10 Dividend Growth Stocks You Can Count On
What should investors prioritize in dividend growth stocks? A history of aggressive payout expansion, and the ability to generate enough cash to keep the hikes coming.
The unprecedented pandemic of the past year upended financial markets – at least for a couple months. But while the 2020 bear market was the shortest in history, it was long enough to cause lasting damage to income investors via reduced or outright suspended dividend payments.
However, this same environment acted as a proving ground for dividend growth stocks. Companies that were able to not just maintain their payouts, but announce dividend increases, across the pandemic demonstrated a high level of fiscal soundness that bodes well now that the world is starting to return to normal.
Generally speaking, dividend growth stocks offer investors a number of benefits. Unlike bonds that have a set fixed principal and interest payment, dividend growers can provide a higher baseline of income year after year. That cash can be used to reinvest in more shares, open other positions or just collected and spent.
And simply by virtue of being stocks, dividend growth picks typically have more potential than bonds for price appreciation.
Where should investors look for steadily increasing payouts? We've tracked down a number of dividend growth stocks that have upped the ante, at minimum, by 7% annually over the past five years. We've also selected stocks across a broad number of industries for those that want to keep sector diversification in mind.
Here are 10 noteworthy dividend growth stocks that should be on every investor's radar.
Data is as of May 2. Stocks are listed in order of increasing five-year-average dividend growth. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
- Market value: $11.2 billion
- Industry: Insurance brokers
- Dividend yield: 1.9%
- Five-year average dividend growth: 7.1%
- Payout ratio: 73.8%
Many dividend growth stocks tend to be household names, but not Erie Indemnity (ERIE, $214.02). Erie Indemnity offers insurance sales, underwriting and policy issuance in 12 states and Washington D.C. With a market cap of nearly $12 billion, it's technically a large-cap company, but it's on the smaller end.
Despite that size, it's still a worthy buy for any income-oriented portfolio. As an insurance company, it's the kind of financial play that might not attract the attention of a big bank, but can be hugely profitable over time.
Investing in insurance companies has been a proven way to success. Just ask Warren Buffett. While Buffett's stock holdings are light on insurers, don't forget that Berkshire Hathaway (BRK.B) subsidiaries include the likes of well-known Geico and reinsurer General Re.
"Even if a market is saturated, some of these (insurance companies) can post strong earnings growth that allow them to buy back stock and grow dividends aggressively, even if you're only growing at GDP type growth rates," says Jeremy Bryan, portfolio manager at Gradient Investments.
That's the case with Erie. Earnings and revenue grew by low double-digits in 2020. And looking back at the past five years, earnings have grown by 11% annually, while revenues have expanded by 19% annually. In other words, Erie is delivering solid growth in a mature, heavily regulated industry.
That financial performance has allowed Erie to grow its payout by about 7% annually over the past five years. The company also has a buyback program, but paused it for liquidity reasons during the first nine months of 2020. And when the economic outlook improved late last year, ERIE didn't just upgrade its regular payout (by 7.3%) – it offered up a special dividend of $2.00 per share, equivalent to roughly two quarters' worth of extra payouts.
- Market value: $22.6 billion
- Industry: Household and personal products
- Dividend yield: 2.4%
- Five-year average dividend growth: 7.6%
- Payout ratio: 46.4%
Clorox (CLX, $182.50) was a familiar name and a strong performer at the outset of the pandemic, as its germ and virus-killing products flew off the shelves. But shares have lost nearly a quarter of their value since August, bringing them back to right around pre-pandemic levels.
"Clorox got expensive due to COVID. Before then, it was a sleepy company. Suddenly, everyone got paranoid about germs," says Sean O'Hara, president of Pacer ETFs. "That's people speculating on the overall earnings."
However, now that CLX is starting to trade at more normalized levels – its forward price-to-earnings (P/E) ratio is on par with the S&P 500 – investors might once again consider this stalwart among dividend growth stocks.
While Clorox is best known for its virus-killing bleach, that just scratches the surface of the company's offerings. Its vast line of household products include Pine-Sol, Liquid-Plumr and the Green Works brand. The company also offers food products under the Hidden Valley name, as well as vitamins, minerals and supplements. Its other consumer brands include Kingsford charcoal, Glad wraps and Fresh Step and Scoop Away cat litter products.
This broad basket of strong consumer brands across multiple industries makes for a company that's been able to increase its dividend at a relatively high rate (7.6%) over the past five years.
Thus, while the current yield of 2.3% isn't massive, continued rapid dividend growth should keep it growing well past the rate of inflation and ensure a much higher "yield on cost" for shareholders.
Clorox currently pays out less than half of its profits as earnings, so CLX has plenty of headroom to keep growing its dividend.
- Market value: $176.5 billion
- Industry: Fast-food restaurants
- Dividend yield: 2.2%
- Five-year average dividend growth: 7.7%
- Payout ratio: 81.8%
While the restaurant industry shut down last year, fast-food chains were able to stay open thanks to their existing drive-thru capability and enhanced delivery options. The granddaddy of fast-food chains McDonald's (MCD, $236.08) saw a sharp rebound in shares following the pandemic selloff in March.
