5 Top Stocks Growing Their Dividends Well Above Inflation

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 significantly above the rate of inflation in the last year:

Company

1-Year Dividend Growth Rate

UPS (NYSE: UPS  )

9.2%

Williams Partners (NYSE: WPZ  )

8.6%

3M Company (NYSE: MMM  )

7.5%

Altria (NYSE: MO  )

7.3%

Prospect Capital (NASDAQ: PSEC  )

5.1%

Source: S&P Capital IQ.

UPS's massive global network allows it to deliver packages to 220 countries and territories. Its tremendous scale and logistical expertise have helped UPS build a wide moat around its business, and the company's ample free cash flow generation has allowed it to return cash to shareholders in the form of share buybacks and dividends (currently 2.7%). CAPS participants no doubt appreciate this and have given UPS a four-star rating.

Williams Partners is a diversified master limited partnership focused on natural gas transportation and storage, natural gas liquid fractionation, and oil transportation. Williams Partners has a four-star CAPS rating and offers investors a sizable 6.6% dividend.

More than just Post-it Notes and Scotch tape, 3M operates in areas that include health care, industrial, and transportation. This innovative global powerhouse currently sports a top five-star rating in CAPS and pays a 2.1% dividend.

As the parent company of Philip Morris USA, Altria controls much of the U.S. tobacco market with Marlboro, Copenhagen, Skoal, and other brands. Fools have given Altria a four-star rating in CAPS, and its stock is yielding a hefty 5.5%.

Prospect Capital is a business development company that provides capital to middle-market companies and private-equity firms for refinancings, leveraged buyouts, acquisitions, recapitalizations, later-stage growth investments, and capital expenditures. Prospect Capital has a four-star CAPS rating and is paying a large 11.7% dividend.

The Foolish bottom line
Had you invested in these companies a year ago, you would have enjoyed total dividend increases ranging from 5% to 9%. 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. If you're interested in hearing about some excellent companies that are likely to boost their dividends from this point forward, I'd like to offer you a brand-new free report from The Motley Fool's expert analysts called "Secure Your Future With 9 Rock-Solid Dividend Stocks." Today I invite you to download it at no cost to you. To discover the identities of these companies before the rest of the market catches on, you can access this valuable free report by simply clicking here now.


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