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A select group of stocks have consistently beaten the market for the last century. Known as “dividend growers,” these are companies that consistently raise their dividend payment every year.
Consider some of the best-performing stocks over the last 30 years, including Altria (NYSE: MO), ExxonMobil (NYSE: XOM) and McDonald’s (NYSE: MCD). They all share the common attribute of consistent dividend growth.
Look no further than McDonald’s as an example. In 1976, the fast-food restaurant chain initiated its first dividend at an annual rate of $0.10. At the time, McDonalds stock traded around $3.50. Some 37 years later, McDonalds dividend has grown to $2.52. Meanwhile, the stock has soared 2,695% (that’s no typo).
If you’re looking to really grow your investment income and capital gains, you don’t want to own McDonald’s. Instead, you need to own the next McDonald’s…
Today, I’ll recommend five dividend growth stocks that are poised to double their dividends within the next few years. This rapid dividend growth should result in impressive share price gains. Plus, the growing dividend means that income investors can expect bigger dividend payouts in the years ahead.
Dividend Growth Stock #1: Cisco Systems (Nasdaq: CSCO)
It’s been a rough decade for Cisco. The networking giant has had trouble adapting to increased competition, and shareholders have been punished. Over the last decade, the stock posted a loss of 6%. And the last five years haven’t been any better – an investment in the S&P 500 would have beaten Cisco stock by 3-to-1.
One small bright spot has been the company’s dividend, which was initiated in 2011. Since then, the quarterly dividend has tripled and Cisco stock offers a 3.5% yield.
Even with increased competition and weak sales, Cisco is in great financial shape. The company’s balance sheet is pristine, with $50.6 billion in cash and investments. That amount equals 45% of the entire market cap of the company. In addition to dividends, Cisco has been using cash to buy back stock. In late 2013, the board authorized another $15 billion for buybacks. Looking forward, a special dividend or substantial dividend hike could be on the horizon.
Dividend Growth Stock #2: CVS Caremark (NYSE: CVS)
CVS made headlines last month when the company announced that it would stop selling tobacco products. That move highlights the fact that CVS is a healthcare company, and not a tobacco shack. With 7,600 stores, CVS is the second-biggest drug store after Walgreen (NYSE: WGN). The company should benefit from Obamacare and demographic shifts including the aging of America.
On the dividend front, CVS hasn’t been very generous with its dividends. The current annual dividend of $1.10 translates into a 1.5% yield. But over the last three years, that dividend has grown 120%. It’s no coincidence that CVS shares have jumped by an identical amount (exactly 119.9%) over the last three-year period.
With a low dividend payout ratio of just 24%, there is plenty of room for CVS management to pay bigger dividends. Historically, CVS has spent $3 on share buybacks for every $1 on dividends. Another double of the dividend is very plausible over the next three or four years.
Dividend Growth Stock #3: Discover Financial Services (NYSE: DFS)
Visa (NYSE: V) and MasterCard (NYSE: MA) are the best-known credit card companies in the world. Both stocks have rewarded investors over the last five years, with Visa gaining 341% and MasterCard soaring 439%.
But the lesser-known Discover Financial Services may be the best bet for income investors who are also seeking growth. Like the bigger credit card companies, Discover hasn’t been generous with its dividend. But its 1.4% yield is double the dividend offered by Visa and MasterCard. And over the last five years, the stock has increased tenfold.
Last year, Discover upped its dividend by a handsome 43%. With a dividend payout ratio of just 12%, Discover could easily increase its dividend payout by another 50% in the next year. For investors who buy the stock today in the $50s, it’s easy to imagine a cost-basis dividend yield of more than 3% in just a few years.
Dividend Growth Stock #4: Ford (NYSE: F)
Motor City has been roaring back to life, with new vehicle sales in the U.S. topping 15 million units in 2013. At Ford, U.S. sales rose by a solid 11%. That was enough to raise the company’s profits by 26%.
After taking a dividend hiatus since 2006, Ford began paying a dividend again in 2012. Last year, the company doubled the dividend and now pays $0.50. With shares trading around $15, the stock yields a decent 3.2%.
Next year, Ford’s earnings per share are expected to soar more than 40% to nearly $2. That should allow Ford to generously increase its dividend payments. With a decent yield today, Ford offers investors a bet on the recovery of the American auto industry and the possibility of much bigger dividend checks.
Dividend Growth Stock #5: Qualcomm (Nasdaq: QCOM)
Qualcomm has a great business. The company makes chips that go inside smartphones from Apple (Nasdaq: AAPL), Samsung and others. Growth in the smartphone market has helped Qualcomm grow its sales by 126% over the last three years.
With a 1.9% dividend yield, many income investors overlook this stock. But that’s clearly a mistake. Over the last four years, Qualcomm doubled its dividend payout. With $31.6 billion in cash and investments on the balance sheet and no long-term debt, the company is in superb financial shape.
Qualcomm’s dividend payout ratio currently stands at just 33%. That – combined with the huge cash stash – means that the company could easily up its dividend payments.
*****
There are obviously no certainties in the world. But time and again, I’ve seen dividend growth stocks like these beat the market. Buying and holding dividend growth stocks isn’t sexy. But it is a simple strategy for building wealth by owning profitable companies that are committed to their shareholders.
What are your favorite dividend growth stocks? Send me an email at [email protected] I’ll share some of your top ideas with fellow Income & Prosperity readers next week.
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