"There's nothing wrong with McDonald's," says O'Hara, but adds that "they're (currently) struggling with the other side of the Covid trade."
That's certainly true. Despite being open, fast-food traffic is down, possibly as more consumers have been cooking at home. Revenue at McDonald's dropped 9% last year and earnings slid 24%. MCD shares themselves have underperformed over the past year, too, up 26% to the S&P 500's 44%.
Nevertheless, Wall Street is high on MCD's prospects going forward. The stock currently boasts 21 Strong Buy ratings and another seven Buys compared to just nine Holds and no Sell ratings of any kind, according to S&P Global Market Intelligence.
Among MCD's appeals is being among the dividend growth stocks in the S&P 500 Dividend Aristocrats, boasting more than four decades of consistent payout growth. Its average annual dividend growth rate over the past five years is 7.7%. While it does pay out nearly 80% of earnings to sustain the dividend, an earnings rebound in 2021 should bring that number back down.
- Market value: $43.2 billion
- Industry: Restaurant supplies
- Dividend yield: 2.1%
- Five-year average dividend growth: 7.7%
- Payout ratio: N/A
Restaurant supplier Sysco (SYY, $84.73) sounds like the kind of company that was knocked down heavily by the pandemic – and indeed, it was. In fact, it still is. Shares dropped by as much as 65% in the 2020 downturn, and they still remain a couple percent from pre-pandemic levels.
That said, analysts view SYY as a solid recovery play.
"SYY is very well positioned, in our view, to capitalize on the recovery taking place in restaurants," says CFRA analyst Arun Sundaram, who rates the stock at Buy. "SYY has been investing in its customers, employees, working capital and technology in anticipation of a recovery later this spring and summer once more people are fully vaccinated. Many smaller, privately held competitors don't necessarily have this advantage … due to liquidity constraints or the risks involved with spending before an actual recovery occurs."
Like many of the dividend growth stocks on this list, SYY has a modest dividend yield (2.1%) but a strong compounded growth rate that means much better yields on cost for longer-term investors. Specifically, Sysco has boosted its payout by 7.7% annually over the past five years. That reflects Sysco's relative dominance in the restaurant supply industry.
Sysco is, like many of the picks on this list, a Dividend Aristocrat, though it's currently the one at the greatest risk of losing its title. SYY's payout hasn't grown since the start of 2020 – if it doesn't raise the payout even marginally by the end of the year, it would be disqualified from the Aristocrats.
That having been said, the financial restraints holding back Sysco's dividend growth appear to be temporary. A pandemic-affected earnings drop brought Sysco's payout ratio to 90% of earnings last fiscal year, and it's expected to earn just $1.35 per share this fiscal year while having to pay out $1.80 per share in dividends at current levels. But if it can hold out long enough, dividend safety should look much better, as earnings are expected to shoot up to $3.17 per share in 2022.
"High payout ratios are something to be cognizant of," says Wayne Breisch, managing director and portfolio manager at Logan Capital. "It can create a situation where you have less flexibility if there's a period of market stress."
- Market value: $15.2 billion
- Industry: Asset management
- Dividend yield: 3.7%
- Five-year average dividend growth: 9.2%
- Payout ratio: 71.8%
Financial stocks can be a source of dividend growth, though they do have a few sector-specific difficulties to deal with. For instance, many larger banks face Federal Reserve scrutiny on dividend and buyback spending. Simply appraising their ability to reliably pay dividends is a little more difficult, too.
"We eliminate all financials as they're hard to view on a free cash flow basis," adds Pacer ETFs' O'Hara.
Bryan offers a counterpoint, "Financials are now attractive," he says. "They didn't cut their dividends, and after 2008-2009, they faced increased regulations. They're also the healthiest they've ever been. Their yields are likely to grow over time, as interest rates remain low."
What's an investor to do?
One way is to split the difference and focus on nonbank financials with a strong track record of dividend growth. With a 9.2% compounded dividend growth rate over the past five years, Franklin Resources (BEN, $30.00) would appear to qualify.
Franklin Resources is an asset management company that primarily operates under the Franklin Templeton Investments brand. It currently boasts $1.5 trillion in assets under management, and boasts 1,300 investment professionals across the globe.
BEN shares, at 3.7%, boast one of the best yields among the dividend growth stocks on this list. That's more than double the 1.5% yield on the S&P 500 at present. With a payout ratio of nearly 72% of earnings, investors might want to expect more modest dividend growth going forward, but it still looks like a strong candidate to outpace inflation.
Air Products & Chemicals
- Market value: $63.8 billion
- Industry: Industrial gasses
- Dividend yield: 2.1%
- Five-year average dividend growth: 9.3%
- Payout ratio: 70.5%
Air Products and Chemicals (APD, $288.48) is a prime example of a mature company with slower growth potential that's nonetheless capable of expanding its margins and passing along those improvements to shareholders.
You wouldn't know it by the 2.1% yield. But that's just because share prices have grown rapidly, too. Indeed, over the past five years, APD has improved its dividend at an annual average of 9.3% – a time frame in which the share price has shot up by 114% to the S&P 500's 84%.
