Shareholder-friendly dividend payments can meaningfully improve portfolio returns, but not just any dividend stock is worth owning in portfolios. Some dividend paying stocks may boast enticingly high yields because their businesses are stalling, rather than accelerating, and their prices are down as a result. We asked three of our top Motley Fool contributors to name dividend stocks they think offer investors the chance for both income and growth.
Matt DiLallo: Natural gas pipeline giant Spectra Energy (NYSE:SE) already pays a lucrative dividend: Its current yield is a robust 4.5%, and the quarterly payout has steadily risen over the years. In fact, the company has met or exceeded its dividend growth target for nine consecutive years.
Spectra Energy plans to keep that streak going, promising to deliver $0.14 per share annual dividend growth through 2018. Fueling that growth are the more than $8 billion in projects it currently has under construction, which are expected to drive $1 billion in incremental EBITDA by 2020. That's a big boost in cash flow for a company that projects its EBITDA to be around $2.9 billion this year.
This company is not pursuing growth at all costs, however. Spectra Energy takes a disciplined approach, only sanctioning projects that can deliver attractive returns on capital. Further, it funds its projects with a balance of debt and equity to ensure that it keeps its investment-grade credit rating. Finally, the company plans to deliver a growing dividend while maintaining a healthy coverage ratio of at least 1.1 times.
In Spectra Energy, investors can bank on reliable income growth through at least 2018, though given its history, the company will likely keep its streak going much longer.
Dividend growth you can set your watch by
Tyler Crowe: Increasing a dividend at high rates is great for investors, but chances are, those big boosts can't be sustained over the long term. If you plan to buy and hold investments for years and years, finding companies that raise their dividends at consistent rates can be extremely valuable for your portfolio. In the energy industry, it's hard to find a dividend-paying stock that has a more consistent growth record than Enterprise Products Partners (NYSE:EPD).
A major trap that many companies fall into in this industry is to pay extravagant dividends when times are good. Once the market turns south, though, those payments get called into question. For years, Enterprise has avoided this pitfall by keeping its payout well within the limits of its cash flow in the good times, leaving plenty of wiggle room in the bad times. That's how the company has been able to maintain its streak of raising its dividend by about 5% every quarter alive. By the way, that streak of consecutive dividend raises is now at 48 straight quarters, and there aren't signs that it will be coming to an end any time soon.
Enterprise's stock has rallied a bit in 2016, but shares still have an attractive yield of 5.3%. With its strong track record of raising dividends and today's yield, Enterprise Products Partners is a great dividend growth stock to add to a portfolio.
The sky is the limit
CEO Satya Nadella is knee-deep in transforming the company from a stodgy player in the slowing PC market into a dynamo in cloud-based business productivity.
Last quarter, commercial revenue for its Office 365 platform grew 54%, and office consumer products and cloud services sales grew 19%. Revenue from Azure, a cloud-computing platform that allows for the management of applications through Microsoft's data centers, skyrocketed 102%. Commercial cloud sales clocked in at a $12 billion annualized run rate, putting Nadella well on his way to delivering on his forecast for revenue of $20 billion from the segment in 2018.
Thanks largely to the company's cloud success, Microsoft's overall sales and EPS handily outpaced industry-watchers' projections for the quarter. Adjusted revenue grew 5% to $22.6 billion from a year ago and adjusted net income soared 23% on a non-GAAP basis. That growth came despite ongoing struggles for its smartphone business and a seasonal slowing in demand for Xbox.
Those headwinds, however, should begin easing soon. Microsoft has significantly restructured its mobile phone operation, and demand for Xbox consoles should accelerate after the new Xbox One S console launches on Tuesday. Additionally, Xbox Live engagement has never been better, with monthly active users up 33% last quarter from a year ago. Xbox sales could also benefit this holiday season from the anticipated launch of 500 gigabyte and 1 terabyte Xbox One S bundles, planned for Aug. 23.
Overall, Nadella has me thinking Microsoft deserves a spot as a core holding in dividend portfolios. Its 2.4% yield may not pay the highest, but given the company's growth potential, it's more than respectable.