Investing in solid dividend stocks is one of the best ways to predictably generate wealth over the long term, especially if those dividends are set to grow going forward. But not all dividend stocks are created equal, and it's no easy feat to separate the best from the rest.
So, we asked three top Motley Fool investors to find growth dividend stocks that they believe are positioned to beat the market going forward. Read on to see why they chose Retail Opportunity Investments (ROIC -0.53%), American Express (AXP -0.43%), and Digital Realty Trust (DLR 1.11%)
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Shopping for shiny new dividends
Steve Symington (Retail Opportunity Investments): Considering Retail Opportunity Investments has increased its dividend for each of the past six years, it certainly fits into the attractive mold of a "growth dividend stock." That's not to say this should come as a big surprise; as a real estate investment trust, Retail Opportunity Investments is required to return at least 90% of its earnings to investors in the form of dividends.
Just as its name implies, Retail Opportunity Investments focuses primarily on buying and revitalizing retail properties in densely populated, middle- to upper-class areas. These are also necessity-based properties -- which most often means they're anchored by a popular grocery chain -- ensuring they remain desirable locations with high foot traffic. In turn, Retail Opportunity Investments has been able to maintain a portfolio lease rate of at least 97% for more than three years, all while steadily increasing rents for its tenants. (Same-space comparative base rent last quarter climbed 24% and 9.1% on new and renewed leases, respectively.)
Meanwhile, Retail Opportunity Investments continues to acquire new properties at an impressive clip. As of its first-quarter 2017 report in late April, the company had already completed $124.5 million in shopping-center acquisitions, bringing its portfolio to 84 shopping centers encompassing roughly 9.7 million square feet.
But shares are also trading around 13% below their 52-week high as of this writing, despite the fact Retail Opportunity Investments confirmed last quarter that it was well on track to meet its full-year goals. As Retail Opportunity Investments continues to build its portfolio and increase its dividends over the long term -- as I suspect it will once again in the coming quarters -- I think investors who take advantage of this pullback will be handsomely rewarded.
Don't overlook AmEx in the growth of electronic payments
Jason Hall (American Express): It's been tough going for American Express over the past few years, with bad news seeming to hit regularly. This included the loss of two of its biggest credit card partners as well as lawsuits over its merchant practices. This has weighed heavily on its stock price, which has been particularly painful considering how well the market has done over the same period:
AXP Total Return Price data by YCharts.
That's a huge missed short-term opportunity. But instead of selling AmEx now, it strikes me as an excellent time to buy. Even with the loss of important partners in recent years, the company has done a solid job limiting the impact on its bottom line, and it remains hugely profitable.
Most importantly, American Express is set to benefit from the huge growth in the global middle class that's already underway. In coming decades, the world's middle class population will increase by more than 1 billion, and almost entirely in places where electronic payments are a bare fraction of transactions today. But the growth of mobile computing and web access is quickly changing that.
This will drive big profit growth for AmEx, which will in turn be able to continue growing its dividend. The dividend has increased nearly every year since the mid-1990s, and that track record is likely to continue for a long time to come. With a payout ratio of 23% last year, the dividend is also very secure.
The 1.5% yield may seem small, but with many years of growth ahead of it, it's set to get much bigger for long-term investors.
Powering our digital lives
Brian Feroldi (Digital Realty Trust): Rapid consumer adoption of smartphones and other bandwidth-hungry devices has created unprecedented amounts of data. In response, companies of all sizes are in desperate need of storage solutions that can help them handle all of that information.
Digital Realty Trust is happy to fill that need. This real estate investment trust, or REIT, specializes in owning and operating data centers located around the world. The company currently owns 156 data centers that are strategically placed in traffic-heavy areas, and it then rents out space in them to more than 2,300 customers.
This business model has worked out fantastically well for long-term shareholders. The company's core FFO -- which is a REIT proxy for earnings -- have grown at a 14% annualized rate since 2005. In turn, the company has easily been able to pass along regular dividend increases to its investors. When combined, Digital's stock has been a home-run investment.
DLR Dividend data by YCharts.
Looking ahead, tech trends like cloud computing and 4k video promise to increase our dependence on data centers. That should keep demand for Digital Realty's services growing for years to come. With a dividend yield of 3.3% and the potential for double-digit growth on the horizon, Digital Realty looks like a great stock for any investors who are after upside potential and income.
