Dividend growth stocks are arguably the best type of stocks to own because they continuously reward shareholders with dividends and share buybacks. The goal when investing in dividend growth stocks is to find stocks that will continue to raise their dividends for many years to come. Procter & Gamble (PG -1.12%), McDonald's (MCD -0.77%), and PepsiCo (PEP -0.01%) are three industry-leading companies with sustainable dividend payouts. Not only are they dividend aristocrats (more on that in a minute), but they are also top dividend growth stocks to buy today. Here's why.
1. Procter & Gamble
Procter & Gamble has had its fair share of up and downs in recent years. However, one thing that has remained consistent is management's commitment to creating shareholder value in the form of dividends and share buybacks. The consumer products giant has increased its dividend for the past 58 years running at a compounded rate of more than 9% a year. Not to mention, Procter & Gamble has been paying a dividend for the past 124 years without fail. Now that is reliability!
The stock currently boasts a dividend yield of 3%, which is significantly better than the S&P 500's yield of 1.9%. The conglomerate increased its dividend 7% to $2.45 per share in fiscal 2014, and returned a whopping $6.9 billion to shareholders in the form of cash dividend payments. In addition to this exceptional dividend growth, investors can rest easy knowing P&G will be able to continue paying a dividend in the future thanks to its strong balance sheet. During fiscal 2014, the company generated a whopping $10.1 billion in free cash flow.
Part of this strength comes from Procter & Gamble's portfolio of leading consumer brands including Gillette razors, Tide laundry detergent, and Crest toothpaste. In fact, the company has 23 brands under its umbrella today that each generate between $1 billion and $10 billion in sales annually. Together, these things make a compelling argument for Procter & Gamble as a top dividend growth stock. Throw in the stock's price-to-earnings growth value of 2.47, which is below the household products industry average of 2.99, and the stock looks attractively priced at where it trades today at around $84 a share.
2. McDonald's
The fast-food giant's stock may be down nearly 6% this month, but its dividend has never looked so good. Last month, McDonald's beefed up its quarterly cash dividend by as much as 5% to $0.85 per share. For those keeping track at home, that means the burger chain now pays an annual dividend of $3.40 per share. The stock currently boasts a dividend yield of 3.62%, which similar to P&G is above the S&P 500's yield. Moreover, the company has returned $3.2 billion to shareholders year to date, and is now on track to return $18 to $20 billion to investors by 2016.
McDonald's stock offers investors high dividend growth with little risk. To be sure, Mickey D's has increased its dividend every year since it first started paying one in 1976. Sure, McDonald's earnings growth has suffered in recent quarters because of a challenging global environment, but with a net profit margin of 19.5% it is one of the more profitable companies within the industry.
This combined with the sheer size of McDonald's operations, over 35,000 locations serving 70 million customers in 100 countries today, mean the restaurant chain should have no problem continuing to reward shareholders for many years to come. Shares also look tasty today trading near the stock's 52-week low at around $93 a pop.
3. PepsiCo
Not only is the king of pop a household name, but it has also been rewarding income investors every year since 1952. Better still, Pepsi has increased its payout for the past 42 straight years. The soda and snacks giant recently boosted its dividend 15% to $2.62 annually, up from $2.27 per share. The company's payout ratio has increased to 53% as a result. The payout ratio is important because it tells investors how much of the company's net income is being given back to shareholders. Importantly, at 53% of Pepsi's net income, management still has ample cash to invest in growing the business.
On top of this, Pepsi plans to buy back $5 billion of its shares this year, thus further increasing shareholder value. It's worth noting that the company has already returned $6 billion to shareholders in the form of dividends and share repurchases so far this year.
Thanks to its strong portfolio of brands, Pepsi should have no problem continuing to grow its dividend well into the future. Consider this, Pepsi is the world's largest snack food company by market share, with 22 brands in its snack business that each pull in annual sales north of $1 billion. In addition, Pepsi's latest performance is nothing to balk at -- the company grew its earnings 7% to $1.32 per share while organic revenue climbed more than 3% in the third quarter, despite a challenging retail environment.
This is also a great time for investors to own Pepsi because of its strategic partnership with the NFL. With football season in full swing, shareholders can capitalize on management's plan to promote the Pepsi brand through NFL-related sweepstakes, Super Bowl events and other season-long campaigns. Shares of PepsiCo are currently trading around $94 apiece.
