When looking to invest in companies that can provide income to investors through dividends, it makes sense to give weight to a stock's dividend yield (dividends per share over 12 months as a percentage of a company's stock price). But dividend yield is only part of the equation when analyzing dividend stocks. Another key aspect of a company's dividend to consider is the dividend's growth potential.
Two excellent dividend stocks with exceptional dividend growth potential are Apple (NASDAQ:AAPL) and Starbucks (NASDAQ:SBUX). Here's a close look at why these two companies' dividend growth potential makes them good investments for dividend investors.
Apple currently has a dividend yield of about 1.3%. With a dividend yield this low, investors could easily gloss over the tech giant as a compelling dividend investment. But Apple's dividend looks very attractive after its growth potential is considered.
The first reason investors can expect Apple's dividend to continue rising is because management has made a habit of increasing the company's dividend every year. Apple's dividend has increased at an average rate of about 11% annually over the past five years, with its most recent increase coming in at a growth rate of 16%.
Then there's Apple's extremely low payout ratio, or the percentage of earnings a company is paying out in dividends. Apple has a payout ratio of just 24%, leaving plenty of room for more dividend increases.
Finally, Apple's underlying business is performing well -- and a growing business makes it easy to support dividend growth. Apple's trailing-12-month earnings per share is up 31% year over year.
With Starbucks, investors get both a meaty dividend yield and strong dividend growth potential. Currently, Starbucks has a dividend yield of 2.7% -- more than twice Apple's dividend yield. But Starbucks' dividend also looks poised to rise sharply in the coming years.
First, consider Starbucks' robust dividend growth in recent years. Over the past five years, Starbucks' dividend has increased at an average rate of 24% annually, with its most recent increase coming in at a strong rate of 20%. Even more, Starbucks is so serious about its dividend that this year, it broke from its pattern of increasing it every 12 months and instead increased it one quarter early. The increase reflected management's new plan for "accelerated return of cash to shareholders," the company said in a press release in June, when it announced the dividend increase.
Further increases should come easy. Like Apple, Starbucks also boasts a low payout ratio, though not quite as low. Starbucks has a payout ratio of 36% -- low enough to sustain strong dividend growth for years. Investors can also rest easy knowing Starbucks' underlying business is strong. The company has seen double-digit growth in non-GAAP EPS recently, with non-GAAP EPS rising 13% year over year in the company's most recently reported quarter.
For investors looking to buy stocks with dividends likely to grow at double-digit rates in the years ahead, Apple and Starbucks are both good bets.