The only thing better than a steadily growing dividend is one that's available at a discount. Income investors have many choices in this vein right now, thanks to the market's 2022 swoon.
But not all discounted dividend stocks are worth owning over the long term. Let's take a look at a few standout businesses that have excellent growth prospects, but don't require shareholders to take on too much risk. Read on for some good reasons to like Microsoft (MSFT -1.96%), Costco (COST -1.78%), and Garmin (GRMN -1.03%).
1. Microsoft
Microsoft stock is down more than 25% this year, along with many of its tech giant peers. But that sell-off seems overdone.
Sure, parts of the business are under pressure as consumers shift spending away from areas they prioritized in early phases of the pandemic. PC and productivity software sales are down, and video game engagement has dipped compared to 2021.
But Microsoft's massive cloud services business is still growing and gaining market share. That success helped overall sales rise 16% in the most recent quarter after accounting for currency exchange rate shifts.
The tech giant is also among the most cash-rich companies on the market, having generated $22 billion in operating income just in the last full quarter. That helps explain why management felt confident enough on Sept. 20, 2022, to boost the dividend by 10% even though growth is slowing in many markets.
2. Costco
Costco isn't the perfect dividend stock. The retailer pays out a small portion of its annual earnings relative to peers like Walmart. But there's more to Costco's dividend than its stated yield of less than 1%.
Management prefers to make one-time special dividend payments, which traditionally occur every few years. That approach isn't ideal for income investors seeking predictable growth. But it does mean you're likely to get far more than the current 0.7% yield while owning this stock over several years.
Costco is likely to see strong earnings growth ahead, too. It is nearly time to raise membership fees, for example, which power nearly all its profits. Costco's renewal rates are hovering near all-time highs as well, as consumers value its price leadership in this inflationary era. That's why the stock's decline in 2022 makes it a more attractive dividend stock.
3. Garmin
Garmin is no stranger to tough selling environments. The tech hardware specialist saw collapsing demand for its automotive GPS devices as smartphones took over that function for many drivers. Yet sales steadily rose in each of the last five years thanks to its deep portfolio that includes smartwatches, marine and aviation products, and fitness trackers.
That growth streak is likely to end in 2022, but that's no reason to abandon this stock. Garmin remains highly profitable, with operating margin on track to land at 21% of sales this year compared to 25% in each of the last two years. Sales will likely drop to $4.9 billion from $5 billion in 2021, but annual revenue is still well above the pre-pandemic level of $3.8 billion.
Garmin doesn't have an especially long track record of consistent dividend raises. But its current yield of more than 3% translates into a solid cushion for investors willing to hold the stock through the next few quarters of volatility ahead.
