The data is pretty remarkable. Companies that grow their dividends outperform all other types of stocks by a lot. Since 1972, dividend growers and initiators have delivered 10.7% total annualized returns, according to data by Ned Davis Research and Hartford Funds. That's better than companies in the S&P 500 (8.2%), non-dividend growers (7.1%), and non-payers (4.8%).
Many companies pay a growing dividend. However, only a few offer a higher-yielding payout that they can grow at an above-average rate. Two companies with excellent track records of increasing their above-average payouts at high rates are Prologis (PLD 0.79%) and NextEra Energy Partners (NEP -0.86%). That rapid dividend growth should continue, making them stand out as some of the best dividend growth stocks to buy this month.
Ample embedded growth ahead
Prologis has been a dividend growth juggernaut in recent years. The real estate industrial trust (REIT) gave its investors a 25% raise earlier this year. It has grown its dividend at a 12% compound annual rate over the last five years. That's one of the best rates in the REIT sector and more than double the 5% compound annual growth rate of the S&P 500. What makes that growth all the more impressive is that Prologis' 2.7% dividend yield is significantly higher than the S&P 500's 1.6% payout.
Prologis should have no problem continuing to grow its payout at an above-average rate in the coming years. A big factor is its legacy warehouse portfolio's enormous embedded rent growth. Because Prologis signs long-term leases with tenants, it has yet to fully capture the surge in rental rates coming out of the pandemic. Its existing lease rates sit 62% below current market rents. Because of that, the company estimates its net operating income will grow at a high single-digit annual pace for the next several years as legacy leases expire and roll over to market rates.
On top of that, Prologis recently closed its acquisition of Duke Realty, which will be immediately accretive to its earnings. The REIT is also investing billions of dollars in development projects. These growth drivers should enable Prologis to continue growing its cash flow per share at a double-digit annual rate. That should support a similar dividend growth rate.
A powerful dividend growth plan
NextEra Energy Partners offers best-in-class dividend growth. The clean energy infrastructure company has expanded its dividend by a 15% compound annual rate since its formation in late 2014. That's one of the fastest dividend growth rates in the energy sector.
The company is in a class of its own. It's the only company in the S&P 1000 with a market cap above $5 billion (it's at $6.9 billion) and a dividend yield of over 2.25% (it's yielding nearly 4%) that has grown its dividend by more than 50% over the past five years and projects to deliver more than 12% annual dividend growth through 2025. NextEra Energy Partners anticipates it could grow its payout at a 12% to 15% compound annual rate during that timeframe.
Powering the company's plan is its ability to acquire income-producing renewable energy-generating assets. NextEra Energy Partners has a vast acquisition opportunity set, thanks to its relationship with leading renewable energy project developer NextEra Energy (NEE -1.25%). That company has a large portfolio of operating assets and a massive pipeline of development projects that it can steadily drop down to its affiliate. NextEra Energy Partners can also invest in organic expansions and make third-party acquisitions. It has many ways to fund new deals, which will allow it to continue growing its payout rapidly.
Top-tier dividend growth stocks
Prologis and NextEra Energy Partners have delivered some of the best dividend growth rates in their classes over the past several years. That's even more impressive, considering their higher dividend yields. They should be able to continue delivering some of the best dividend growth in their sectors in the coming years. That makes them stand out as great dividend growth stocks to buy this month.
