Building a portfolio that can see you through retirement requires finding stocks that can not only enjoy capital appreciation but also income generation. The makes dividend growth stocks an important component of an investor’s long-term strategy.
Dividend growth investing has proved to be the best method of amassing generational wealth. It is better than buying bonds, gold, real estate — or even non-dividend-paying stocks! That’s because historically dividends have made up as much as 40% of the S&P 500‘s annual return going all the way back to 1930. It’s been an amazingly consistent track record that investors can use to their advantage.
What follows are three of the best growth stocks to buy for building a lifetime of riches.
Ulta Beauty (ULTA)
The first growth stock investors should consider buying is Ulta Beauty (NASDAQ:ULTA). The beauty products and personal care leader has a phenomenal track record of creating expanding shareholder value.
Over the past decade, Ulta has quadrupled in value with a 343% return for investors. And despite my highlighting the importance of finding dividend growth stocks to buy, the beauty care company actually does not pay a dividend. So why recommend it? Because I think it can and will pay one in the near future.
Ulta has a terrific decade-long history of sharply growing sales, profits and free cash flow (FCF) per share. At the same time it has reduced the number of shares outstanding and embarked on a pattern of reducing its debt. So far Ulta has been using its significant FCF generation to create a lean, financially sound business. But because FCF per share now exceeds $20 it is clear that Ulta Beauty can readily support paying a generous dividend to shareholders.
While the stock market crushed the stock over the past few months on concerns over a dicey economy impacting consumers, that is a transitory situation and the outlook over the next decade is quite healthy. With plans for expansion into Mexico, Ulta Beauty is a deeply discounted growth stock to buy.
S&P Global (SPGI)
S&P Global (NYSE:SPGI), on the other hand, is a dividend growth stock that should be high on your list. Arguably best known as the owner of numerous stock market indices, most notably the S&P 500, the financial information and analytics firm is poised for exceptional growth for the next 10 years and beyond.
The company has richly rewarded shareholders with a total return of more than 500% over the past decade. While the yield of under 1% is nothing to write home about, S&P Global regularly increases the payout every year. In 2013, it paid a dividend of $1.12 per share but with a compounded annual growth rate (CAGR) of 11.7%, the annualized payout is now $3.64 per share. More impressive, S&P Global has grown its FCF by a muscular 17.7% CAGR.
Because it has a low earnings-based payout ratio of 43% and an even lower 32% FCF payout ratio, the financial services firm has plenty of cash available to keep paying its dividend and raising the payout. The payout ratio indicates how much cash it is using after paying its bills to pay its dividend. Lower is better and S&P Global’s is well within the margin of safety.
Microsoft (MSFT)
The last growth stock to buy is tech titan Microsoft (NASDAQ:MSFT). Its 10-year track record of generating shareholder returns is unparalleled. Its total return over that time period is 1,150%, for a CAGR of over 29%. In comparison, the S&P 500 has returned less than 234%. That’s nearly a five-to-one outperformance by the software giant.
As is well-known by now, Microsoft has fully embraced artificial intelligence (AI) as its long-term growth strategy. Integrating the technology throughout its products and services has made Microsoft one of the premier AI stocks on the market. It even makes its own AI chip called Maia. Shares are up 35% over the past year as a result and yet it still trades at about 2x sales.
Despite this tremendous growth, Wall Street still sees more room to run. Analysts forecast earnings will grow 16% annually for the next five years. They may be underselling it. Microsoft’s cloud services business Azure is one of the fastest growing opportunities, making it essential to businesses moving their data to the cloud. It is the second biggest cloud business behind Amazon (NASDAQ:AMZN).
It’s dividend also yields less than 1% but it has grown the annualized payout from 97 cents a decade ago to $3.00 per share today. That’s a 10% CAGR with FCF growing more than 9% annually.
The past 10 years have been amazing for investors but the next 10 should see it only pad that lead.
On the date of publication, Rich Duprey did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.