[Editor’s note: This article is regularly updated to include the most relevant information available.]
People generally assume that a dividend stock has to have a high starting yield to generate lots of income. This is a mistaken assumption. In fact, you often earn more income over the long run buying a fast-growing company with a low starting dividend yield, than one with a large current yield but minimal growth prospects.
Think about capital allocation for a second. When a company has many ways to grow its business internally, it generally shouldn’t pay a huge dividend.
As shareholders, you get more value from the company opening more stores, factories and whatnot to grow the business. Frequently, by the time a company starts paying a huge dividend, it is a sign of a corporation getting up there in years; the company no longer has tons of vigor to keep expanding.
A mature company can pay large dividends for decades, but it won’t have jaw-dropping earnings and dividend upside any more.
Oftentimes, the best way to get a dividend yield is by buying a company as it is just starting to transition from all-out growth toward stable maturity. You get a company that has started to pay a dividend, but still has plenty of opportunities to reinvest in its business and keep earnings moving sharply higher.
Let’s start looking at these underappreciated dividend growth machines with arguably the last decade’s most iconic example.
Dividend Stocks: Apple (AAPL)
Dividend growth since 2009: Dividend payments began in 2012
Yield-on-cost for December 2009 purchase: 10.2%
Dividends received last decade if you invested $10,000 in December 2009: $5,605
Apple (NASDAQ:AAPL) is one of the last decade’s most impressive dividend stories. Apple had last paid a dividend way back in 1995. As the company’s fortunes faded, it had to suspend its dividend altogether during the lean years. After the turn of the century, the outlook started to improve with the iPod and subsequent new product launches.
For years, Apple piled up more profits and cash as iPhone sales exploded. In 2012, the company realized that it was running out of great new growth opportunities, and the company’s treasury was overflowing. So, after a 17-year drought, Apple kicked off paying a healthy sum out to shareholders once again.
They launched with a $1.51 per year dividend in 2012, and have steadily hiked it since then. Impressively, despite not starting a dividend payout until 2012, if you had invested $10,000 at the end of 2009, you’d have already gotten back $5,605 in dividends on your starting investment. The yield-on-cost — that is to say your annual yield on your starting investment — topped 10% as well.
Income investors that skipped AAPL stock a decade ago because it didn’t pay a dividend ended up missing one of the 2010’s best yield plays.
Dividend growth since 2009: 26.1% per year compounded
Yield-on-cost for December 2009 purchase: 5.5%
Dividends received last decade if you invested $10,000 in December 2009: $2,295
Credit card network giant Visa (NYSE:V) launched its initial public offering in 2008. Despite the inopportune timing, Visa stock has been a nearly instantaneous winner for its investors. But it didn’t initially appear to be much of a dividend-paying stock.
Visa paid just 11 cents per share in dividends in 2009; that calculated out to just a 0.5% dividend yield based on Visa’s then-$22 stock price.
Times have changed though. For one, Visa’s stock is up almost 10x over the past decade and now trades around $160. Visa’s dividend payments are up by a similar amount, with the annual payout jumping from 11 cents a year to $1.20 a year per share.
The company’s success comes from several factors. For one, it only has one true global competitor — Mastercard (NYSE:MA). Other rivals have failed to achieve the necessary scope to really compete.
Also, the purchase of Visa Europe a few years ago was a great move that provided more growth runway than investors had expected. Though disruption may eventually come from newer financial payment technologies, for now, Visa remains an unexpected dividend growth stock superstar.
Dividend growth since 2009: 13.3% per year compounded
Yield-on-cost for December 2009 purchase: 6.1%
Dividends received last decade if you invested $10,000 in December 2009: $3,402
Just over the past year or so, apparel giant Nike (NYSE:NKE) has started to get some attention as a leading dividend growth stock. The company is well-positioned internationally, as it has grown sales in China and other key emerging markets. This has helped Nike post double-digit EPS growth for years and has led to a sharply rising Nike stock price.
Long-time Nike stock owners will know that the company has been increasingly generous with its dividends as well. Like numerous stocks on this list, Nike never looked like much of a dividend payer, as its current annual yield is usually around 1%.
That’s right in line with where it is now — Nike pays 1.3% at the moment.
So how has Nike delivered such compelling dividend growth over the past decade? Simple: It compounds. By growing the dividend at more than 13% per year, a starting 1% yield quickly becomes so much more.
In fact, if you bought $10,000 of Nike stock a decade ago, you’re now getting $610 per year in income. Additionally, you’ve earned back more than a third of your starting investment in dividends cumulatively.
Let Nike be an example of the power of a fast-growing dividend to pile up plenty of wealth in just one decade.
Texas Instruments (TXN)
Dividend growth since 2009: 20.4% per year compounded
Yield-on-cost for December 2009 purchase: 13.8%
Dividends received last decade if you invested $10,000 in December 2009: $5,787
If you think of superstar tech stocks, Texas Instruments (NASDAQ:TXN) probably wouldn’t be the first name that comes to mind. But the Dallas-based firm has become a mega-successful semiconductor firm in its own right.
TXN stock has surged from less than $25 per share in 2009 to over $100 now. And it has managed tremendous dividend growth as well, as it has put up a compounded growth rate of more than 20% per year.
