As has been discussed previously, for long-term investors looking to build wealth and boost retirement income, stocks that have a proven history of rewarding shareholders via dividends could be a key investment strategy. Unlike growth investing though, where quick appreciation of a stock's value as the company expands profits is the goal, a dividend-growth investor’s main focus would be reliable and reliably increasing payouts so that the value of the dividend checks keeps growing every year.
The math on this is simple: suppose you bought a stock at $20 a share and in return receive a $1 annual dividend. The annual yield on your initial investment would be 5%. But if that payout is hiked by the company to $1.50 annually your yield—based on the cost of your $20 share purchase—is now 7.5%. If that annual payout continues to grow, reaching $2 a share your yield on cost would be a whopping 10%.
Because the right dividend growth investment could be a powerful way to improve your returns over time, we recommend investing in companies that have a history of offering regular dividend increases on a sustained basis. As a rule, these companies run mature and stable businesses whose management has a long-term philosophy that involves caring about the company's reputation and rewarding loyal investors.
Regular dividend payouts can also signal a lot about a company’s ability to predict its own future. It would look very unprofessional, not to mention damaging, for management to hike dividends only to then cut them after a few quarters because cash flows had collapsed.
Our picks for strong dividend growth stocks? The two below hit all the right parameters.
1. Home Depot
For example, Home Depot (NYSE:HD) is the largest home improvement retailer in the US. Shares of the stock, which closed yesterday at $169.82, are currently trading at the lower end of their 52 week range. And though its 2.44% dividend yield may not look too exciting, if you take into account the number of dividend hikes the company delivered during the past 10 years, the investment case changes.
Home Depot has paid dividends for the past 29 years, raising its payout by more than 350% over the last 10 years. Investors now get a quarterly dividend of $1.03 per share, up from $0.225 a a decade ago.
Plus, Home Depot is expanding digital sales which is helping propel strong growth momentum for the retailer. With a manageable dividend payout ratio below 50%, you can expect continued dividend growth as well.
2. Procter & Gamble
Consumer staple giant Procter & Gamble (NYSE:PG), is another example of a stock worth stashing in a buy-and-hold portfolio where it can sit quietly and earn growing payouts for an investor. P&G stock, which closed yesterday at $91.94 currently yields 3.1%. It has increased its payouts for 60 consecutive years, a track record few companies throughout the world can match.
This consistent dividend growth also shows how powerful the company’s cash-flow generation is. Its product portfolio, which includes such globally recognized brands as Pampers diapers, Tide laundry detergent, and Charmin toilet paper, is strong enough to sustain revenue growth through wars, recessions and market downturns. And its payout ratio of 67.67 is healthy enough to ensure a continued growing income stream to investors. Over the past decade, its annual payout has doubled to $2.87 per share.
Bottom Line
Buying dividend-growth stocks should be a critical component of your buy-and-hold investing strategy. Their steadily increasing payouts will help expand wealth while providing a hedge against economic uncertainty. In our view both Home Depot and Procter & Gamble fit the bill handsomely.