In 2018, Starbucks (NASDAQ:SBUX) gave investors more reason than ever to bet on the company's dividend. Not only did Starbucks increase the amount of cash it has authorized to return to shareholders through repurchases and dividends by $10 billion, but the company increased its quarterly dividend by 20% -- and it did it one quarter earlier than usual.
Management's obvious commitment to dividend growth combined with the company's overall healthy business makes the coffee giant a great dividend stock. Indeed, the company's dividend could easily double in as little as five years, making Starbucks stock a way for investors to get their hands on both a meaningful dividend yield and strong dividend growth potential.
A strong dividend
Investors who buy Starbucks today get a solid dividend.
Dividend growth has been particularly impressive. Starbucks' most recent 20% dividend increase wasn't the company's only sharp dividend increase in recent years. Indeed, the company's quarterly dividend more than doubled in just three years, rising from $0.16 in 2015 to $0.36 in 2018.
Starbucks' current quarterly dividend of $0.36 comes out to $1.44 annually, giving the coffee company a meaningful dividend yield of 2.3%. By comparison, the average dividend yield of stocks in the S&P 500 is 2.2%.
Dividend growth prospects
Looking ahead, more strong dividend growth is likely. This is especially evident by Starbucks' low payout ratio, or the company's dividend payments as a percentage of its earnings. Starbucks has a payout ratio of just 39%, indicating there is significant room for further increases in the coming years.
Also supporting the case for further increases in Starbucks' dividend is the company's strong bottom-line growth recently. Starbucks' non-GAAP earnings per share rose 13% year over year in Q4 and 17% for the full year of fiscal 2018. Over the coming years, management expects that its non-GAAP earnings per share can continue growing at double-digit rates. Strong earnings growth, of course, will help support further dividend growth.
Considering Starbucks' recent dividend growth, its low payout ratio, and management's expectation for double-digit annualized earnings-per-share growth over the long term, it's reasonable to expect Starbucks' dividend to compound at an average rate of around 15% annually over the next five years, helping it double during this period.
While it's always possible that Starbucks' dividend growth in the coming years falls short of a 15% compound average annualized growth rate, it's also possible that it exceeds this rate. After all, Starbucks' dividend has increased at an average rate of 26% over the past five years.