It has one of the most impressive dividend stories of America’s large-capitalization stocks, in fact. Had you bought $10,000 worth of Texas Instruments at the end of 2009, you’d have already received back nearly $6,000 today. On top of that, you’d be getting $1,380 dollar a year in dividends going forward off your initial $10,000, which makes for a whopping 14% yield on cost.
How has Texas Instruments managed this feat? It’s due to three separate mechanisms. For one, the company has matured and slowed down growth, instead ratcheting up its dividend payout ratio. It’s a classic example of the process I discussed at the top of this article where a company converts from aggressive expansion to a more balanced approach. Where it has grown, it has done so strategically, focusing on long-life semiconductor chips for applications such as sensors and automobiles where there is less competition than in other categories such as cell phones, CPUs or memory chips.
Finally, Texas Instruments has utilized fantastic capital allocation. The company was quick to take advantage of low interest rates, issuing billions in debt earlier this decade for interest rates of less than 2%. It used this to buy back stock, driving up EPS and allowing it to pay a much larger dividend on its remaining outstanding shares.
This combination of smart expansion and crafty financial dealings allowed Texas Instruments to be one of the decade’s top growth and income stocks.
Estee Lauder (EL)
Dividend growth since 2009: 19% per year compounded
Yield-on-cost for December 2009 purchase: 7.9%
Dividends received last decade if you invested $10,000 in December 2009: $4,218
Luxury cosmetics company Estee Lauder (NYSE:EL) checks a lot of the same boxes as Nike. Like Nike, Estee Lauder has enjoyed unmatched success in China, Hong Kong and other key Asian markets. Like Nike, EL is benefiting from a huge wave of global prosperity and rising consumer spending in almost every corner of the world. And like Nike, Estee Lauder benefits from international media.
Nike has its amazingly effective athlete endorsements to sell products. Meanwhile, Estee Lauder has tapped into Instagram culture to sell more makeup and cosmetics products than ever before.
While Nike is more of a household name for many investors, Estee Lauder has managed to top its consumer goods peer in dividend growth.
Impressively, Estee Lauder has put up 19% per year dividend growth, such that its generally low current dividend yield has exploded into an absolute income machine over the past decade. Shares purchased 10 years ago now pay nearly 8% per year, and an initial $10,000 investment has kicked out more than $4,200 in dividends already.
And the good times should keep on rolling, as Estee Lauder has numerous tailwinds at its back. The rise of global travel in particular is of great benefit, as Estee Lauder sells a remarkable amount of products in airport shops. It turns out people with spending money are eager to buy expensive products during their vacations.
And that, in turn, will put even more dividends in Estee Lauder shareholders’ pockets in coming years.
Hormel Foods (HRL)
Dividend growth since 2009: 16.9% per year compounded
Yield-on-cost for December 2009 purchase: 8.8%
Dividends received last decade if you invested $10,000 in December 2009: $5,057
Income investors tend to love the food and beverages sector. There are plenty of iconic American companies in this category, and many of them have paid rising dividends for decades on end. What’s less-known, however, is that the smaller, more dynamic food companies often top the bigger ones.
A beverage stock like Coca-Cola (NYSE:KO) is widely known and loved. No less, Warren Buffett is a huge fan. Yet KO stock delivered a rather ordinary decade of dividends. It grew its dividend at just 7% per year compounded, and offers a yield-on-cost of 6% if you bought in 2009.
Hormel Foods (NYSE:HRL), the maker of Spam, Skippy peanut butter, Wholly Guacamole and a wide range of other foods has easily topped staid giants like Coca-Cola.
Hormel grew its dividend by nearly 17% per year over the past decade, and investors that bought in 2009 are now getting a 9% annual dividend on their purchase. Impressively, anyone that bought then has now gotten back more than half their starting investment in dividends.
What’s the key to Hormel’s success? The company has tons of organic growth; it has more than tripled revenues and earnings this decade. That far eclipses most food and beverage rivals. Also, the company’s debt-free balance sheet means it doesn’t have to pay interest, freeing up more money for dividends.
Broadridge Financial (BR)
Dividend growth since 2009: 17.3% per year compounded
Yield-on-cost for December 2009 purchase: 8%
Dividends received last decade if you invested $10,000 in December 2009: $4,671
Broadridge Financial (NYSE:BR) is probably the least-known company on this list. Which goes to show that you can get fantastic dividend growth from smaller and less famous companies.
While Broadridge isn’t a household name, you’ve almost certainly used its services. That’s because the company dominates proxies, which is how corporations communicate with us shareholders. When you get mail or digital communications about annual meetings, shareholders votes or any other such matter, Broadridge is usually the service provider. The company provides additional financial services such as operating automatic dividend reinvestment plans (DRIP) for shareholders.
Maybe not the world’s most exciting business, but it is a vital one. Get anything wrong, and investors would be infuriated. So companies and brokerages have little incentive to switch service providers to save a tiny sum of money compared to the potential downside from dissatisfied customers. Meanwhile, the need for these functions continues regardless of how the economy is going; Broadridge’s earnings fell less than 5% even during the Great Recession.
The company’s indispensable services and strong cash flow have made it a champion dividend payer. It grew dividends more than 17% per year last decade, and is now paying out 8% per year of dividends on an initial 2009 investment. With the company now moving into software for wealth management services, investors should expect Broadridge’s latest expansion efforts to lead to even more income growth over the next decade.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, Ian owned TXN, EL, HRL and BR shares.