Chasing yield might be enticing, but it can also lead you right to the investing equivalent of quicksand. Stocks that offer high yields often do so because the underlying company is declining or in a slow-growth phase, and all too frequently, that chunky payout isn't enough to compensate for a lagging share price. Alternatively, investing in companies with modest but quickly and dependably growing yields is often the better move if you're also aiming to achieve substantial capital appreciation.
Read on to see why Disney (DIS -0.55%), Starbucks (SBUX 0.65%), and Nike (NKE -0.36%) are dividend growth stocks that should be on your buy list.
Image source: Getty Images.
Stack dividends in the Magic Kingdom
Disney hasn't gotten much attention as a dividend stock, but that could quickly change. A roughly 6% dip in the company's share price year to date on the heels of last year's 10% payout increase has already lifted the company's yield to roughly 1.6% -- which is not far removed from its historical high, and the company's low payout ratio suggests it has plenty of room to grow its returned income component. The table below breaks down some of the company's essential dividend stats:
| Current Yield | Payout Ratio | Years of Dividend Growth | Dividend Growth Over the Last 5 Years |
| 1.6% | 26.5% | 2 | 108% |
Data source: Yahoo Finance.
Disney's history of consistently raising its payout is actually better than a first look suggests as well. The company distributed a one-time payout bonus when it switched from an annual disbursement to a semiannual disbursement in 2014, which made for an unfavorable comparison the following year, but otherwise, the company has consistently raised its dividend annually since 2010.
For a company that's at the top of its industry and has a history of successfully navigating changes in the entertainment landscape, Disney looks like a bargain trading at 17 times forward earnings estimates. The potential for dramatic payout increases over the long term further sweetens the pot.
Brew up big income growth
Like Disney, Starbucks is another stock that has lagged the broader market in 2017, with shares down roughly 2% while the S&P 500 index has climbed roughly 12% year to date. It's also a top stock to turn to if you're looking for dividend growth. Check out the table below for a quick look at the coffee company's dividend profile:
| Current Yield | Payout Ratio | Years of Dividend Growth | Dividend Growth Over the Last 5 Years |
| 1.8% | 51% | 6 | 138% |
Data source: Yahoo Finance.
Starbucks has more than doubled its payout over the last five years and quintupled its disbursement since it began paying a dividend in 2010. The cost of distributing its dividend currently represents just over half of its trailing 12-month earnings and less than half of free cash flow over the period, and the business is still growing at a fast clip. The coffee giant expects that it will be able to increase earnings between 15% and 20% annually through fiscal 2022 as it carries out a substantial expansion initiative -- with plans to grow its store count from roughly 26,700 at the end of its last quarter to 35,000 locations internationally in 2021. The company is also likely to benefit from increased sales of food products and packaged goods.
Even if it falls short of some of its targets, Starbucks should still have lots of room to increase its payout and looks like a worthwhile growth stock trading at roughly 26 times forward earnings.
Dividend growth? Just do it
With one of the strongest brands on the planet, Nike has pricing power that's unmatched by its competitors in the footwear and apparel space -- a characteristic that will likely help it continue to deliver substantial dividend growth in the years to come. Check the table below for a summary view of The Swoosh's dividend profile:
| Current Yield | Payout Ratio | Years of Dividend Growth | Dividend Growth Over the Last 5 Years |
| 1.3% | 29% | 15 | 71% |
Data source: Yahoo Finance.
With a low payout ratio and the company's commendable track record of delivering annual payout increases over the last decade and a half, Nike stock looks like a smart bet for investors seeking income growth. Based on Nike's current stock price, the market also seems to be underestimating the business's long-term potential. Nike is poised to realized big growth opportunities as it expands its international footprint, takes advantage of direct-to-consumer selling, and carries out cost-cutting initiatives -- momentum drivers should also help it continue to improve its returned income component.
Recent sales-growth slowdown and concerns about the health of the overall retail industry have led to a stagnating share price, but Nike's scale advantages and penchant for fashion innovation will likely help it remain at the forefront of its industry for decades to come. Trading at a reasonable 22 times forward earnings, Nike has the makings of a dividend growth stock capable of delivering tremendous long-term returns.
