Dividend stocks can sometimes be deceptive. High yields can be cut and stocks with low payouts today could be paying you a much more significant amount in the future. The big takeaway is to focus on stocks that increase their dividend payments over time. This not only suggests that the current dividend is more likely to be safe, but that as long as the business is performing well, the company will continue bumping up its payout.
Three dividend growth stocks you should consider adding today include Humana (HUM 0.92%), Broadcom (AVGO 1.40%), and Costco Wholesale (COST -0.32%). Although none of their payouts are terribly high, there's the potential to earn a lot of dividend income from these stocks over the long haul.
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1. Humana
A health insurance company can be a stable business -- and Humana is no exception, posting profits of at least $2.7 billion in each of the past three years. Its revenue from premiums hit nearly $80 billion in 2021, up 7.6% from the previous year. Even with COVID-19 healthcare costs weighing on the company's operations (its operating margin was just 3.7% this past year vs. 6.5% in 2020), Humana has still been able to generate a healthy profit to support its recurring dividend payments.
The company's dividend is modest in size today, yielding just 0.6%, which is below the S&P 500 average of less than 1.4%. But that also makes it easy for Humana to allocate more resources to growing its payouts. Last year, the company's dividend payments were just $354 million and accounted for less than 16% of its operating cash flow.
Humana investors currently receive $0.7875 in dividends for each share that they own. That's an incredible 172% higher than the $0.29 that it was paying just five years ago at the start of 2017. Although it's unlikely the rate increase will continue at that pace, it's probable that Humana will make more increases in the future, especially with the company projecting that its per-share profit will rise this year to $23.08, up from $22.67 in 2021.
2. Broadcom
Another company that's known for aggressively hiking its dividend payments is Broadcom. The tech company develops semiconductor devices, and it also has infrastructure software that helps its customers manage and automate applications on the cloud.
Unlike Humana, Broadcom generates much stronger margins. Over the past four quarters, its profit margin was an impressive 27% of revenue. And sales of $7.7 billion for the period ended Jan. 30 rose 16% year over year. Broadcom expects its top line to grow to $7.9 billion in the next quarter.
The business has been generous with respect to rewarding its shareholders, noting that it paid $1.8 billion in cash dividends during the past quarter and spent another $2.7 billion on share buybacks. Over the trailing 12 months, the company has spent more than $10 billion on buybacks and dividends, which is still less than the $13.7 billion it generated in free cash flow during that time.
A company that is committed to rewarding shareholders is a good sign for investors. At 2.8%, its dividend yield already looks good. But investors will likely still see increases to the payout. Broadcom's quarterly dividend of $4.10 is more than four times the $1.02 that it was five years ago. Its payout ratio is a bit high at more than 80%, but with more growth on the horizon, Broadcom is likely to keep the dividend hikes coming.
3. Costco
Big-box retailer Costco announced that it would be raising its dividend payment earlier this month. At $0.90, the most recent bump-up is a 14% increase from the $0.79 the company was previously paying. And that's nearly double the $0.50 it was paying five years ago. With Costco, investors also get the potential to benefit from special dividend payments. A special dividend is rare, a one-off payment that the company may decide to issue if it has done particularly well. Costco issued a $10 special dividend in 2020 and a $7 one in 2017.
Costco doesn't generate strong margins, but even at more than 2% of revenue, it still generates billions of net income. Over the trailing 12 months, it has accumulated $5.5 billion in profit on sales of $210.2 billion. As a percentage that's relatively small, but that's still strong enough to leave enough for the business to grow and pay its dividend. With a payout ratio of only 25%, there's plenty of room for the company to make more rate increases for the foreseeable future.
At $594 per share -- just off its 52-week high -- the only reason Costco's stock might not be a scorching-hot buy right now is that it may be too expensive. The shares trade at more than 46 times its profits while the S&P 500 index is at a multiple of less than 25. However, if you're planning to hold Costco's stock for the long haul, its current share price could still look cheap years from now.
