Dividend stocks with growing payouts can be some of the best income investments to hold for the long term. Over time, with regular dividend hikes, even a yield that is modest when you buy the stock can become more impressive. But to capitalize on that, investors have to remain patient.
Over the past five years, Anthem (ELV 0.57%), Microsoft (MSFT -4.08%), and Enbridge (ENB -0.36%) have increased their dividend payments by more than 40%. And what's exciting is that there's still room for those payouts to climb even higher.
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1. Anthem
Managed healthcare company Anthem serves more than 117 million people through all of its affiliated businesses. One of the ways it grows is through acquisitions. And in November, it announced it was buying Integra Managed Care, which serves 40,000 Medicaid members and has a focus on helping adults with long-term care needs. Last year, Anthem closed its purchase of Beacon Health Options, a behavioral health business that today serves more than 40 million people across the country.
Deals like these have helped Anthem grow not just revenue but also its bottom line. In the trailing 12 months, the company has generated a profit of $5.5 billion on revenue of $133.9 billion. Back in 2016, Anthem's profits were just $2.5 billion on revenue of just under $85 billion.
Powered by that growth, the company has significantly bolstered its dividend payments. At current share prices, the stock yields just over 1% (slightly below the S&P 500's average yield of 1.3%). While that may be modest, for long-term investors what makes this attractive is the potential for management to further boost those payouts. Anthem's $1.13 quarterly dividend today is 74% higher than the $0.65 that it was paying five years ago. Over that period, the dividend has grown at a compound annual rate of 11.7%. And with a payout ratio of just 20%, management has plenty of room to raise the dividend from here.
As such, there's plenty of incentive for investors to just buy and hold shares of this healthcare stock for many years.
2. Microsoft
Tech giant Microsoft's dividend doesn't feature a terribly high yield today, either -- just 0.7%, which many income investors may scoff at. But the stock offers the best of both worlds: dividends and long-term growth. Microsoft is now worth $2.5 trillion, and its market cap has risen by nearly 450% in five years while the S&P 500 has increased by 107%.
Whether you're bullish on remote work, cloud computing, or video games, Microsoft has you covered with its Microsoft 365 business software suite, its Azure platform, and Xbox console. The sheer diversity the company offers is what makes it an incredibly stable and safe investment. And if it runs out of growth opportunities, it can just buy a business, as it did with LinkedIn back in 2016, when it paid $26 billion for the professional networking platform.
It certainly has the financial flexibility for such moves. Over the past 12 months alone, Microsoft brought in more than $60 billion in free cash flow. That was also more than three times the $16.9 billion it paid out in dividends during that time.
In five years, Microsoft has increased its dividend payments by 59%, from $0.39 to $0.62, for a compound annual growth rate of 9.7%. Yet its payout ratio sits at just 25%.
Given the company's strong growth -- sales rose 22% to $45.3 billion in the quarter that ended Sept. 30 -- there's plenty of reason to expect that the dividend will only get bigger.
3. Enbridge
Enbridge is the only stock on this list with an above-average yield. At 7.1%, it almost looks too good to be true, which may lead income investors to worry that a dividend cut is around the corner. But that's not the case. This pipeline company is among the safest investments in the oil and gas industry.
On Dec. 7, Enbridge announced it would be raising its dividend by 3% -- its 27th annual payout hike in a row. It will distribute 3.44 Canadian dollars per share next year, which is 43% higher than the CA$2.413 that it was paying in 2017, giving the dividend a compound annual growth rate of 7.3%.
With a payout ratio of more than 100% of earnings, at first glance, the current dividend looks unsustainable. But Enbridge is a great example of a company where looking at the payout ratio alone can give you a misleading impression about the safety of its dividend. The company targets its payout to be in the range of 60% to 70% of its distributable cash flow (DCF) -- a common metric to use for that purpose in the oil and natural gas industry. DCF excludes non-cash items that do factor into earnings, but that don't impact a company's ability to make dividend payments.
For 2022, the company anticipates that its DCF per share will fall in the range of CA$5.20 to CA$5.50, which would put its payout ratio based on that metric at a very sustainable 64%. Enbridge also projects that its DCF will grow at an annual rate of 5% to 7% through 2024. So for the foreseeable future, there are no alarm bells here to suggest its extraordinary dividend is in any jeopardy.
With Enbridge, investors have an opportunity to pick up a solid income stock that's already paying a high yield, and the strong possibility of further dividend hikes in the years ahead.
