History has taught us that dividend growth stocks are the absolute best way to grow both your income and wealth over time.
One such group of dividend stocks is known as the S&P 500 Dividend Aristocrats — S&P 500 companies that have increased their payouts for at least 25 consecutive years. Aristocrats have collectively outperformed the S&P 500 over time with less volatility.
Of course, to be able to pay secure and growing dividends, a company needs to have a strong competitive advantage that gives it good pricing power and allows it to generate strong free cash flow.
Today, we’re going to look at 10 great dividend growth stocks worth investigating. These are companies with strong businesses that consistently generate rivers of FCF that allow them to reward long-term dividend lovers. Each of these companies also scores well using our Dividend Safety Scores, which income investors can learn more about here.
Here they are, in order of free cash flow margin:
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: 4%
FCF margin: 22.7%
5-year annual dividend growth: 8%
Teva Pharmaceutical Industries Ltd is one of the world’s largest generic drug makers. Its fully integrated production capabilities make it one of the few generics makers that can replicate complex molecules and even biosimilars — one of the most promising sectors in the pharma industry.
Better yet, some short-term troubles — including a slower-than-anticipated integration of Allergan’s (AGN) generic drug division Actavis, which Teva recently bought for $40.5 billion — has resulted in lowered guidance and the market overreacting by selling off Teva’s shares to the tune of 45% in the past year.
This has created an appealing long-term buying opportunity.
Synergies from Actavis are expected to amount to $1.4 billion. Plus, Teva should achieve another $2 billion in ongoing cost cutting efforts set to boost the company’s already high FCF margin.
That should spell great news for dividend lovers, who already enjoy a generous and highly secure dividend. Better yet, with a low FCF payout ratio of just 31.2%, Teva has plenty of room to continue growing its payout at a solid clip as it continues its efforts to expand its market share in both developed and emerging markets.
Dividend yield: 3.5%
FCF margin: 25.3%
5-year annual dividend growth: 27%
Cisco Systems, Inc. is the world’s dominant enterprise telecom equipment provider, with a massive installed base that creates high switching costs and allows it to generate substantially more revenue per unit of equipment sold than rivals such as HP Inc. (HPQ).
And while the telecom industry is moving away from hardware and toward a cloud and software service based future, Cisco is investing heavily into these areas as well, and setting itself up to be a dominant provider in data centers, cloud computing, the internet of things and cyber security.
This has resulted in a steadily rising proportion of CSCO’s sales coming from high-margin recurring revenue streams. This should allow Cisco to offset the secular decline in its core hardware business.
In the meantime, aggressive cost cutting efforts have allowed Cisco to continue growing free cash flow, which combined with steady buybacks, has resulted in continued growth of FCF per share and a low payout ratio of just 40.3%.
That’s despite years of very fast dividend growth that is likely to continue for many more years, as Cisco transitions from a fast-growing tech stock to an excellent dividend growth core holding.
Dividend yield: 4.6%
FCF margin: 25.8%
5-year annual dividend growth: 8%
Philip Morris International Inc. holds all the international rights to sell dominant cigarette brands such as Marlboro, and this gives it a wide moat with plenty of pricing power to offset the gradual declines in cigarette volumes over time.
In fact, in the past year, PM was able to increase the price of its products by a very impressive 5%, resulting in constant currency EPS growth of 18%.
Better yet, Philip Morris is finding great success in its smokeless tobacco product, iQOS, in which tobacco is heated but not burned. That should provide PM with solid continued long-term growth potential as global consumers migrate away from cigarettes and towards electronic alternatives.
And with massive economies of scale, and ongoing cost cutting efforts Philip Morris International should be able to maintain its exceptional margins, including operating margins in the low to mid-40% range.
Combined with a low-capital-intensive business model, PM generates exceptional FCF per share that makes the current generous dividend not just highly secure, but likely to keep growing steadily in the years to come.
Philip Morris’ high yield makes it a favorite holding for investors living off dividends in retirement.
Dividend yield: 3.2%
FCF margin: 29.1%
5-year annual dividend growth: 20%
Recently Qualcomm, Inc. has suffered some regulatory setbacks regarding its IP royalty rights in South Korea and China. However, given its dominant position in both 3G and 4G telecom chip design, the company maintains a nice moat that should result in slow but steady, high-margin revenue growth in the coming years as global smartphone sales continue expanding.
Meanwhile, the recent acquisition of NXP Semiconductor represents an excellent long-term investment that should allow Qualcomm to become a dominant player in the fast-growing internet of things, as well as the automotive sector and secured payment industry.
In the meantime, Qualcomm’s growing river of free cash flow is being put to work on aggressive share buybacks (4.3% CAGR share reduction over the past five years), that combined with its low FCF payout ratio of 43.6% should allow QCOM to continue delivering solid double-digit dividend growth
QCOM isn’t just a solid core dividend growth stock. It’s likely to be a strong market beater in the coming decade.
Dividend yield: 2.7%
FCF margin: 29.5%
5-year annual dividend growth: 24%
Texas Instruments Incorporated is the world’s largest maker of analog chips, which allow electronics to measure real world conditions such as temperature, pressure and volume, and convert it into digital signals understood by computers.
