Risk-averse income investors often like to focus on stocks with solid track records for paying and increasing dividend payments. But some of the most promising dividend growth stocks are the ones that don't have long streaks of dividend increases yet. That doesn't mean they aren't good income stocks to own, and overlooking them could be a mistake.
Two dividend stocks that have been growing their dividend payments in recent years and could one day become Dividend Aristocrats are Humana (HUM 1.08%) and Microsoft (MSFT -1.27%). They don't pay high yields, but here's why dividend investors should consider them anyway.
1. Humana
Health insurance company Humana currently pays a dividend yield of just 0.7%. It's a low payout (the S&P 500 average is 1.8%), and with interest rates on the rise, you might even earn more of a return by putting the money in a savings account with a local bank. But for long-term income investors, what makes the stock attractive is its potential for dividend growth in the future.
Humana's payout ratio is incredibly low at just 12% of earnings. There is ample room for the company to increase its dividend payments, and Humana has already made significant increases to its payout over the past five years:
HUM Dividend data by YCharts.
Investors who bought the stock five years ago are collecting just about twice as much in dividends today. Future rate hikes are probable given the low payout ratio and the stability the company offers; last year, 83% of the revenue Humana generated came from government-related contracts.
In the trailing 12 months, Humana has netted a profit of $3.1 billion on sales of $89.3 billion. Its free cash flow totaled $2.7 billion during that time and was more than seven times the $372 million it paid out in dividends.
Humana hasn't always followed a consistent schedule of increasing its payouts, but since 2011, they have more than tripled from the $0.25 that the company was paying investors back then. With strong fundamentals and more demand likely in the future for its services due to an aging demographic, Humana looks to be a solid growth stock to own, a potential Dividend Aristocrat in the making.
2. Microsoft
Tech titan Microsoft recently announced it was hiking its dividend payments. Investors will be receiving a 10% increase on their dividend, which will now pay $0.68 every quarter. Over a five-year stretch, Microsoft has grown its dividend by just under 62%.
MSFT Dividend data by YCharts.
The tech company has been regularly increasing its dividend payments since 2011 when it boosted its payout from $0.13 to $0.16. Its payout ratio of 25% is also low, making it possible for Microsoft to make more aggressive rate hikes in the future. For now, investors may want to temper their expectations, however, as growth remains a top priority for the company; in January, Microsoft announced it was going to acquire gaming company Activision Blizzard in an all-cash deal worth $68.7 billion.
Microsoft has brought in $65.1 billion in free cash flow over the past 12 months, which gives it the flexibility to focus on growth while still paying and increasing its dividend, which during that time cost the company $18.1 billion.
At 1.1%, Microsoft's yield may be underwhelming, but it's likely to rise in the long run. Plus, the company's growth potential could more than make up for that as the business has plenty of opportunities to expand its business, whether it is in cloud computing, gaming, developing more Office products, or expanding LinkedIn's services.
Microsoft was a solid stock to own decades ago, and it's a safe bet to remain that way in the future. With a growing dividend on top of all that potential, there's no shortage of reasons as to why you may want to buy and hold the stock.
