Dividend growth investors are generally best served by picking stocks with proven business models. That's because a proven business model leads to steadily growing sales and earnings over time, which should also translate into a consistent and growing dividend. A diversified portfolio of quality dividend stocks can provide investors with the income they need now and in the future.
Here are two stocks that I believe have proven business models and could form the foundation of a dividend growth investor's portfolio.
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1. Starbucks
With a market capitalization of $98 billion, Starbucks (SBUX -1.01%) is the largest coffee/cold beverages chain in the world. Starbucks is the world's most valuable restaurant brand primarily due to two factors.
First, Starbucks has a beverage of some kind for just about everyone. If you're on the go in a hot climate, you can try one of its iced or cold beverages. Contrary to the belief that Starbucks is predominantly a coffee company, iced and cold beverages actually account for 70% of its sales. And if you're on the go in a cold climate, you can try one of the company's coffees or hot teas. Starbucks also has numerous products that can be purchased at retailers for customers looking to make coffee in the comfort of their own homes.
Next, Starbucks boasts the largest rewards program among its peers, with 26.4 million active loyalty members in the U.S. enrolled in its Starbucks Rewards program. This figure represents a 21% year-over-year growth. Rewards programs incentivize customers to patronize a business consistently and potentially more frequently, which bodes well for Starbucks.
This explains why analysts anticipate that Starbucks will be able to deliver 11% annual earnings growth over the next five years. Coupled with a manageable dividend payout ratio of 56.8% in its previous fiscal year, this should allow the dividend to grow as fast as earnings. That's why Starbucks' current 12-year dividend growth streak is just the beginning of decades of payout raises to come.
Income investors who are also looking for growth should consider buying Starbucks' market-beating 2.3% dividend yield. At a forward price-to-earnings (P/E) ratio of 25.5, the stock looks to be reasonably valued for the income and growth that it can provide investors.
2. T. Rowe Price Group
With over $1.5 trillion in assets under management as of February, T. Rowe Price Group (TROW -1.71%) is one of the biggest asset managers on the planet.
Thanks to T. Rowe Price's status as a leading asset manager, the business has been able to gradually increase its net revenue and earnings over time. This has translated into 34 consecutive years of dividend increases for shareholders, which makes T. Rowe Price a Dividend Aristocrat.
There are three reasons why I believe that the stock will build on this track record in the years to come. First, analysts anticipate that T. Rowe Price will generate 13% annual earnings growth over the next five years. This assumes that corporations will keep innovating to drive their earnings and stock prices higher, which will also result in higher net revenue and earnings for T. Rowe Price.
Secondly, T. Rowe Price maintained a regular dividend payout ratio of just 33.9% in 2021. This gives the stock plenty of additional free cash flow to maintain its dividend during just about any economic downturn. And it also allows T. Rowe Price to raise its dividend in line with its high earnings growth rate. For a stock with a market-beating 3.1% dividend yield, this is quite a bit of growth potential.
Third, T. Rowe Price has a balance sheet with no long-term debt and plenty of liquidity. This serves as yet another buffer for the company to keep paying its dividend, even in a recession.
Best of all, right now T. Rowe Price is trading at a lowly forward P/E ratio of 12.7. This makes the stock an attractive pick for income and growth investors alike.
