It's tempting for investors seeking dividend income to limit their searches to only high-yielding dividend stocks. But investors who do this may risk putting too little emphasis on one other important factor: dividend-growth potential.
It stands to reason that stocks with high dividend yields are generally trading at cheaper valuations than companies with low dividend yields. But there's sometimes good reason for some dividend payers to command higher valuations than their peers. In many cases, that reason is simple: Some dividend stocks trade at pricier valuations because their businesses are top-notch and their dividends are likely to grow substantially in the years to come.
Two stocks with low dividend yields today that are still worthy of a dividend-investor's portfolio are Apple (AAPL -0.57%) and Domino's Pizza (DPZ -0.08%). With strong dividend-growth prospects for both companies, it makes sense that the two stocks trade at premium prices relative to their dividend payouts.
Apple
Apple has a dividend yield of just 0.6%, so it would be extremely easy for investors looking for income to pass on the tech stock. But investors who decide to examine the stock more closely may come to a different conclusion.
It doesn't take long when examining the company's financials to realize that the tech giant is a cash cow. The company generated nearly $108 billion of free cash flow over the trailing 12 months.
This understanding of the company's strong stream of cash flow quickly puts Apple's dividend growth potential into perspective. The company is paying out less than $15 billion of this free cash flow annually in dividends. There's plenty of room, therefore, for Apple's dividend growth to continue.
Helping to give investors confidence in the likelihood of dividend growth in the future, Apple has made a habit of increasing its dividend payout every year since it was initiated in 2012. Highlighting the company's dividend growth, Apple's current quarterly dividend of $0.23 ($0.92 annually) is up by 46% over the last five years.
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Domino's Pizza
Pizza delivery-company Domino's Pizza has a slightly higher dividend yield of 1.2%. Even so, it's still likely low enough for many dividend investors to overlook the stock as a good option for income.
There's good reason, however, to love this dividend payer. Not only is pizza delivery a predictable business and the company's brand well known, but Domino's dividend is growing very fast. Over the last five years, the pizza-company's quarterly payout has risen 139%. And strong dividend growth persists today, as the company most recently increased its dividend by 17%.
Looking ahead, more strong dividend growth from Domino's Pizza is likely, since the company is only paying out about a third of its free cash flow in dividends.
While Apple and Domino's Pizza have low dividend yields today, shareholders of these two companies will likely benefit from substantial dividend growth in the years to come. More importantly, investors will own shares of strong companies with powerful brands and significant long-term potential. These high-quality companies with promising dividend-growth potential are arguably worth their premium prices.
