High-yield dividend stocks may be appealing, but when it comes to a long-term, income-based investing strategy, focusing on growth rather than the highest current yields may be the best way to go. After all, plenty of high-yielders can turn into dividend traps. In these situations, a dividend cut/suspension, and/or a worsening of fundamentals sends the stock lower. This outweighs cumulative dividends received.
In contrast, high-quality dividend growth stocks can provide steady payouts that increase over time, plus a stronger chance of long-term capital appreciation, as shares move higher in line with earnings growth. The emphasis here, of course, is high-quality. Plenty of companies can implement big dividend increases, only to scale back when their payout ratios get too high. Or, if the cyclical nature of their businesses makes further increases difficult.
As such, the best approach may be to focus on names with an existing long track record (at least ten years) of dividend growth, sustainable payouts (under 50% of earnings), all while offering some semblance of a yield (at least 1%). These seven dividend stocks meet our criteria. All possibly “dividend aristocrats” in the making, each one is currently raising their respective payouts by at least 10% annually.
Analog Devices (ADI)
Analog Devices (NASDAQ:ADI) makes semiconductors for the industrial and automotive sectors. While the chip industry is cyclical, and many names in the space pay small dividends, if any dividends at all, Analog has built an impressive record as a dividend growth stock.
The company has raised its dividends 19 years in a row. This means ADI stock is just six years away from becoming a dividend aristocrat. Paying out $3.44 per share in dividend annually (1.82% forward yield), ADI has increased this amount by an average of 11.4% over the past five years.
Given ADI’s payout ratio of 30.2%, it may be able to continue raising its payout at a double-digit pace. High uncertainty may loom over earnings this fiscal year (ending October 2023), but analysts expect steady earnings per share of at least $11 during FY2024 and FY2025. That leaves plenty of growth runway.
L3Harris Technologies (LHX)
L3Harris Technologies (NYSE:LHX) is an aerospace and defense company. Defense stocks can be a great defensive play for your portfolio. As I have discussed previously, a popular defense stock, Lockheed Martin (NYSE:LMT), is well-regarded for its dividend growth track record.
However, alongside LMT stock, LHX stock is a strong dividend growth play in this sector. Although LHX’s forward yield (2.26%) trails that of LMT (2.44%), L3Harris is one year closer to dividend aristocrat than its larger, better-known peer. That’s not all. The company has raised its payout by nearly 15% annually over the past five years.
LMT has only raised its payout by 8.71% annually. LHX also has a lower payout ratio (34.8%) compared to LMT (41.6%). Once completed, a pending merger with Aerojet Rocketdyne (NYSE:AJRD) could drive further dividend growth, as management has said the transaction will be accretive to earnings.
Moody’s Corporation (MCO)
Moody’s Corporation (NYSE:MCO) has Warren Buffett’s seal of approval, as it’s one of the largest holdings in Berkshire Hathaway’s (NYSE:BRK-A, NYSE:BRK-B) equity portfolio. However, at current prices, I can see why some investors may be hesitant about entering a position in the bond ratings firm’s shares.
MCO stock currently trades at a rich 32.6 times forward earnings. Yet while MCO may seem like a “wonderful business” that’s fully priced, not merely fairly priced, the opportunity for solid returns remains. Based on sell-side forecasts, future earnings growth may enable Moody’s to sustain and grow its valuation at a double-digit clip.
Not only that, total returns could be further boosted by MCO’s fast-growing dividend (forward yield of 1.01%). With a 13 years of dividend growth under its belt, the company has raised its payouts by around 12.7% annually over the past five years.
Back in Feb., InvestorPlace’s Josh Enomoto listed Snap-On (NYSE:SNA) as one of the best industrial dividend stocks. Taking a look at the tool and equipment maker’s dividend stats, it’s easy to see why.
With a forward dividend yield of 2.71%, SNA stock has a 13 year track record of dividend growth. Raising its payouts by an average of 14.72% annually, its payout ratio (around 35%) remains at a sustainable level. Besides providing the company with the ability to consistently raise its payout, Snap-On’s steady earnings growth over the past decade has resulted in solid price appreciation.
Shares are up nearly three-fold during this time frame. Yes, after experiencing a big earnings run-up during the pandemic era, future earnings/share price growth could come more gradually. Even so, this, coupled with SNA’s steady, growing dividend, may still be enough to produce solid returns from here.
S&P Global (SPGI)
S&P Global (NYSE:SPGI), which maintains equity indices like the S&P 500, as well as provides credit ratings, is a high-quality business with a deep economic moat. As such, it makes sense why this stock is a strong choice among dividend growth plays.
SPGI stock currently has a modest dividend (1.03%). However, with 16 years of dividend growth, annual dividend growth topping 16% over the past five years, and a payout ratio of just 29.7%, there is ample room for this payout to rise.
This is especially the case, when you consider forecasted earnings growth for S&P Global. Analysts expect the company’s bottom line to grow by 22% this year, 15.5% next year, and by another 14% the year after that. This alone points to further strong price appreciation, yet when you factor in the growing payouts, potential future returns are even stronger.
Tractor Supply Company (TSCO)
Speciality retailer Tractor Supply Company (NASDAQ:TSCO) is a “category killer” that’s likely not threatened by the likes of Amazon (NASDAQ:AMZN). A purveyor of farm equipment and other rural lifestyle merchandise, the company dominates in this retail niche.
With this comes a strong history of earnings growth, and in turn, dividend growth, for TSCO stock. At current prices, shares sport a forward yield of 1.75%. With a 12-year track record of raising its payouts, Tractor Supply’s annual dividend growth rate over the past five years comes in at a staggering 28.5%. Sure, after implementing big increases, dividend growth could decelerate.
But while the rate of future payout increases may slow down, TSCO will likely remain one of the best dividend growth stocks. With a 37.9% payout rate, coupled with further earnings growth, continuing to increase payouts by at least 10% is definitely within reach.
UnitedHealth Group (UNH)
In past coverage of UnitedHealth Group (NYSE:UNH), I have pointed out the many strengths with shares in this diversified health care company. The company’s recession-resistant nature, for one. In addition, the prospect of continued strong earnings growth, and of course, UNH’s track record with dividend growth.
UNH stock is another example of a dividend stock with an average-sized payout today (1.25%) that could grow leaps and bounds from here. Raising its payout 13 years in a row, payout growth for UnitedHealth Group over the past five years has been around 17.1% annually.
Again, like many of the aforementioned dividend growth stocks, high earnings growth, plus a possible increase in its payout ratio, could mean additional big dividend increases down the road. While not the sole reason to buy, UNH’s dividend further boosts the argument as to why it could be a strong core portfolio holding.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.