Don't make the mistake of only looking at yield when searching for dividend stocks. Inflation has historically grown roughly 3% a year, quietly eroding the buying power of stagnant or slow-growth dividends. This is why you should consider mixing in a few companies with a history of rapid dividend growth into your portfolio of higher-yielding stocks. Here are three stocks that have increased dividends by 10%, over three times the historical rate of inflation growth, in 2018: Eaton Corporation plc (ETN +0.91%), A.O. Smith Corporation (AOS 0.30%), and Cintas Corporation (CTAS +0.12%).
1. Big yield, solid prospects
Eaton is a diversified industrial giant with a focus on helping companies make efficient use of energy. In February, it upped the dividend by 10%. That move marks nine consecutive years of annual increases. The yield is 3% today, a full percentage point higher than what you would get from an S&P 500 index fund.
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Eaton has six divisions, electrical products (33% of second-quarter revenue), electrical systems and services (28%), hydraulics (13%), aerospace (8%), vehicle (16%), and e-mobility (about 2%). Although it has exposure to a lot of different industries, it says that roughly 80% of its key end markets are in the early to-mid growth stages of their cycles. So it is expecting "solid market growth for several years."
The tiny e-mobility division, meanwhile, was only started up in the first quarter, is already inking deals, and could grow to as large as $4 billion in annual revenue by 2030 -- which would put it on par with the hydraulics, aerospace, and vehicle divisions revenue-wise. That's a huge growth opportunity.
Eaton's stock price has run up lately, following strong results. But if you are looking for a combination of yield and dividend growth, it is still worth a deep dive today.
2. A price drop worth looking into
A.O. Smith's biggest business is making water heaters. That's not very exciting until you consider that two of its key growth markets are Asian giants China and India, where hot water is still a luxury for many. As the populations of these countries move up the socioeconomic ladder, one of the first things they buy is a water heater. To put some numbers on that, over the past decade Smith's revenue in China has expanded by 21% annually. India, meanwhile, is a relatively new focus for the company, but it expects its target market there to more than double in size between 2020 and 2030. There's a lot of opportunity here.
That said, the stock has fallen roughly 12% from early-year highs, despite solid business results. But if you look back over the last decade, that's a normal correction for the stock. Now might be a good time for a deep dive for growth-minded investors -- earnings have expanded at an incredible 26% a year since 2010 and the company's huge opportunities in Asia suggest the good news will keep coming.
The yield is relatively low at 1.2%, but that's not surprising since Smith is really a growth stock. The exciting thing for dividend investors is that the dividend has expanded at an annualized rate of 17% a year over the past decade, more than five times the historical rate of inflation growth. Moreover, the dividend has been increased for 25 consecutive years. This year's increase, meanwhile, was an incredible 29%. If you're looking to add some growth to your dividend portfolio, A.O. Smith is a stock you should be considering today.
3. Uniformly good results
Cintas' main business is renting out uniforms, which is the reason for that bad pun in the header (sorry about that). Like Smith, it is a growth stock. Earnings have grown at 13% a year over the past decade, driven by internal investments and acquisitions. The dividend, though, has expanded at a robust 15% a year over the past 10 years and has been increased for 35 consecutive years. The last dividend increase was 22%.
That said, Cintas pays only one dividend a year, with the last dividend paid at the end of calendar year 2017. Yes, technically, that wasn't in 2018, but don't get hung up on that minor detail because the outlook for another big hike at the end of this year is strong. Fiscal 2018 earnings (the company's fiscal year ends in May) were up over 30%, helped along by the 2017 acquisition of G&K Services. Fiscal 2019 earnings are projected to be up over 20%. So growth is still going strong, which is effectively what backs the company's long history of big dividend hikes. There's no reason to doubt that more good dividend news is to come.
CTAS Dividend Yield (TTM) data by YCharts.
That said, Cintas is one to keep on your wishlist. The stock is up 35% so far this year and looks expensive when you consider key valuation metrics, like the price-to-sales and price-to-earnings ratios. Its yield, however, is a puny 0.75% today. But with its strong history of growth, don't write Cintas off because it can add some valuable dividend growth to a portfolio filled with higher-yielding but slower-growing dividend payers. If the yield jumps above 1%, you should start looking more closely. If it spikes above 2%, like it did during the last recession, it would likely be a great buy.
Two to look at now, one to watch for later
Eaton and A.O. Smith are both pretty compelling opportunities today when you consider their earnings and dividend growth outlooks. Eaton has the higher yield, but Smith's rapid dividend growth helps to make up for its lower yield -- especially now that it looks like the stock might be on sale. Both are worth deep dives today for investors trying to add a little dividend growth to their portfolios. Cintas, in the meantime, is a one of those names you keep on your wishlist, hoping for a market downturn to make it a buy. But you have to make sure to keep watching for that downturn or you may miss the opportunity.
