Dividend investors would be wise to focus not just on a stock’s current yield but also on the long-term growth potential of its dividends. That’s because strong businesses that consistently raise their dividend payouts reward shareholders with a steadily rising income stream that essentially equates to a raise every year. And, well, who doesn’t like a raise?
But there are other reasons to value dividend growth so highly, and they’re well supported by research. For instance, a study by C. Thomas Howard published in Advisor Perspectives found that for every percentage point a stock’s yield rises, its annual return increases by 0.22 percentage points if it’s a large cap, 0.25 if it’s a mid cap, and 0.46 if it’s a small cap. Even better, Howard found that dividend-growing stocks outperformed dividend cutters by 10 percentage points per year from 1973 to 2010 and beat both flat- and no-dividend stocks. And the icing on the cake is that Howard showed that this outperformance came with a third less volatility. Higher returns, less volatility-induced stress, and a steadily growing income stream — what’s not to love?
With that in mind, here are five stocks that have grown their dividends significantly above the rate of inflation in the last year:
| Company | 1-Year Dividend Growth Rate |
|---|---|
| Colgate-Palmolive Company (NYSE:CL) | 7.6% |
| 3M Co (NYSE:MMM) | 7.5% |
| Johnson & Johnson (NYSE:JNJ) | 7.3% |
| Altria Group Inc (NYSE:MO) | 7.3% |
| The Procter & Gamble Company (NYSE:PG) | 7% |
Source: S&P Capital IQ.
More than just Post-it Notes and Scotch tape, 3M Co (NYSE:MMM) operates in areas that include health care, industrial, and transportation. This innovative global powerhouse currently sports a five-star rating in CAPS and is yielding 2.1%.
A vast and diverse health care giant, Johnson & Johnson (NYSE:JNJ) strives to help people get well through its consumer products, pharmaceuticals, and medical devices. J&J’s popular products include Tylenol, Listerine, Band-Aid, Neosporin, and Splenda, among many others. This Fool favorite currently has a four-star ranking on CAPS and offers investors a 2.9% yield.
As the parent company of Philip Morris USA, Altria Group Inc (NYSE:MO) controls much of the U.S. tobacco market with Marlboro, Parliament, and other brands. Fools have given Altria Group Inc (NYSE:MO) a four-star rating in CAPS and its stock is yielding a hefty 5%.
A leader in consumer goods, The Procter & Gamble Company (NYSE:PG) offers products for household care, beauty and grooming, and health and well-being. Some of The Procter & Gamble Company (NYSE:PG) ‘s billion-dollar brands include Gillette, Head & Shoulders, Bounty, Crest, Oral B, and Tide. This dominant consumer goods titan has a four-star CAPS rating and offers investors a growing 2.9% dividend.
The Foolish bottom line
Had you invested in these companies a year ago, you would have enjoyed total dividend increases of more than 7%. And, importantly, all of these companies grew their payout much faster than the rate of U.S. inflation during that time, thereby protecting (and growing) your purchasing power. But more important to investors today is to identify the companies that will grow their dividends substantially in the years ahead.
The article 5 Rock-Solid Stocks Growing Their Dividends Well Above Inflation originally appeared on Fool.com and is written by Joe Tenebruso.
Joe Tenebruso manages a Real-Money Portfolio for The Motley Fool and is an analyst on the Fool’s Stock Advisor and Supernova premium service teams. You can connect with him on Twitter @Tier1Investor. Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends 3M and Procter & Gamble. It recommends and owns shares of Johnson & Johnson.
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