Dividend stocks that grow their payouts over the years can give investors an extra incentive to hold those investments for the long haul. But investors also need to be careful not to assume that just because a company has been raising its payouts that those patterns will continue indefinitely.
A couple of stocks that have been rapidly increasing their payouts in recent years are Baxter International (BAX -0.22%) and Costco Wholesale (COST 0.17%). While neither of them is a Dividend Aristocrat, it's hard to ignore how fast their dividend payments have been growing of late.
Can these stocks continue making aggressive rate hikes, and are these investments worth adding to your portfolio today?
1. Baxter International
Baxter makes medical products that assist with many facets of healthcare. Their products help with kidney and respiratory care, and they also assist with running diagnostics and helping patients recover quickly from surgery. The company got bigger last year with its $10.5 billion acquisition of medical technology company Hill-Rom, which makes smart beds and other products.
However, Baxter's financials haven't been looking great recently, with the company reporting a net loss of $2.9 billion for the period ended Sept. 30. Baxter incurred goodwill impairment charges of just under $2.8 billion, which led to a steep loss for the quarter. The positive is that its free cash flow over the trailing 12 months has totaled $751 million, which is more than the $567 million that the company paid in dividends during that time frame.
At $0.29, the company's quarterly dividend currently yields 2.2%, which is above the S&P 500 average of 1.7%. Five years ago, Baxter was paying its shareholders just $0.16, and it has been consistently raising its payouts since then. Earlier this year, it announced a 3.5% increase to its dividend, marking the seventh straight year it has raised its payouts.
BAX Dividend data by YCharts.
While the dividend looks good today, I wouldn't rely on or expect significant dividend growth in Baxter's future. The company's margins are normally slim, in the single digits, and with the business coming off a big acquisition, there may be some added uncertainty with respect to how safe the payout will be in the future.
Despite some impressive dividend growth in recent years, Baxter has slowed down its rate of increases of late, and that could be a sign to investors to temper their expectations for the future. The healthcare stock is down 40% this year and there isn't an overwhelming reason to buy shares of Baxter today.
2. Costco Wholesale
Big-box retailer Costco is known for being a popular place to shop at any time. Whether they're loading up on supplies amid a pandemic or just looking for a way to save money by buying in bulk, the company continues to attract shoppers consistently.
Costco releases monthly sales numbers, and for the month of November, total company sales were still up 4.3% from the same month last year. The resiliency in the business has enabled Costco to continuously post profits and grow its dividend over the years.
The stock currently pays a yield of just 0.7%, but that can be a bit misleading as the company has been raising its payouts for nearly two decades. At $0.90, the dividend is now 80% higher than the $0.50 it was paying in late 2017. The company could afford to pay more of a dividend, but it smartly avoids making larger increases to avoid putting itself into a tough position later on. Instead, the company has issued special dividends when it has done particularly well; in 2020, it paid a special $10 dividend per share dividend as a result of a strong performance that year.
Costco's modest payout ratio of 26% makes this a solid dividend stock to own, as it's likely that the company will continue making more increases to the payout in the future. The only reason to potentially hold off on buying the stock just yet is that it trades at a multiple of 37 times its trailing earnings. But historically, the stock has normally traded at a premium, so it may still be a good buy at its current price given the safety the business offers and its continued growth.
COST PE Ratio data by YCharts.
If you're buying for the long term, Costco can be a solid investment to add to your portfolio today, as both its profits and dividend are likely to continue rising for the foreseeable future.
