Investing in high-quality dividend growth stocks can be one of the most powerful strategies for beating the market over the long term. Disney (NYSE:DIS), Ford (NYSE:F), and Home Depot (NYSE:HD) offer three examples of rock-solid fundamentals and big potential for dividend growth over the years ahead. As such, they seem positioned to deliver attractive gains for investors.
The Magic Kingdom
The entertainment industry is cyclical and volatile, as consumer spending on discretionary activities depends on the health of the economy. But Disney isn't your average entertainment company.
It owns several of the most valuable brands in the business, including Disney itself, ESPN, ABC, Pixar, and Marvel. Disney also has considerable human talent and as well as financial resources to invest in areas such as movie production and marketing. This offers an additional layer of resilency to its business model.
Disney has produced solid financial performance through the ups and downs in the business cycle, proving that management knows how to translate the company's strengths into consistent financial performance for investors. Free cash flow is in the neighborhood of 12% to 13% of revenue, so Disney retains a considerable share of sales with which to reward investors with growing dividends and buybacks.
Disney stock yields 1.45%, which is not particularly exciting. On the other hand, the company has increased its payments over the past several years. What was an annual dividend of $0.60 per share in 2011 has more than doubled to $1.42 per year today. Disney is also paying dividends more frequently, changing its dividend schedule from annual to semiannual last year.
Importantly, Disney has a lot of room to continue raising dividend payments. Wall Street analysts expect it to earn $5.81 per share in the current fiscal year; dividends amount to a conservative 24% of that.
Ford is firing on all cylinders
Ford operates in a challenging industry. Vehicle sales are cyclical, the competitive landscape is aggressive, and companies in the business need to invest heavily in capital expenditures.
However, Ford has done an admirable job improving profitability and reducing debt over the past several years. The company was operating 27 different platforms in 2007, and it has substantially reduced that number to nine in 2016. This has enabled Ford to capitalize on its economies of scale, generate higher profit margins, and respond more rapidly to consumer demand.
Revamped models such as the Fiesta, Focus, Fusion, and Taurus show that Ford can make high-quality and fuel-efficient vehicles to compete against Japanese automakers, an approach that's generating solid financial performance. Automotive operating cash flow was a record $2.7 billion for Ford in the first quarter of 2016.
Dividends from the iconic automaker have tripled since 2012, going from $0.05 to $0.15 quarterly per share. The payout ratio is also safe, at 29% versus earnings forecasts. Even more impressive, Ford stock yields a better-than-average 4.5%.
Home Depot is built on solid ground
Home Depot operates nearly 2,300 retail stores throughout the United States, Canada, and Mexico. The company is expected to generate $94.3 billion in revenue in the current fiscal year, making Home Depot the largest home-improvement retailer in the world.
Scale is a competitive advantage in the industry, allowing Home Depot to negotiate low prices with suppliers and to leverage efficiencies in areas areas such as advertising and rent costs. In addition to brand recognition and geographical presence, Home Depot has relationships with professional contractors across its key markets, which brings stability to sales.
Management intends to maintain a dividend payout ratio in the neighborhood of 50% of earnings, resulting in impressive dividend growth for investors over the past several years. What was a quarterly dividend of $0.29 per share in 2012 has now turned into $0.69 a quarter. The dividend yield stands at 2.1%.
Home Depot not only rewards investors with consistently growing dividends, but the company also buys back stock, having reduced its outstanding share count by 20% in the past five years.
As long as the company keeps capitalizing on its fundamental strengths to distribute growing cash flows via dividends and buybacks, chances are good that investors in Home Depot will be handsomely rewarded in the years ahead.
Andrés Cardenal owns shares of Ford and Walt Disney. The Motley Fool owns shares of and recommends Ford and Walt Disney. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.