"You'll get more income over time from a fast dividend grower than a slow one. By a lot," says O'Hara.
While the company only experienced single-digit earnings growth in 2020, it still managed to improve its bottom line during the worst economic performance since the Great Depression. And despite being in the high-cost world of industrial production, the company managed to do so with a 21% profit margin.
The provider of industrial gases boasts a variety of customers across a number of industries. That diversification provides stability over time. The only complaint on APD at the moment is a high forward P/E of 32. But the overall trajectory of the company makes it a compelling story for those seeking out high-quality dividend growth stocks.
Automatic Data Processing
- Market value: $79.7 billion
- Industry: Staffing and employment services
- Dividend yield: 2.0%
- Five-year average dividend growth: 11.9%
- Payout ratio: 62.9%
Automatic Data Processing (ADP, $186.99) is a leading payroll processor that also provides other human resources services.
It's also a leading large-cap dividend growth stock, upping the ante by nearly 12% annually on average over the past half-decade.
The company's fiscal 2020, which ended in June, was a modest year of growth for the company. Net earnings rose by about 8% and revenue increased 3%, compared to a 22% jump in net earnings and 6% gain in revenue in fiscal 2019. The wild swings in employment rates likely impacted how many payrolls and other programs the company was able to offer its customers.
Nevertheless, the stock hit its pre-pandemic high in March of this year and has since surpassed it.
The company's payout ratio is a bit on the high end, at 63% of earnings. But a stronger job market in 2021 should help propel ADP's operations and thus its cushion for not just paying out the dividend, but expanding it for a 47th consecutive time later this year.
- Market value: $24.9 billion
- Industry: Packaged foods
- Dividend yield: 2.1%
- Five-year average dividend growth: 12.3%
- Payout ratio: 60.4%
Hormel (HRL, $46.20) – most popular for making Spam, but a provider of numerous other food brands including its namesake meats and chili, Dinty Moore stews and Skippy peanut butter – performed well during the pandemic but has since leveled off, roughly flat over the past 52 weeks.
Revenues only grew a modest 1.2% for its fiscal 2020 ended October, though the $9.6 billion it brought in was still a record. Net earnings, however, dropped 7.2%.
But the consumer staples mainstay managed to yet again boost its dividend, from 94 cents per share to 98 cents. Over the past five years, the payout has grown an average of 12.3% annually. A 60.4% payout ratio gives the company room for decent dividend growth over time, though better bottom-line results would certainly expand its ability to be more generous.
The secret to future returns comes down to its products and how they stack up. And Hormel boasts 35 brands that are either No. 1 or No. 2 in their categories.
"The products that dividend growth companies are bringing to the marketplace are also No. 1 or No. 2 in their industry," says Breisch. "Most of these companies are global and are able to go after opportunities no matter where they may be."
Illinois Tool Works
- Market value: $72.9 billion
- Industry: Specialty industrial machinery
- Dividend yield: 2.0%
- Five-year average dividend growth: 15.7%
- Payout ratio: 68.8%
Illinois Tool Works (ITW, $230.46), which supplies manufactured products and equipment worldwide to various industries, might not be a household name, but it's among the most well-known companies among people that build or repair anything for a living.
Its wide array of products allows ITW to benefit from specific trends as they ebb and flow. For instance, the company's metal fasteners and plastic components in its automotive segment can play to any growth in that space. Its construction division provides key materials for housing construction, a particularly booming market of the past year.
"It's a fruitful area as long as you understand it may be more cyclical," says Gradient Investments' Jeremy Bryan. "Most companies are conservative on their dividends, but the businesses can be cyclical."
Illinois Tool Works weathered 2020 with a relatively modest performance in terms of earnings and revenue. But as a leader in the sector, ITW managed to maintain a healthy 16.7% profit margin last year, even in spite of tame earnings and revenue growth.
The company's five-year compounded dividend growth rate is nearly 16%. ITW pays out more than two-thirds of its profits as dividends, however, so it will need solid earnings growth to keep up that rate.
- Market value: $141.7 billion
- Industry: Home improvement retailer
- Dividend yield: 1.2%
- Five-year average dividend growth: 16.5%
- Payout ratio: 31.0%
Home improvement retailer Lowe's (LOW, $196.25) boasts the highest rate of payout improvement on this list of dividend growth stocks. It has expanded its quarterly distribution by 16.5% annually – a rate that would see the dividend double every five years or so.
New money won't get much of a yield, at 1.2%. But continued dividend growth could inflate that yield over time – and given that Lowe's pays out just 31% of its earnings as dividends, the stock has oodles of potential on that front.
Lowe's business looks well-positioned at the moment. Pandemic trends have put a charge into the housing market, and put an increased emphasis on remote workers improving their environs, adding up to higher spending on home improvement.
"We own Lowe's. It's our #1 holding," says O'Hara. "It has the highest free cash flow in terms of dollars, so it gets the biggest weight."
"Classically, Home Depot has been where investors have gone for the dividend. But Lowe's is catching up," says Bryan, who adds that both stocks look like very high-quality names.