Dividend stocks can provide investors with recurring cash flow that they can use for just about any purpose. However, inflation can chip away at the value of a dividend over time. One way investors can offset that risk is by investing in companies that regularly increase their payouts.
One of the top dividend growth stocks you can invest in right now is healthcare company AbbVie (ABBV 1.85%).
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AbbVie has doubled its dividend payments in just five years
Today, AbbVie pays investors a quarterly dividend of $1.41 per share (or $5.64 per share annualized), currently yielding 3.55%. That's more than twice the average S&P 500 yield, which is just under 1.4%. But if you had invested in AbbVie years earlier, your dividend income as a percentage of your initial investment would be much higher because of the increases in payouts during that time.
Data by YCharts.
In five years, the dividend has risen by 120%, meaning your dividend income would have more than doubled since then. That averages out to a compounded annual growth rate of 17.1%. If the company were to continue raising its dividend payments at that rate on an average over the next few years, then on an initial investment of $10,000, here's how much income you could be collecting over the next five years:
| Year | Annual Dividend | % of Original Investment |
|---|---|---|
| 0 | $355 | 3.55% |
| 1 | $415.70 | 4.16% |
| 2 | $486.79 | 4.87% |
| 3 | $570.03 | 5.70% |
| 4 | $667.51 | 6.68% |
| 5 | $781.65 | 7.82% |
Table by author.
The caveat here is that dividend payments are never guaranteed, and rate increases are even less certain. AbbVie could very well continue to make increases in the future, and its track record (it's a Dividend King) suggests that's likely to happen. But the rate increases could be more modest than the 17% it has averaged in the past five years; its most recent hike was a more modest 8.5%. But the bottom line is the same: With a dividend growth stock, you'll be collecting more on your original investment over time. Although AbbVie's dividend yield is 3.2% today, the table above shows how income can quickly rise by just hanging on to your investment.
However, one important thing investors should always consider with dividend growth stocks is how much room they have to increase their payouts in the future. If a company's cash is tapped out, investors may only be left with nominal increases moving forward.
Investors should use payout ratios when evaluating dividend growth stocks
A common way to evaluate a company's dividend is by comparing its dividend payments per share against earnings per share. Using that metric, you can arrive at its payout ratio. Here's how that ratio has looked for AbbVie in the past five years:
Data by YCharts.
The one thing you'll note is how quickly these percentages can change over time. If the company has a bad year, the payout ratio can spike, making the dividend look unsustainable. In 2020, for example, AbbVie's earnings per share plummeted from $5.28 the previous year to just $2.72. And a big part of the reason was due to one-time expenses related to its acquisition of Allergan and contingent consideration related to the monoclonal antibody drug, Skyrizi. And while the company would recover from that, an investor screening for stocks with low payout ratios could have easily overlooked AbbVie.
Another way to assess a dividend is by relying on cash flow. Using this approach, investors can see that, over the years, AbbVie has reported more than sufficient free cash flow to cover its dividend payments (even during years where accounting profits declined):
Data by YCharts.
At an average buffer of more than $8 billion, it's easy to see that there has been ample room for the company to raise its dividend payments over the years, and it remains in a strong position today.
Is AbbVie stock a buy?
AbbVie is a top drugmaker with more than $56 billion in revenue last year, a solid 23% over the previous year. Its financials look strong and safe enough to not just cover but increase its dividend payment in the future. The increases may not be as generous as they have been in the past, but odds are the company will continue to boost its dividend payments.
For income investors, this is definitely a top dividend stock worth hanging on to for not just years but potentially decades.
