Investing in dividend growth stocks can be a great way to see your recurring income increase over the years. But some dividend stocks only increase their payouts by 1% or 2% each year. And while they can technically call themselves dividend growth stocks, it's an underwhelming level of growth for many income investors -- in some years, that won't even cover inflation.
Three stocks that have been growing their payouts at a much more rapid pace include Amgen (AMGN -0.81%), Visa (V -0.03%), and The Home Depot (HD 0.09%). And what's encouraging is that these are income-generating investments that could continue to increase their payments in the years ahead.
Healthcare company Amgen is a great dividend stock because its profits are consistent and it has a lot of financial wiggle room to make sure that its payouts can continue. In each of the past eight quarterly results, Amgen's net profit margin has come in higher than 27%.
During the nine-month period ending Sept. 30, the company generated $8.3 billion in cash from its day-to-day operating activities. That was plenty of cash to cover both its investing activities, which totaled just over $4 billion during that period, and its dividend payments of $2.8 billion. Amgen even had sufficient cash to pay down debt and repurchase common stock. There's plenty of room for it to continue raising its dividend, which it has done in recent years at a great rate.
Today, the company pays its investors a quarterly dividend of $1.60, which yields 2.8% -- well above the typical S&P 500 stock that pays around 1.8%. Five years ago, Amgen's quarterly payout was $0.79, just less than half of what it is now. The company has raised its dividend payments by an average compounded annual growth rate (CAGR) of 15.2% during that time.
With strong cash flow and the company's $13.4 billion acquisition of Celgene now complete, giving it access to psoriasis medicine Otezla, the drugmaker's product line-up looks as strong as ever.
The stock itself is having an off year in 2020, falling 5% thus far and underperforming the S&P 500, which is up 14%. But for those investors with a long-term "buy and hold" mindset, I believe it's still an excellent buy.
Credit card company Visa pays a modest dividend yield of just 0.6% today, making its the lowest payout on this list. But like Amgen, it's been aggressively growing those dividend payments to make them much more meaningful to investors. Toward the end of 2015, Visa's quarterly dividend was $0.14 per share. Today, it's more than double that at $0.32, having risen by a CAGR of 18% over the past five years.
Although that's a high rate of growth, like Amgen, Visa can afford to beef up its payouts. Its profit margins over the past two years are even stronger, coming in normally at well over 40%.
In its fiscal year 2020, Visa's cash flow from operating activities totaled $10.4 billion, which was well above the $1.4 billion it spent on its investing activities and the $2.7 billion it distributed in the form of dividend payments. There's plenty of room for this company to continue making its dividend stronger, which in turn will make it a more appealing investment for income investors who today may not think its yield is high enough. Despite a rocky landscape for the financial sector, Visa's stock has risen by 10% in 2020.
3. The Home Depot
Home improvement retailer Home Depot has been fared well during the coronavirus pandemic. People staying at home during shutdowns and doing repairs around the house have helped push demand for Home Depot's products. Its net sales of $99.8 billion in the nine months ending Nov. 1 were up more than 18% from the same period last year. It's a high rate of growth given that in fiscal 2019, its net sales of $110.2 billion grew at a rate of only 1.9%. Through the last nine months, Home Depot's cash from operating activities of $17.4 billion has eclipsed its capital expenditures of $1.5 billion. And there's still plenty of cash left over, even after its total cash dividend payments of $4.8 billion.
Home Depot's current quarterly dividend of $1.50 yields 2.2% annually. The the company has increased those payments by 154% from the $0.59 that it was paying five years ago, averaging a CAGR of 20.5% during that time.
With a decent yield today and the business still going strong, Home Depot's dividend yield could get a whole lot higher in the years ahead, even if home improvement projects start to slow down. Year to date, Home Depot's stock is up over 23%.