Dividends have played an essential role in investor returns over the years. Research from Hartford Funds indicates that 85% of the cumulative total return for the S&P 500 (^GSPC -0.22%) since 1960 is attributed to reinvested dividends and the impact of compounding. This historical context highlights why stocks that pay dividends remain a fundamental strategy for long-term investors looking for both capital growth and sustainable income.
However, not all dividend-paying companies are alike. Research consistently indicates that businesses that increase their dividends tend to outperform those that do not pay dividends or that maintain stagnant payouts. Data from Ned Davis Research shows that from 1973 to 2023, companies that grow their dividends delivered average annual returns of 10.2%, contrasting sharply with the 4.3% return of non-payers. Notably, these dividend growth stocks also achieved these high returns with significantly lower volatility.
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When searching for promising dividend growth stocks, special attention should be given to payout ratios. Companies with payout ratios under 75% generally have more financial flexibility, enabling them to sustain or increase dividends even in economic downturns. Let’s explore three standout dividend growth stocks that feature strong competitive positions along with conservative payout ratios, setting them up for future success irrespective of short-term market fluctuations.
A Warehouse Leader with Impressive Dividend Growth
Costco (COST -0.98%) operates a membership-based warehouse retail model that continues to flourish in a highly competitive retail environment. The company emphasizes delivering exceptional value through bulk purchasing, fostering a loyal customer base.
Costco’s fundamental business metrics remain robust, with U.S. and Canadian membership renewal rates consistently surpassing 90%. The company generates stable revenue from membership fees while keeping product margins thin to provide remarkable value.
While Costco’s 0.51% dividend yield might seem modest, its impressive 12.6% growth rate over the past decade highlights the strength of its shareholder return strategy. With a conservative 27% payout ratio, the company maintains flexibility to continue growing its dividends while also investing in store expansion and digital enhancements.
A Payment Processing Giant with Exceptional Dividend Growth
Visa (V -0.12%) operates one of the largest payment processing networks globally, benefiting from unmatched reach and acceptance. The company takes advantage of significant network effects that solidify its competitive edge as its user base grows.
Visa’s business model yields excellent margins and requires minimal capital to maintain its tech infrastructure, resulting in substantial free cash flow to support both business investments and shareholder rewards.
The company’s dividend performance highlights its dedication to shareholders, with an impressive 17.5% growth rate over the past decade leading the featured companies. A disciplined payout ratio of 21.7% indicates management’s careful approach in balancing reinvestment in the business with shareholder returns.
A Premium Payment Brand with Strong Customer Loyalty
American Express (AXP 0.04%) stands out for its integrated payment and lending model aimed at affluent consumers and businesses. The company’s premium brand and exclusive benefits have developed a dedicated customer base that appreciates its products.
American Express is continually expanding its merchant acceptance network while upholding its reputation for outstanding customer service. Its proprietary closed-loop network yields valuable data insights that enhance risk management and marketing efforts.
With a 1.24% dividend yield and a 10.7% growth rate over the last decade, American Express offers a solid mix of immediate income and growth potential. The company’s 20% payout ratio signifies considerable capacity for future dividend increases as it progresses with its growth strategy targeting younger consumers and small businesses.
American Express presents an enticing opportunity for dividend growth investors, as its premium business model, focus on affluent clients, and expanding merchant acceptance lay a strong foundation for ongoing dividend increases and share price growth in the future.
American Express is an advertising partner of Motley Fool Money. George Budwell holds positions in Costco Wholesale and Visa. The Motley Fool recommends and has positions in Costco Wholesale and Visa. The Motley Fool has a disclosure policy.
