5 Dividend Growth Stocks To Help You Sleep Like A Baby

One of the primary reasons for owning dividend-paying companies is that the dividends tend to grow steadily over time.

More importantly, these well-established companies that pay dividends typically increase their dividend payments from year to year.

Around 95% of my retirement portfolio is backed by businesses that grow their dividends, and of course, that’s the reason that I sleep well at night.

As I remind my son, who is becoming an income-oriented investor, stocks go up or down, and there’s never any guarantee they will increase in value. However, dividend stocks offer a partial return on investment that’s virtually guaranteed.

It’s very rare for dividend-paying companies to stop paying dividends, and what I love about these companies is that they’re highly disciplined to reward stakeholders.

Many investors fail to appreciate the significant impact dividends have on profits. From 1980 to 2019, 75% of the returns of the S&P 500 came from dividends.

This means the addition of dividend payments made up the majority of what investors have gotten in returns on investment as compared to what their returns would have been without dividend payments.

In this article I wanted to highlight a few of my favorite dividend stocks, that of course includes a few of my favorite REITs, as well as a few C-Corporations. As always, thanks for reading, and always remember,

“The safest dividend is the one that’s just been raised.”

Dividend Growth Stock #1 – American Tower (AMT)

When it comes to “dividend growth” stocks, investors do not usually think of REITs. However, American Tower is a very special REIT that you can put in the dividend growth category.

American Tower is the premiere cell tower REIT. They own, develop, and lease out space on their cell towers to telecommunication companies such as Verizon Communications (VZ), AT&T (T), and T-Mobile (TMUS).

In a time when these telecom giants battle over customers, why not own the infrastructure behind what makes those companies tick, which is exactly what American Tower does. As 5G continues to roll out both here and globally, there is plenty of growth available for a company like AMT.

AMT currently has a portfolio of ~223,000 communication sites.

5G has data speeds 4G could only ever dream of reaching, but the problem going from 4G to 5G is the range. 4G is expected to have a range of roughly 10 miles, but when it comes to 5G wavelengths, they only have a range of roughly 1,000 feet, less than 2% of the range of 4G. What this means is there is a greater need for more cell towers to support 5G.

AMT currently pays an annual dividend of $6.24, which equates to a dividend yield of 2.9%. The dividend is well covered with a low payout ratio of 54%, providing plenty of room for continued dividend growth.

Speaking of dividend growth, AMT has a five-year dividend growth rate of 18% and they have increased their dividend for 10 consecutive years and counting.

American Tower currently trades at an AFFO multiple of 21.3x and a forward AFFO multiple of just 20.5x. Over the past five years, shares have traded at an average AFFO multiple of 25.6x, indicating shares appear undervalued by a wide margin currently.

Dividend Growth Stock #2 – Prologis (PLD)

Since we are on the topic of REITs, why not include another special REIT that is not only blue-chip but also a company that continues to grow their dividend at a nice clip, and that REIT is Prologis.

Prologis is not only one of the largest REITs on the market today with a market cap of $106 billion, but they also are the premiere warehouse/industrial REIT as well. The company continues to expand their portfolio both organically and through acquisitions. In 2022, the company acquired Duke Realty for a value of $23 billion. The acquisition will add the following:

• 142 million square feet of fully operational logistics buildings in 19 major U.S. markets, including Southern California, New Jersey, South Florida, Chicago, Dallas and Atlanta
• 7 million square feet of buildings under development; approximately 17 million square feet of developable land
• Over 500 new customers

The company’s top customers include Amazon (AMZN), FedEx (FDX), and Home Depot (HD). Prologis has a portfolio that consists of more than 4,900 buildings with 1.0 billion square feet across the world.

Prologis shares have been hit hard in 2022, down 32% on the year, but that’s now providing a great opportunity for investors heading into 2023. Revenue continues to grow, and that is flowing into the expanding FFO and AFFO we continue to see.

The REIT pays an annual dividend of $3.16/share which is very safe with a low payout ratio of 61%. PLD has increased their dividend for nine consecutive years now and they have a five-year dividend growth rate of 12.4%.

In terms of valuation, shares of PLD currently trade at 24x next year’s AFFO estimates of $4.71. Over the past five years, shares have traded closer to 28.7x, meaning the current valuation is well below historical averages.

Dividend Growth Stock #3 – Lowe’s Companies (LOW)

Although the remainder of this list will consist of non-REITs, there will be no drop off in quality. This next company has a duopoly in the home improvement sector, and that company is Lowe’s Companies.

Lowe’s has lived in the shadow of Home Depot for a number of years, and for good reason. Home Depot has been far superior when it comes to results and efficiency with how the business has been run.

However, Lowe’s has closed the gap in recent years and that charge has been spearheaded by CEO Marvin Ellison, who had a former senior leadership role at Home Depot, meaning he knows exactly what made that company great. Mr. Ellison is now bringing those qualities and implementing them into Lowe’s and the results have been enormous.

