Investing in a dividend stock that doesn't increase in value means that over the years, inflation will chip away at your recurring payments. Buying shares of a stock that typically raises its payouts can be a great way to not just hedge against that risk, but also lead to more cash flow for you and your portfolio over the long term. For a dividend to double within a span of five years means that a company has raised its payouts by roughly 15% every year.
That's a high percentage, but both Humana (HUM -0.05%) and Broadcom (AVGO -0.41%) have hiked their dividend payments at even greater rates. Below, I'll look at just how much their payouts have risen, whether there is room for more rate hikes, and if you should add these income stocks to your portfolio today.
Health insurance company Humana has done a remarkable job of creating value for shareholders over the years, simply through increasing its dividend payments. Today, it pays investors a quarterly dividend of $0.70, which yields a modest 0.6%. That is well below the S&P 500 average of around 1.5%, but if the company keeps raising its payouts, it could soon eclipse that percentage.
Humana is paying more than double the $0.29 quarterly payments it was making five years ago. It has been raising its payouts at an average compound annual growth rate (CAGR) of 19.3% since then. With an incredibly low payout ratio of 10%, investors don't have to worry about the company's rate hikes putting its dividend payments at any risk. And when looking at Humana's cash basis, it is evident there is room for even more growth. Over the trailing 12 months, Humana's free cash flow of $4.7 billion has eclipsed the $323 million the company has paid out in dividends during that time frame. It has spent much more cash ($1.8 billion) on buying back shares, which also helps add value for shareholders by giving the stock price a boost.
In 2020, the company generated $77.2 billion in revenue, up 18.9% from the previous year, driven primarily by an increase in premium revenue which rose by 17.9%. And that growth trickled down to the bottom line with the company's profits climbing by 24.4% to $3.4 billion.
What makes Humana a safe investment is that the bulk of its revenue comes from government contracts, which in 2020 accounted for 83% of the company's premiums and service revenue. Anytime the government is a big customer, that can help make a company's operations more stable and make the stock less risky to own.
Over the past year, shares of Humana are up 18% while the S&P 500 has increased by 43%. But this underrated healthcare stock could be a great buy, trading at just 17 times its earnings -- investors are paying a multiple of 27 for the average stock in the Health Care Select Sector SPDR Fund. With a low valuation, a safe business, and an attractive dividend, Humana could be an excellent investment to hang on to for many years.
Another solid dividend stock to consider adding to your portfolio is Broadcom. The company provides infrastructure software and semiconductor solutions, helping businesses build their connectivity and perform more of their operations in the cloud. Unlike Humana, Broadcom already pays a high yield today. With quarterly payments of $3.60, the stock yields 3%, which is already well ahead of the S&P 500 average.
Those payouts are more than seven times the $0.49 that Broadcom was paying its shareholders five years ago. The 635% growth in its dividend since then reveals a CAGR of 49%.
The obvious problem here is that the rapid growth in dividends isn't sustainable over a longer time frame. Right now, the company's payout ratio sits at over 140%. However, Broadcom's free cash flow of $12.4 billion over the past 12 months leaves plenty of room for the company to pay its dividend, as its distributions totaled $5.7 billion during that period. While there is room for the company to continue increasing its dividend, investors should temper their expectations; its last hike was a 10.8% increase, which looks to be a lot more realistic, especially given how high the dividend is right now.
Broadcom's business also looks to be in solid shape right now. On March 4, it released its first-quarter results for the period ending Jan. 31. Net sales of $6.7 billion grew 13.6% year over year. And for the second quarter, the company projects its top line will increase by a similar amount. Semiconductor sales led the way with $4.9 billion in Q1, improving 17.1% from the same period a year ago. And with a big shortage in semiconductors around the world, demand may continue to be strong for the foreseeable future.
Shares of Broadcom are up 71% in the past 12 months. And although it is trading at a hefty P/E of more than 53, on a forward basis that drops to less than 17, slightly below Qualcomm's multiple of nearly 19. Broadcom is a solid buy as both its dividend income and revenue will likely continue to increase in the coming years.