5 Stocks Growing Their Dividends by 20% per Year

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 by more than 20% annually over the last three years:

Source: S&P Capital IQ

Had you invested in these companies three years ago, you would have enjoyed total dividend increases ranging from 77% to 610%. 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. In fact, it's possible that companies such as the ones mentioned above, that have substantially grown their dividends in the past, will have to cut their future payouts if their business prospects begin to dim. On the other hand, companies like Apple (AAPL 1.27%) , which have recently initiated dividend programs, have low payout ratios and tremendous earnings growth prospects, are well positioned to grow their dividends for many years.