Currently, shares of LOW have fallen 21% on the year, but over the past three years, shares have gained nearly 70% compared to HD gaining 45% over that same period.

The company is largely tied to the Real Estate sector, which is dealing with a struggling housing market at the moment and has caused Lowe’s to pullback to a very cheap valuation.

Home sales may be slowing with rising rates and a slowing economy, but for long-term minded investors this is a great opportunity in a dividend king. Lowe’s has increased their dividend for 61 consecutive years and they have a five-year dividend growth rate of 21%. The past two years, Lowe’s has increased the dividend 31% and 33%, respectively.

Given the pullback in the shares, Lowe’s currently trades at only 14.2x next year’s earnings. Over the past five years, shares have traded closer to 19.7x, suggesting shares are trading at a deep discount.

Dividend Growth Stock #4 – Tractor Supply (TSCO)

Tractor Supply Co (TSCO) is often compared to the likes of Home Depot and Lowe’s Companies, but in all reality, the company is very different from those two home improvement retailers.

TSCO tends to fly under the radar, but the company continues to grow at a strong clip. For those of you unaware, Tractor Supply Company operates as a rural lifestyle retailer within the United States.

The company offers a selection of merchandise, including equine, livestock, pet, and small animal products necessary for their health, care, growth, and containment.

The company also has hardware, truck, towing, and tool products; seasonal products, such as heating products, lawn and garden items, power equipment, gifts, and toys; work/recreational clothing and footwear; and maintenance products for agricultural and rural use.

So, there’s some crossover in a few departments, but the company locations are often found in rural America.

Looking at the chart below, you can see how the company has been able to grow topline revenues over the years. Over the past five years, TSCO has grown its topline revenue by 86%, and 2022 and 2023 are expected to continue the trend higher.

This is a great company because a lot of their primary products are in need even in a slowing economy. If results do in fact slow, investors can take solace in knowing they are receiving a fast growing dividend that is plenty safe.

Looking at the snapshot below from a recent earnings release, you can see that Livestock and Pet make up nearly 50% of company sales.

The company currently pays an annual dividend of $3.68/share, which equates to a dividend yield of 1.7%. The dividend is well covered by a low payout ratio of just 35%. Dividend growth has been superb as the company sports a five year dividend growth rate of 28%.

In terms of valuation, shares of Tractor Supply Co currently trade at 20.6x next year’s earnings, which are in-line with the company’s recent historical average.

Dividend Growth Stock #5 – Bank of America (BAC)

The final stock on our list is one of the largest bank institutions in the world and that is Bank of America. Bank of America shares have been under intense pressure in 2022 and more recently, as shares have fallen 30% on the year and nearly 15% in the month of December alone.

As the Federal Reserve continues to hike rates, investors are beginning to turn their focus more to when and not if a recession is going to take place. This has provided a great opportunity in one of the most well run banks around in terms of valuation.

I do believe a recession is likely in 2023, but at the same time the valuation on Bank of America already seems like shareholders are pricing that in as well.

The Fed still believes the US economy will bypass a recession and they have their sights set on a peak terminal rate of 5.1%, which is expected to be reached in 2023.

If we do not fall into a recession or fall into a moderate recession, Bank of America shares could be a great place to be invested, especially once the economic outcome becomes more clear. The company has ample reserves to withstand the slowdown.

Net Interest Income, or NII, which can be thought of as the difference between the interest they earn from loans and the interest they pay out for products like savings accounts, has grown as the fed has hiked rates.

However, as the Fed begins to slow the pace and eventually turn to rate cuts, which could be sooner if the US falls into a recession, the NII growth would halt as well, causing the bank to turn to other areas for continued growth.

Overall, as I mentioned, BAC is very well positioned and safe from a liquidity standpoint, and there are plenty of headwinds, but the question remains how much of that is priced in.

Before I get to the cheap valuation, let me first touch on the company’s dividend. BAC shares currently yield a dividend of 2.7% and the company has hiked their dividend for nine consecutive years now. BAC has a five-year dividend growth rate of 13%, also making it a great dividend growth stock. The company also has a low payout ratio of just 27%.

Now for valuation. Shares of BAC currently trade at just 8.7x next year’s earnings. That is assuming 19% EPS growth in 2023, but if we cut that growth to just 10%, BAC shares still only trade at 9.3x compared to a historical average of 13.8x, providing a great opportunity for long-term minded investors.

In Closing…

I wanted to thank you for reading my dividend growth article and I wish you the very best in 2023 and beyond.

A company that consistently increases its dividend payments over time is a clear indication of a company that is steadily creating profits and is less likely to lose its moat strength rating.

“The true investor will do better if he forgets about the stock market and pays attention to his dividend returns and to the operation results of his companies.” Ben Graham