Dividend growth stocks are among the best investments for creating lasting wealth in the stock market. With a history of reliable dividend increases, these dividend stocks provide investors with a steady income stream and, more often than not, capital appreciation. The twin growth engines can power a portfolio to market-beating returns.
Studies show that companies that initiate a dividend and grow the payout over time outperform all other stocks on the market. And why not? Dividend growth stocks have a successful track record of financial discipline and profitability. It allows their competent executives to exploit a competitive edge in their industry.
Yet a few dividend growth stocks excel beyond their peers. They exhibit above-average increases in their dividend and possess excellent growth potential. For investors looking to maximize their returns, the three dividend growth stocks below should be where you begin your journey.
UnitedHealth Group (UNH)
Health insurer UnitedHealth Group (NYSE:UNH) raised its dividend 12% to $2.10 per share last month. This marks the company’s 14th consecutive year of raising the payout. Moreover, for the past decade, the dividend growth stock has increased its dividend at a remarkable 19.6% compounded annual growth rate (CAGR). Over the last five years, it has been slightly slower at 15%, but it is a strong record of rewarding shareholders nonetheless.
When we look back at UnitedHealth’s history, we see that in 2013, it was paying $1.05 per share in dividends. Fast-forward to today, and that is now $8.40 per share. This is why UnitedHealth Group stock is a dividend investor’s favorite.
Notably, the health insurer’s payout is not at risk of being cut or suspended. It generates sufficient free cash flow (FCF) to support the dividend. UnitedHealth has an equally impressive track record of growing cash profits, or some 15% annually, over the past five- and 10-year time frames. That’s why its FCF payout ratio is a very low 20%. The payout ratio measures the amount of FCF used to pay dividends and provides insight into whether the dividends are sustainable. For UnitedHealth Group stock, there is no question its dividend is safe.
Parker-Hannifin (PH)
It is an equally impressive dividend growth stock story with Parker-Hannifin (NYSE:PH), a manufacturer of motion control systems. It has paid a dividend every quarter for some 74 years and raised the payout for 67 consecutive years.
Few stocks on the market have as long of a track record of raising their payout as Parker-Hannifin. What’s remarkable is that typically, such long-in-the-tooth dividend stocks only offer nominal increases. Yet the motion control specialist has a 10-year CAGR of 12% for dividend hikes. It is truly magnificent for a company that has been around for over 100 years.
Parker Hannifin also produces sufficient cash profits to support the dividend. It has grown FCF at an 11% CAGR for the past decade, but that has increased to over 14% over the past five years.
The company also sports a low FCF payout ratio of 27%, meaning its dividend for the past three-quarters of a century will likely be safe for the next 75 years and beyond.
Schwab U.S. Dividend Equity ETF (SCHD)
The third dividend growth stock investors should consider is the Schwab U.S. Dividend Equity ETF (NYSEARCA:SCHD). The exchange-traded fund (ETF) holds about 100 dividend-paying stocks and yields a healthy 3.6% annually.
Created in 2011, it has steadily increased the dividend and has a five- and 10-year CAGR of 10.5%. SCHD, as the ETF is informally known, just announced a massive dividend hike, one of the largest in its history, or a 35% hike. The dividend grew from $0.61 per share to $0.82 per share.
It is important to note that SCHD’s dividends aren’t static but change quarter to quarter, and though rare, they can decline. From the fourth quarter of 2023 to the first quarter of 2024, for example, the dividend fell from about $0.72 per share down to $0.61. However, the distribution has never gone down year over year.
The three largest holdings of SCHD are Home Depot (NYSE:HD), Cisco Systems (NASDAQ:CSCO) and AbbVie (NYSE:ABBV). To track the total return of the Dow Jones U.S. Dividend 100 Index, Schwab U.S. Dividend Equity ETF is the premier dividend growth stock to own.
On the date of publication, Rich Duprey held a LONG position in ABBV stock. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
On the date of publication, the responsible editor did not have (either directly or
indirectly) any positions in the securities mentioned in this article.