While high-momentum growth stocks grab most of the headlines, some of the best performing long-term investments are dividend stocks. The data bears this out. From the end of the first quarter in 1972 through 2019, dividend-paying stocks generated an average annual total return of 12.8%. That outperformed the S&P 500 (12.3% average annual return) and non-dividend payers (8.6%). Meanwhile, the best returns came from dividend growers and initiators (12.9%).
Given this data, beginning investors should consider parking some of their funds in dividend growth stocks. Two great ones for those starting their journey are infrastructure giant Brookfield Infrastructure (BIP 0.23%) (BIPC -0.69%) and renewable energy producer NextEra Energy Partners (NEP -2.78%).
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The definition of a durable dividend
Brookfield Infrastructure has an exceptional dividend track record. The infrastructure owner has increased its payout every year since its initial public offering in 2009. Overall, it has grown its dividend at an 11% compound annual rate during that timeframe. That's given it the fuel to generate an 18% annualized total return since its inception, blowing past the S&P 500's 10% total return during that timeframe.
Powering the company's steady dividend growth has been its four-pronged value-creation strategy:
- Buy: Acquire high-quality infrastructure businesses on a value basis.
- Enhance: Leverage its operational expertise to improve the cash flow of those businesses.
- Sell: Actively recycle mature assets by selling them near peak value.
- Repeat: Reinvest the proceeds into higher returning opportunities.
That strategy has enabled the company to grow its funds from operations (FFO) per share at an impressive 16% compound annual rate since its IPO.
Meanwhile, Brookfield sees lots of growth ahead. The company expects to organically expand its FFO per share at a 6% to 9% annual rate, powered by inflationary rate increases on its existing contracts, rising volumes as the global economy improves, and expansion projects at its existing businesses. Meanwhile, the company believes it can tack on another 1% to 5% annually to its FFO by continuing to recycle capital into new opportunities, with it recently securing two needle-moving deals that should help power its results next year. As a result, the company should have plenty of fuel to achieve its plan to grow its 3.9%-yielding dividend at a 5% to 9% annual rate in the coming years. Combine the yield with its growth prospects, and Brookfield has the power to generate total annual returns in the mid-teens.
High-powered dividend growth ahead
NextEra Energy Partners also has a stellar dividend track record. The renewable energy producer and gas pipeline operator has increased its payout each quarter since its IPO in 2014. Overall, the company has boosted it by more than 215%, giving it the fuel to generate a market-beating 133% total return since its inception.
The company sees more high-powered dividend growth ahead. NextEra Energy Partners currently expects to grow its 3.7%-yielding payout at a 12% to 15% annual rate through at least 2024. The company already has enough internal power to deliver on that outlook through next year after significantly enhancing its plan thanks to a deal with its parent, utility NextEra Energy (NEE -1.06%), and private equity giant KKR (KKR 1.06%). That transaction bolstered its cash flow and enhanced its liquidity, giving it the funding flexibility to complete future deals with NextEra or third-party sellers. Thanks to its parent's extensive clean energy portfolio and the global economy's accelerating shift toward renewable energy, it has no shortage of investment opportunities. Continued outperformance seems likely.
Top-quality dividend stocks
Brookfield Infrastructure and NextEra Energy Partners have excellent track records of paying steadily growing dividends, which have given them the fuel to outperform. Those trends seem likely to continue, given their well-defined growth strategies. They're great dividend stocks for those starting on their investing journey.
