Within the dividend stock portfolio, there is a case for finer diversification. First, there are blue-chip dividend stocks with stable cash flows and relatively muted dividend growth. Further, there are some of the best dividend growth stocks to buy that also trade at attractive valuations. This column focuses on the dividend growth stocks that are worth considering at current levels.

The first screening for some of the best dividend growth stocks is historical dividend growth CAGR. Further, these are companies where margin expansion and cash flow upside are likely to be robust. This will translate into healthy dividend growth coupled with potentially higher share repurchase.

I also believe that these dividend growth stocks trade at attractive valuations. In the next 24 months, total returns from a portfolio of these stocks can comfortably beat index returns. Let’s discuss the reasons to expect healthy dividend upside.

Lockheed Martin (LMT)

Lockheed Martin (NYSE:LMT) stock looks attractively valued at a forward price-to-earnings (P/E) ratio of 17. Further, LMT stock offers a dividend yield of 2.72% and I expect healthy dividend growth from this defense play.

To put things into perspective, Lockheed has increased dividends at a CAGR of 9.78% in the last 10 years. Given the fact that the backlog is swelling on the back of higher geopolitical tensions, I expect a similar CAGR in the coming years.

As of Q3 2023, Lockheed reported an order backlog of $156 billion. Domestic and international order intake has been robust and this sets the stage for sustained upside in free cash flows. For last year, Lockheed had guided for FCF of $6.2 billion. It’s likely that FCF will be similar or higher in 2024.

It’s worth noting that Lockheed is also on the forefront of innovation. This includes hypersonic solutions, directed energy, and next-generation space capabilities, among others. The innovation edge is likely to ensure that backlog growth remains stellar.

Merck (MRK)

Merck (NYSE:MRK) stock is another attractive name among the best dividend stocks to buy. In the last 10 years, dividend growth has been at a CAGR of 6%. However, over a period of five years, dividend growth has been at a CAGR of 9.3%. I expect a similar trend in the coming years.

One reason to be bullish on Merck is a strong product pipeline. Currently, the company has 80 programs in phase two and another 30 in the third phase.

It’s worth noting that since 2019, the company has invested $50 billion towards strategic business development. Recently, Merck acquired Harpoon Therapeutics (NASDAQ:HARP) for a consideration of $680 million. This will help in broadening the oncology pipeline. Overall, these investments will translate into sustained growth and cash flow upside.

I must add here that Merck is targeting operating margin expansion to 43% by 2025. This will translate into robust free cash flows and hence visibility for dividend growth.

Kinross Gold (KGC)

There is a strong case for gold going ballistic this year. The reasons include the possibility of multiple rate cuts and heightened geopolitical tensions. My view is underscored by the fact that central banks have been aggressively buying gold. A good proxy for gold investment is exposure to gold mining stocks and Kinross Gold (NYSE:KGC) looks attractive.

It’s worth noting that KGC stock is undervalued at a forward P/E ratio of 14.3. Further, the stock offers a dividend yield of 2% and I am bullish on healthy dividend growth as realized gold price increases.

As of Q3 2023, Kinross reported a liquidity buffer of $2 billion. Further, based on Q3 free cash flows, the company has an annualized FCF visibility of $500 million. It’s likely to be higher this year and strong fundamentals set the stage for dividend growth coupled with share buybacks. I also believe that Kinross will be pursuing opportunistic acquisitions considering the financial headroom.

On the date of publication, Faisal Humayun 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.