Dividend growth stocks have a long history of outperforming most other asset classes. Companies that consistently boost their dividends generally have exceptional free cash flows, strong balance sheets, and exhibit above-average revenue growth. On top of all that, regular increases to the dividend can create a snowball effect for long-term investors, compounding returns over time when the dividend is reinvested.
Which dividend growth stocks scan as top buys for long-term investors? The following five blue-chip dividend payers all sport exceptional dividend growth rates and superb fundamentals. Here is a rundown of their most compelling attributes and why they might make an outstanding addition to a well-rounded portfolio.
1. Apple
Apple (NASDAQ: AAPL), the tech giant known for its innovative products like the iPhone and Mac computers, has become a fantastic dividend growth stock in recent years. The company's strong brand, loyal customer base, and expanding services segment provide a solid foundation for future growth.
Apple's current yield of 0.45% may seem low, but its three-year dividend growth rate of 2.81% and low payout ratio of 14.7% indicate significant room for future increases. The company's robust operating cash flow of $110.5 billion in 2023 underscores its ability to fund dividend growth while investing in its diverse range of businesses.
Apple's combination of a strong balance sheet, consistent free cash flow generation, and low payout ratio makes it an attractive option for dividend growth investors. The company's continued innovation in hardware and expansion in services provide multiple avenues for future growth, supporting the potential for sustained dividend increases.
2. ExxonMobil
ExxonMobil (NYSE: XOM), one of the world's largest integrated oil and gas companies, has a long history of dividend payments and increases. The company's diverse operations across the energy value chain provide stability and cash flow to support its dividend policy.
ExxonMobil offers a yield of 3.2% and a three-year dividend growth rate of 2.58%, providing an attractive combination of current income and growth. The payout ratio of 44.9% and operating cash flow of $55.3 billion in 2023 indicate the dividend is well covered by current operations.
ExxonMobil's strong position in the energy sector, coupled with its focus on cost reduction and efficiency improvements, makes it a compelling choice for dividend growth investors. The company's investments in low-carbon solutions also position it well for the ongoing energy transition to battle climate change.
3. Medtronic
Medtronic (NYSE: MDT), a global leader in medical technology, offers a wide range of products and therapies. The company's focus on innovation and expanding presence in emerging markets provide multiple avenues for long-term growth.
Medtronic offers a hefty yield of 3.43% with a three-year dividend growth rate of 0.97%. That said, the payout ratio of 100% raises some concerns on the sustainability side of the ledger. However, the company's substantial operating cash flow of $6.04 billion in 2023 provides some reassurance about the sustainability of its quarterly payouts.
Medtronic's strong market position in various medical technology segments and its focus on research and development support its long-term growth prospects. The company's commitment to its dividend, despite recent challenges, makes it an interesting option for income-focused investors.
4. Johnson & Johnson
Johnson & Johnson (NYSE: JNJ), a diversified healthcare company, operates in the high-growth pharmaceutical and medical device arenas. The company's broad portfolio and strong brand recognition provide stability and a wide range of growth opportunities.
J&J offers a yield of 3.12% and a three-year dividend growth rate of 3.1%, providing a balanced mix of current income and growth. The payout ratio of 72.7% is manageable for a diversified healthcare company. After all, J&J raked in a healthy $22.8 billion in operating cash flow in 2023.
J&J's diverse business model, strong financial position, and consistent dividend growth make it an attractive option for conservative dividend growth investors. The company's focus on innovation and value-creating strategic acquisitions should support future growth and additional increases to the dividend.
5. Coca-Cola
Coca-Cola (NYSE: KO), a global leader in the beverage industry, boasts a portfolio of over 200 brands. The company's strong distribution network and marketing capabilities provide a noteworthy competitive advantage.
Coca-Cola offers a yield of 2.83% with a three-year dividend growth rate of 3.29%. The payout ratio of 76.8% is on the higher side, but the dividend is supported by over $11.5 billion in operating cash flow on an annualized basis.
Coca-Cola's strong brand portfolio, global presence, and focus on adapting to changing consumer preferences position it well for future growth. The company's consistent dividend growth record and ongoing efforts to improve efficiency make it an appealing choice for dividend-focused investors.
Key takeaways
These five dividend growth stocks offer an attractive mix of current yield, growth potential, and financial stability. Moreover, they represent diverse sectors, a feature that could aid in portfolio diversification. Best of all, these blue-chip dividend growers are proven wealth escalators, thanks to their top-tier dividend programs.
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George Budwell has positions in Apple. The Motley Fool has positions in and recommends Apple. The Motley Fool recommends Johnson & Johnson and Medtronic and recommends the following options: long January 2026 $75 calls on Medtronic and short January 2026 $85 calls on Medtronic. The Motley Fool has a disclosure policy.
5 Dividend Growth Stocks to Buy and Hold Forever was originally published by The Motley Fool