Finding a high-yielding dividend stock trading at a good value can be a great investment. That's especially true if you plan to start tapping those dividends for income in the near future.
But investors with a longer time horizon may be better suited finding companies with low to average yields, but with above-average dividend growth rates. These companies have the potential to double their dividend payments within just a few years. And if you reinvest dividends along the way, you'll end up receiving an even better yield on your original investment.
Here are three great dividend stocks that could double their payments.
I might be addicted to Starbucks (SBUX 0.59%), but trust that my multiple weekly visits to Starbucks stores didn't sway my judgment in including the company on this list.
The stock currently yields about 1.7%, but management has raised the dividend every year since it was instituted in 2010. Starbucks has averaged a 25% dividend growth rate since instituting quarterly payments, and it's not slowing down. Last November, it gave shareholders another 25% raise.
Importantly, Starbucks still has room to keep raising its dividends. Its current payout ratio -- the percentage of earnings it pays out in dividends -- is just 48% of management's 2017 earnings outlook. Other restaurants have payout ratios in the 60% range.
Starbucks management expects to be able to grow earnings per share 15% to 20% over the next five years. Wall Street analysts currently project EPS growth of 15.3% during the same period. So, even if Starbucks' payout ratio remains the same, it could still increase the dividend at least 15% per year over the next five years, which would double the current payment.
Apple (AAPL 0.29%) is no longer the growth company it was when the iPhone first came out 10 years ago. It instituted a huge capital return program about five years ago. Apple keeps increasing its commitment to return capital to shareholders, most recently announcing plans to return $300 billion total to shareholders by 2019. It's returned $211 billion so far, but just $60 billion of that has been in the form of dividend payments.
Nonetheless, Apple has increased its dividend about 10% every year. And management has publicly stated its commitment to continued annual increases for the foreseeable future. The dividend currently yields about 1.7%.
But there's lot of room for that to grow. Apple's payout ratio is just 28% of the consensus estimate for Apple's 2017 earnings. Most of Apple's capital return program goes toward share repurchases, which supports earnings per share. Indeed, analysts expect EPS to climb more than 11% per year over the next five years, which should enable Apple to continue raising the dividend a steady 10% every year. That rate could climb higher if Apple decides to focus more on dividends versus share buybacks.
Lowe's (LOW 1.16%) has increased its dividend for 54 consecutive years. That's a streak management doesn't want to break. But more importantly, the company has a renewed focus on growing its dividend, with plans to increase it rapidly over the next few years.
At its analyst day in December, CFO Bob Hull said the company plans to increase the dividend another 15% to 20% through 2019 as it targets a payout ratio of 35%. For 2017, the company is expected to pay out around 33% of earnings, so there's a bit of wiggle room to keep increasing the dividend as a percentage of earnings. If the company can grow earnings per share a reasonable 12% in each of the next two years, Lowe's should manage to meet both of its benchmarks.
But there's no reason for the dividend growth to stop there. Analysts expect earnings per share to grow an average of 14.6% over the next five years, so even as Lowe's reaches the top end of its payout ratio target, it has room to grow the dividend. What's more, that payout ratio is an artificial ceiling on dividend payouts. Competitors pay out more than 50% of earnings as dividends, so Lowe's has plenty of room to keep growing the dividend, to which it's newly recommitted.
Despite their relatively low yields today, all three of these stocks present an opportunity to produce more income for investors over the next 15 or 20 years compared to a high-yielding, low-growth dividend stock. All three should see their current dividends double in just a few years.