A common expression in the personal finance community is that money is freedom. While everybody will require different investment balances to achieve financial independence, a good place to start is by working toward being a millionaire. An investment balance of $1 million would generate $30,000 in annual dividend income, assuming a 3% dividend yield. That's not enough to live a life of luxury, but combine it with a Social Security disbursement and it should be enough for most retiring individuals to cover many of the basic necessities in life.
With that in mind, here are three stocks that can help you to build wealth and grow your dividend income over the next 10 to 20 years. It might even help you reach that millionaire goal.
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1. Air Products & Chemicals: The leader of a vital industry
With $12.7 billion in sales from more than 50 countries in its previous fiscal year, Air Products & Chemicals (APD 0.54%) is a major player in the industrial gases industry. Industrial gases are important inputs in a variety of industries, such as electronics, manufacturing, food, and medical.
Because of the crucial role that Air Products & Chemicals plays in so many industries, the company has performed well, which helped the stock crush the S&P 500 index over the last 10 years. A $10,000 investment a decade ago would have turned into $49,200 by now (with dividends reinvested). That's quite a bit better than the $32,310 that the S&P 500 would have turned the same investment into over that period.
Given that Air Products & Chemicals' products will only increase in importance as its customer base grows, it's clear why analysts are forecasting 10.7% annual earnings growth over the next five years. The stock's 2.1% dividend yield is also higher than the S&P 500 index's average 1.7% yield.
And with the dividend payout ratio poised to come in around 57% for the current fiscal year, Air Products & Chemicals' payout is well-covered. Investors can snatch up shares of the stock at a forward price-to-earnings (P/E) ratio of 27.5. Putting this into perspective, that's not much higher than the S&P 500 index industrial gases industry average forward P/E ratio of 25.6. This is arguably a well-deserved premium, which makes Air Products & Chemicals a solid buy.
2. Cintas: A titan of the business services industry
Many businesses provide their employees' uniforms, as well as having a need for restroom supplies, fire extinguishers and testing, and safety compliance training to properly function. And with more than 1 million businesses as customers, Cintas (CTAS 0.29%) is the leader in its industry.
A $10,000 investment in the stock just 10 years ago would now be worth a staggering $116,940 with dividends reinvested. And even as established as Cintas is, the best could be yet to come. This is because the total addressable market in North America alone is an astonishing 16 million businesses. That's why analysts project that Cintas' earnings will compound at 12.2% annually through the next five years.
The company's 1% dividend yield leaves a bit to be desired from income investors. But Cintas' double-digit annual earnings growth potential paired with a dividend payout ratio that will come in around 35% this fiscal year should translate into above-average dividend growth moving forward.
The company's forward P/E ratio of 35 is nearly double the S&P 500 industrial sector average forward P/E ratio of 18. But if there's any business that is worthy of such a hefty premium, a perennial winner like Cintas is top of mind.
3. Essential Utilities: Everybody needs water services
Water and natural gas utilities are vital to the functioning of most societies. With approximately 5 million customers in 10 U.S. states across its Aqua and Peoples brands, Essential Utilities (WTRG -0.35%) is a major utility helping keep society operating.
A $10,000 investment in the stock one decade ago would now be valued at $29,550 with dividends reinvested. Many municipalities don't have the funds to update their outdated water utility infrastructure. As Essential Utilities executes municipal transactions to grow its rate base, analysts are anticipating that earnings will increase at 6.6% annually for the next five years.
The stock's 2.4% dividend yield should also quench the thirst of income investors. And since the dividend payout ratio clocks in at 62%, there should be plenty of room for future dividend growth.
Essential Utilities' forward P/E ratio of 27.2 seems high compared to the S&P 500 utilities sector average forward P/E ratio of 18.9. But it's worth noting that water-oriented utilities have historically traded at a significant premium to the broader sector. This is why I believe the stock is still a buy for dividend growth investors.
