Simply chasing dividend yield will sorely disappoint investors. Very often stocks with the highest yields have something wrong with them. Generally, their stocks have been severely discounted, which sends their yields soaring.
Although dividend investing has proved to be one of the most successful strategies over time, smart investors understand growth, consistency and sustainability are key. Companies that initiate a dividend and increase them over time have outperformed every other class of stock on the market.
According to data from Ned Davis Research and the Hartford Funds, stocks that initiated a payout and then grew it over time generated annual average returns of more than 10% over the 50 years between 1973 and 2022. No other group of stocks was better. Indeed, stocks that didn’t pay a dividend returned less than 4%.
Below are three stocks with rising dividend payments that just hiked their payout by double-digit percentages.
Occidental Petroleum (OXY)
Oil giant Occidental Petroleum (NYSE:OXY) cut its dividend to a penny per share when the pandemic hit but soon returned to raising it again. And it’s done so by substantial amounts. Over the past three years, the dividend rose by a compound annual growth rate (CAGR) of 180%! The oil stock recently announced it would be hiking it again by 22% in April to 22 cents per share.
The dividend is still well below the 79 cent per share level it sat at prior to the cut but Occidental is making up for lost time.
The oil firm is a major player in the Permian basin. That was the primary reason Warren Buffett began buying the stock two years ago. It’s also why he hasn’t stopped purchasing shares. Berkshire Hathaway (NYSE:BRK-A)(NYSE:BRK-B) now owns over 248 million shares of OXY stock worth $15.2 billion.
Because fossil fuel demand won’t evaporate any time soon, and will likely increase for the next few decades, oil stocks like Occidental Petroleum have significant runway for future growth. Expect this Permian player to keep raising its dividend going forward.
Applied Materials (AMAT)
Applied Materials (NASDAQ:AMAT) is another company increasing its payout by double-digit rates. The semiconductor equipment maker just announced it is raising its payout to shareholders by 25%, payable in June. Shares recently hit an all-time high of $214 per share, but has given back a few dollars since.
News the U.S. Justice Department was criminally investigating the company rocked AMAT stock last November. It allegedly tried to evade restrictions on equipment exports to China. Last month Applied Materials revealed the probe had widened to other agencies, including the SEC. However, the stock has shrugged off worries and sent shares soaring.
It’s obviously an issue investors need to be mindful of, despite management dismissing the allegations as “old news.” Yet the highly diversified equipment maker is a good bellwether stock for the broader semiconductor industry. Last month’s earnings report indicated the long contraction in PC sales and smartphones may be winding down while the hot artificial intelligence (AI) trend continues growing at a robust pace.
There is no danger of Applied Materials cutting its dividend. With an earnings-based payout ratio of 14% and an FCF payout ratio under 13%, not only is the dividend well-supported but it has lots of room for future increases.
Domino’s (DPZ)
Hard to believe a simple pizzeria is turning into dividend royalty but Domino’s (NYSE:DPZ) is doing just that. The pizza shop has a 12-year track record of hiking its payout and has done so at a near-20% CAGR. It just announced it was raising the payout from $1.21 per share to $1.51 per share, a 24.8% increase.
Like Applied Materials, DPZ stock’s dividend is well covered. The FCF payout ratio is only 35% meaning there is plenty of money left over after paying the bills to support future increases. Domino’s is a stock that can help you develop an income stream that you could live off by reinvesting dividends.
Although the pizzeria is trading well below the all-time highs hit during the lockdown phase of the pandemic, the stock valued at 25 times next year’s earnings is still affordable. As a leading fast-food restaurant that is growing sales, profits and market share while a lot of other food establishments languish, the premium Domino’s charges is still worthwhile.
On the date of publication, Rich Duprey 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.
