Income investors tend to focus on stocks with high dividend yields. This is understandable, as investors such as retirees need current income. But for long-term growth of dividend income, investors should not exclude lower-yielding stocks with high dividend growth rates.
In this article, we will discuss the prospects of three top dividend growth stocks. These stocks have low payout ratios and promising growth prospects. Plus, they can continue raising their dividends at a fast pace for many more years.
Starbucks Corporation (SBUX)
Starbucks (NASDAQ:SBUX) is a retail coffee giant with more than 36,000 stores worldwide. Nearly half of the stores are in the U.S. and about 20% of the stores are in China. The company operates under the namesake Starbucks brand but also holds the Teavana, Evolution Fresh and Ethos Water brands in its portfolio. The company generated $32 billion in annual revenue in fiscal 2022.
2023 has been another year of impressive growth for Starbucks. In the most recent fiscal quarter, Starbucks grew its comparable store sales 11% thanks to 12% growth in the U.S. and 7% growth in international markets. Same-store sales in China grew 3%, after having remained depressed for four consecutive quarters due to lockdowns.
Adjusted earnings per share (EPS) grew 25%, from 59 cents in the prior year’s quarter to 74 cents, and exceeded the analysts’ consensus by 9 cents. The headwinds from the lockdowns in China and high inflation have subsided. Starbucks reiterated its positive guidance for 2023, expecting EPS growth of 15%-20% at the low end of its long-term guidance.
Starbucks has put together an excellent operating record, growing EPS by 18% per year from 2010-2019. During that period, its net profit margin expanded from 5% to 13%, while the company-owned store count nearly doubled. The Covid-19 pandemic was a major setback, but Starbucks recovered strongly in 2021 with record earnings.
Looking further out, Starbucks has a strong growth trajectory available over the long term thanks to a growing U.S. and international store count, where the company is still in the early innings of expansion, coupled with pricing power. We are forecasting 13% annual EPS growth over the next five years.
Starbucks has increased its dividend for 12 consecutive years. Starbucks is currently offering a dividend yield of 2.1%. Thanks to its healthy payout ratio of 62%, its solid balance sheet and its promising growth prospects, the company is likely to keep raising its dividend for many more years.
Yum Brands (YUM)
Yum Brands (NYSE:YUM) owns the KFC, Pizza Hut, Taco Bell and The Habit restaurant chains. It is present in more than 155 countries and has more than 54,000 restaurants, 60% of which are located abroad. KFC generates about half of the total revenue and operating profit of the company.
In early May, Yum Brands reported financial results for the first quarter of 2023. The company grew its currency-neutral sales 11% over the prior year’s quarter thanks to 8% same-store sales growth and 3% growth of store count. KFC, Taco Bell and Pizza Hut grew their sales 11%, 12% and 10%, respectively. Digital sales rose to a new all-time high and exceeded 45% of total sales.
The strength of Yum’s company brands and their appeal to consumers constitute a significant competitive advantage. Thanks to its established brands, the company enjoys reliable free cash flows. As a result, the company is not likely to have issues servicing its debt. It is also worth noting that Yum Brands has proved markedly resilient during recessions, mostly thanks to its low-priced fast-food offerings.
Yum Brands has returned to strong growth thanks to its increasing store count and its same-store sales. The company expects to grow its store count by 4%-5% per year in the upcoming years. During the last five years, Yum Brands has grown EPS at an 8.8% average annual rate. We expect 10% annual EPS growth over the next five years, which will allow the company to increase dividends as well. With a 47% dividend payout ratio for this fiscal year, the dividend is highly safe. YUM stock yields 1.7%.
Baxter International (BAX)
Baxter International (NYSE:BAX) develops and sells a variety of healthcare products, including biological products, medical devices and connected care services devices used to monitor patients. Its products are used in hospitals, kidney dialysis centers, nursing homes, doctors’ offices and patients at home under physician supervision.
In the first quarter, revenue fell 1.6% to $3.65 billion, but this was $50 million more than expected. Adjusted EPS of 59 cents compared unfavorably to 93 cents in the prior year but was 6 cents ahead of estimates. Results were mostly positive for the quarter. Renal Care, the largest segment within the company, grew 4% despite lower in-center sales following the exit of a distribution agreement last year. Advanced Surgery improved 11% due to a higher number of global procedures. Pharmaceuticals was up 5%, driven by double-digit growth in injectables in the U.S. and higher demand for drug compounding services in international markets.
Baxter provided updated guidance for 2023 as well. The company now expects adjusted EPS in a range of $2.85 to $3 for the year, up from $2.75 to $2.95 previously.
Baxter has a solid dividend growth history. Over the past five years, dividends have grown at 10.6% annually. Baxter has increased dividend payments to shareholders for six consecutive years and paid dividends to shareholders for 32 consecutive years. Baxter has seen growth across its product lines and across its geographic segments over the past five years.
We maintain our five-year projected EPS growth rate of 10% due to the quality of the company as well as the low base of earnings that 2023 is expected to see. Over the next five years, we forecast that dividends will grow at about 10% annually, in line with EPS growth. The stock has a 2.6% current yield.
On the date of publication, Bob Ciura 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.
