If you're investing in dividend stocks, it's important not to overlook the potential for their payouts to rise over time. Inflation can diminish dividend income, and a yield that looks impressive today may not look so great five or 10 years down the road. But even a modest 2% or 3% hike every year can help offset inflation and ensure that the real dividend income you are earning remains intact.
Two dividend growth stocks that income investors should consider buying today are Pfizer (PFE 1.28%) and Best Buy (BBY -1.05%). Not only are these stocks likely to raise their payouts for the foreseeable future, but it also wouldn't be surprising if those payouts were to double within just five years.
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1. Pfizer
Healthcare giant Pfizer pays investors a yield of 3.3% (well above the S&P 500 index's 1.3%) and its business got a lot leaner last year when it spun off its legacy products and slower-growing Upjohn segment -- which is now part of Viatris. The remaining business should provide investors with more growth potential.
When the company released its second-quarter results for the period ending July 4, its operating revenue of $19 billion was up an impressive 86% year over year. Pfizer's COVID-19 vaccine, BNT162b2, contributed $7.8 billion -- but even without that, the growth rate would still be relatively strong at around 13%.
However, long-term investors shouldn't discount the vaccine as booster shots could become the norm; health officials are now possibly looking at administering booster shots five months after the first two doses of the vaccine. And with more potential variants in the future, this could be a recurring source of revenue for the company.
For the current year, Pfizer is projecting revenue between $78 billion and $80 billion. Its diluted per-share profit of $0.98 (up 58% from a year ago) in Q2 was more than double its quarterly dividend of $0.39. Even if the company doubled the dividend to $0.78, its payout ratio would only be about 80%.
Looking ahead, it's probable that Pfizer's revenue and profit will decline -- even if the pandemic doesn't fully come to an end -- as more companies offering vaccines could start to take market share away from the healthcare company. Novavax, for example, will likely apply for Emergency Use Authorization of its vaccine later this year. But in the near term, Pfizer can take advantage of its impressive profits to deploy more aggressive growth initiatives that might otherwise have stalled dividend growth.
It recently announced plans to acquire oncology company Trillium Therapeutics for $2.26 billion in cash. Although Trillium hasn't generated any meaningful revenue, the company possesses "next-generation" therapeutics that help identify and destroy cancer cells.
So while investors may not be able to count on COVID-19 revenue from Pfizer for the next five years, the company's strong results today could set up Pfizer for opportunities that grow its profits over time. That accelerated profit growth may, in turn, lead to a more rapid rate of dividend increases. Although Pfizer's dividend has only risen by 30% over the past five years, the increases over the next five years could be much more generous as the company bolsters both its portfolio and bottom line.
Year to date, shares of Pfizer are up 27%, outperforming the S&P 500's 20% gain during that period. Whether you want a solid growth stock or just a good income investment, Pfizer can serve both purposes.
2. Best Buy
Consumer electronics retailer Best Buy currently pays its shareholders a quarterly dividend of $0.70 which yields 2.4% annually. It's a decent payout that the company has been aggressively increasing in recent years. It has only taken management four years to double the dividend. And twice since 2015, the company has even issued special cash dividends -- a great sign the business is doing well.
The company released its latest quarterly results on Aug. 24 and it was a remarkable performance, to say the least. Its comparable enterprise sales for the period ending July 31 grew 20% year over year to $11.8 billion. And the company's diluted per-share profit skyrocketed 76% to $2.90 -- more than its annual dividend. Even compared to 2019's numbers, revenue is up 24% and operating income has more than doubled.
As the business heads into the third quarter, however, the company expects comparable sales to fall between 1% and 3% as it goes up against some tougher numbers from a year ago. However, CEO Corie Barry is optimistic about the long-term future of the business, saying that "there has been a dramatic and structural increase in the need for technology. We now serve a much larger install base of consumer electronics with customers who have an elevated appetite to upgrade due to constant technology innovation and needs that reflect permanent life changes."
Even if the company doesn't deliver this type of impressive growth for the next five years, there's still ample room for the dividend to increase; the company's payout ratio remains low at under 30%.
With a new normal that looks more bullish than ever in an era of greater digitization and more remote work, Best Buy's numbers could continue to look strong. And if that's the case, the dividend could easily double within five years. For income investors, now may be a great time to buy the stock, which is up 18% year to date.