Texas Instrument’s amazing FCF margin is courtesy of a truly sweet spot in its high-fragmented industry. The company’s strong IP and reputation for reliability give it strong pricing power. However, because analog chips are an integral component in most electronics, but also not that expensive in the first place, manufacturers don’t have much incentive to go with lower-priced, but less advanced competitors.
This allows TI to prolong the lifecycle of its chips, meaning it can amortize the cost of R&D over a longer time period, and boost margins. Since TXN has in recent years been able to buy worldwide manufacturing equipment from bankrupt rivals for pennies on the dollar, Texas Instruments has been able to generate margins and returns on capital that are 50% to 100% better than its rivals.
Those rich margins create strong cash flows. Management, in turn, aggressively returns cash to shareholders in the form of buybacks and dividends. But thanks to a low FCF payout ratio of 39.6%, TXN boasts a rock-solid dividend that is likely to continue growing at 10% for the next decade, generating impressive total returns of about 12% to 13%.
Dividend yield: 2.5%
FCF margin: 31.4%
5-year annual dividend growth: 17%
Under Satya Nadella, Microsoft Corporation has made great strides in becoming far more than just an old tech dinosaur that’s coasting along on the fading glory of its dominant position in PC operating systems.
Specifically, the company’s Azure cloud platform has secured a solid second place behind Amazon.com, Inc.’s (AMZN) Amazon Web Services offering. In the most recent quarter, it saw incredible 121% year-over-year revenue growth.
Better yet, Microsoft’s Office 365 subscription service is also doing very well, (54% growth). And its Dynamics and Cloud services businesses are also growing at a solid 13% clip.
Combined with its recent acquisition of LinkedIn, which potentially promises to become a free cash flow monster for the company, Microsoft has a solid cash growth runway ahead of it. And with a low FCF payout ratio of just 42.2%, MSFT’s very safe dividend should continue growing nicely in the coming years.
Thus, Microsoft should generate market-beating total returns — even at today’s near-record share prices.
Dividend yield: 1.3%
FCF margin: 38.3%
5-year annual dividend growth: 44%
The great financial crisis of 2008-09 nearly wiped out Bank of America Corp. However, under CEO Brian Moynihan, BofA has undergone one of the single greatest turnarounds in corporate American history.
Speculative and money losing divisions have been sold off, lending standards have been tightened to among the most conservative in the industry and management has shown a laser focus on creating a fortress-like balance sheet. So Bank of America might not be impervious to any future economic downturn, but it’s certainly far better shielded than most.
Best of all, BAC has delivered billions in cost cutting efforts that have allowed it to greatly increase both earnings and tangible book value per share despite the lowest interest rates in history. And with rates now heading higher, Bank of America has numerous tailwinds at its back to help power phenomenal EPS and dividend growth.
Specifically, management still has $3.3 billion in cost cutting planned. Meanwhile, Trump’s promised corporate tax cuts and bank deregulation should add $3.2 billion to the annual bottom line, and BofA could see $5.3 billion in additional profits per 100-basis-point increase in interest rates.
Bank of America could potentially see its dividend increase nearly 10-fold in just the next five years.
Dividend yield: 1.6%
FCF margin: 41.6%
5-year annual dividend growth: 27%
TD Ameritrade Holding Corp. is one of America’s largest discount brokers, but thanks to its relationship with Canadian banking giant Toronto-Dominion Bank (TD), it has a major competitive advantage.
That’s because the cash that its clients aren’t using at the moment can be used by Toronto-Dominion to provide low-cost funding via its deposit-insured account product. This means the brokerage gains access to interest-rate-sensitive bank-like revenue but doesn’t actually have to hold reserves against it.
In addition, TD Ameritrade’s 6.5 million clients are typically above-average in trading volume (16 trades per year). When combined with the synergistic cost savings from its upcoming Scottrade acquisition (as well as rising profits from higher interest rates on its float), this should mean ongoing high-margin growth in the coming years.
Consistent share buybacks (1.5% CAGR over the past five years) support a rock-bottom 26.6% FCF payout ratio. So this discount broker has the capability to continue growing its dividend at a double-digit pace for as far as the eye can see.
Dividend yield: 3.6%
FCF margin: 46.6%
5-year annual dividend growth: 13%
Simon Property Group Inc. is America’s largest real estate investment trust (REIT) by market cap. Thanks to its exclusive focus on high end, and luxury malls, CEO David Simon has been able to not just survive the rise of online retail, but thrive despite it.
Specifically this industry veteran has been able to anchor the REIT’s properties, (located in North America, Europe, and Asia) with top end retailers and extract impressive annual rent increases while still maintaining an impressive 96.3% occupancy rate. Better yet, the company is able to invest new shareholder capital into highly profitable endeavors with cash yields as high as 10%, (excellent in today’s overheated real estate market).
And despite reporting strong 6.8% growth in funds from operations this year, Simon Property Group is trading at near its 52 week low, thanks to the market’s overreaction to rising interest rates. SPG boasts a highly secure dividend that’s nearly covered by its cash flow twice over. The company’s adjusted funds from operations (AFFO the REIT equivalent of free cash flow, and what funds the dividend) payout ratio of 61.1% is very low for a REIT. So, Simon Property Group is well on its way to delivering 6% to 7% dividend growth over the next decade.
Combined with its low volatility (beta of 0.62), Simon Property Group could easily achieve some of the best risk-adjusted total returns of any dividend growth stock in America (about 16.5%) over the next decade.