Most investors like dividends because they desire an income stream. However, here's an even more important reason to like companies that pay investors: In a 40-year stretch from 1972 to 2012, companies that paid a dividend delivered a 7.2% total annual return, according to a study by Ned Davis Research. Contrast that with non-payers, which only produced a 1.6% yearly return over that time frame according to the study.
Even better, the study also found that dividend growers outperformed non-growers -- delivering a 9.5% total annual return -- while higher dividend-paying stocks outperformed lower- and non-dividend payers by about 3% annually. Given those findings, investors who already like dividends will love TransCanada (NYSE:TRP), Medical Properties Trust (NYSE:MPW), and Pattern Energy (NASDAQ:PEGI) because all three offer a fast-growing, high-yield payout. That combination makes them all the more likely to outperform over the long term.
Visible growth coming down the pipeline
Canadian natural-gas pipeline giant TransCanada has a long history of paying a growing dividend to investors, with its current streak up to 17 consecutive years. That growth has enabled the company to produce market-smashing total returns of 14% annually since 2000. That outperformance doesn't seem like it will be ending anytime soon, since TransCanada expects to increase its already generous 4%-yielding payout by a 10% annual rate through 2020, with another 8% to 10% increase anticipated in 2021.
Fueling that rising income stream is the company's 24 billion Canadian dollar ($19.4 billion) backlog of expansion projects, which should produce 8% to 10% annual earnings growth through 2021. Further, the company has another CA$20 billion ($16.2 billion) of expansion projects in development, which has the potential to keep the payout growing for several more years.
On top of that growth, the company has conservative financial metrics, including receiving 95% of its earnings from stable sources, covering its payout with cash flow by more than 1.6 times, and a top-tier balance sheet. Add it all up, and TransCanada offers a fast-growing dividend backed by excellent financial metrics.
A healthy dividend
Medical Properties Trust is a real estate investment trust (REIT) that owns hospitals and other healthcare-related real estate. Those properties generate very consistent cash flow for the company, which enables it to pay an attractive dividend yielding 7%. Further, the company has grown that payout every year since 2013 -- including 4% last year -- by expanding its portfolio of properties.
Currently, Medical Properties Trust pays out about 74% of its cash flow in dividends, which is below its aim to return between 75% to 80% of its cash flow to investors each year. Because of that, it should have no problem increasing its payout in the near term, since it expects cash flow to rise nearly 11% in 2018, thanks to a recent acquisition. Meanwhile, future deals should help push cash flow even higher, which, thanks to its conservative payout ratio and peer-leading balance sheet, should enable Medical Properties Trust to deliver healthy dividend growth for years to come.
Gale-force income growth
Wind-power company Pattern Energy Group offers the highest yield of this trio, at 7.8%. That's mainly because, at the midpoint of its guidance range, Pattern would have paid out 97% of its cash flow via dividends last year. That said, cash flow has been rising at a rapid rate in recent years due to the company's quickly expanding portfolio of wind farms. Last year, for example, cash available for distribution (CAFD) was on pace to increase 15% versus 2016's level. Because of that, Pattern Energy raised its dividend every single quarter. In fact, it has grown its payout in 15 consecutive quarters, and by a total of 35% since its Initial Public Offering (IPO) in late 2013.
Pattern Energy should be able to continue growing its payout at a rapid pace in the coming years. That's because the company holds the right of first refusal to acquire 1,150 MW of wind facilities, which, for perspective, is roughly 100 MW larger than the portfolio it operated at its IPO. That said, the company's target is to acquire 1,114 MW above those currently identified, which would enable Pattern to grow its CAFD at a high-single- to a low-double-digit annual rate per share through 2020. That forecast suggests Pattern Energy could increase its dividend by a similar clip over that time frame, enabling it to maintain its fast-paced growth rate.
Generous yields with visible growth
All three of these dividend stocks offer well-above-average dividends that should increase at a healthy clip in the coming years. While that growing income stream alone should be enough to entice income seekers, it's only half the story. An equally important factor is that these fast-growing high yielders have a good chance at delivering market-beating returns in the coming years, given the history of dividend growth stocks.
If you like dividends, you should love this trio.