a vital foothold in fintech and the world of digital financial services.
What it all means for investors is that Visa has plenty of growth left in the tank to make it a great buy among dividend stocks in spite of its small yield.
Dividend Yield: 2.21%
Maybe I’m biased because I live near Wendy’s (NYSE:WEN) corporate headquarters, but I happen to think they make the best traditional fast food burger. Turns out, I’m not alone.
Sales at WEN continue to rise and through the third quarter of 2019, the burger joint has already seen total sales jump by 3.5%. The key to that has been Wendy’s new updated menu, mobile apps, social media team and delivery partnership with Door Dash and Grubhub (NASDAQ:GRUB).
Those moves have once made Wendy’s a leader in the Burger Wars. Profitability is way up thanks to this new “1 More Visit, 1 More Dollar” strategic plan. The firm has plenty of avenues to keep the growth going such as its new breakfast menu, digital kiosks, and high margined bundled combo meals.
All of this has quietly made Wendy’s into one of the best dividend stocks out there. Over the last ten years, Wendy’s has been raising its payout. But thanks to its high margins and continued sales boost, the burger joint has kicked into high gear. Last year alone, WEN managed to raise its payout twice for a 41% total jump in its dividend.
With Wendy’s targeting sales growth of 4% to 5% per year and 50% payout ratio, investors will be able to see similar long-term growth in their dividend income from the stock. So while WEN’s current 2.21% is about average for the broader market, the power behind that payout is great.
Dividend Yield: 1.86%
Both Wendy’s and Visa’s dividend growth stories are relatively new. But there are plenty of dividend stocks that have been delivering the goods for decades. A prime example is medical device maker Medtronic (NYSE:MDT).
Since creating the first pacemaker back in the 1950s, MDT has continued to innovate across a wide variety of medical devices, therapies, and health needs. These days, the focus is on high margined and specialized devices. Glucose/Insulin pumps that use A.I., artificial hearts, spinal surgery gear, etc. Aside from providing bigger profits to Medtronic’s bottom line, these sorts of devices are outside the icy grasp of too much government regulation when it comes to price. It’s a smart move for both now and later.
In the now, it has made Medtronic a star dividend payer. The firm has been raising dividends for 42 years straight. This puts in elite company. Even better, over the last five years, those payouts have risen by around 12% annually. That’s some pretty impressive dividend growth.
With more focus on “tech-like” medical devices coming down the pike, management expects the growth to continue with 8% annual EPS growth targets for the next few years. That will certainly allow MDT to keep its pace of strong dividend growth going.
Once again, Medtronic is highlighting the fact that an initial high yield isn’t everything, especially over the long haul.
At the time of writing, Aaron Levitt did not hold a position in any stock mentioned.