After notching double-digit gains in each of the last three years, the S&P 500 index and the Nasdaq Composite are lower by 7% and 12% year to date, respectively, on mounting concerns over inflation and interest rate hikes.
The good news for long-term investors is that sell-offs in the broader market have created buying opportunities. Here are three high-quality dividend growth stocks that can help your portfolio endure the volatility.
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1. Texas Instruments
The first stock to buy hand over fist is the chipmaker Texas Instruments (TXN 1.25%). Texas Instruments' $167 billion market capitalization makes it the ninth-largest semiconductor stock in the world.
Despite its 4% year-to-date decline, Texas Instruments has outperformed the Nasdaq Composite by a wide margin thus far this year. And I believe the stock will continue to outdo the Nasdaq for the foreseeable future.
This is because the global semiconductor industry is so large and fast-growing that it will require numerous companies to fill the demand. Growing consumption of consumer electronics devices and the essential nature of chips as components for those devices are expected to lead the industry to compound at an 8.6% annual rate from $452.3 billion in 2021 to $803.2 billion by 2028.
Due to Texas Instruments' leadership in an industry that's critical to the modern economy, analysts anticipate the stock will generate 10% annual earnings growth through the next five years. And with a dividend payout ratio of 51% in 2021, this should allow the stock to grow its dividend right around 10% annually in the medium term. This level of growth potential and Texas Instruments' market-smashing 2.5% dividend yield (which is exceptionally high for a tech stock) is an attractive pairing.
Investors looking for a trifecta of income and growth at a reasonable price can pick up shares of Texas Instruments at a forward price-to-earnings (P/E) ratio of 20.1. This makes it a solid stock to buy and hold for the long haul.
2. Norfolk Southern
Norfolk Southern (NSC 0.17%) operates roughly 19,300 route miles in 22 states in the eastern U.S. and the District of Columbia. The company's $67 billion market capitalization makes it the fifth-largest railway company in the world.
And with about 28% of U.S. freight volumes (i.e., consumer products, chemicals, construction materials, and automobiles) being moved via rail, Norfolk Southern is crucial to the modern economy, just like Texas Instruments. An investment in Norfolk Southern is a bet that the U.S. and global economies will continue to grow over time. This will result in much more freight needing to be transported from point A to point B, which will drive Norfolk Southern's revenue and earnings higher.
Analysts are forecasting that Norfolk Southern's earnings will increase at a 13% annual rate over the next five years. The stock's dividend payout ratio was just 34.4% in 2021, which is below the 35% to 40% payout ratio management is targeting. This suggests that mid-teens annual dividend growth is a realistic expectation for the next several years.
Even though the stock has only dipped 4% year to date, investors can snatch up Norfolk Southern's market-besting 1.8% dividend yield at a forward P/E ratio of 20.2. This is a sensible valuation for a stock of Norfolk Southern's quality, which is what makes it a decent buy at this time.
3. McDonald's
With a market capitalization of $175 billion, McDonald's (MCD 0.47%) is the largest fast-food franchise in the world. Elevated concerns surrounding the current inflationary environment and McDonald's closure of stores in Russia at this time have caused the stock's shares to drop 11% year to date.
McDonald's unparalleled brand of approximately 40,000 restaurants around the globe leads me to believe that the company will be able to pass rising costs onto its customers. Even with the inflationary pressures in the fourth quarter of last year, McDonald's was able to produce global comp sales growth of 12.3% over 2020 and 10.8% over 2019. This suggests that McDonald's has pricing power to endure just about any economic situation.
That's why analysts are expecting 13% annual earnings growth over the next five years for McDonald's. Given the stock's 56.6% dividend payout ratio in 2021, there looks to be plenty of flexibility to hand out at least high-single-digit annual payout raises in the years ahead. These are enticing growth prospects when paired with McDonald's market-topping 2.3% dividend yield.
Investors can scoop up the stock's shares at a forward P/E ratio of 23.7, which is a rational valuation for a Dividend Aristocrat like McDonald's.
