While high-yield dividend stocks generate more excitement than the lower yielders, dividend growth stocks may be better for buy-and-hold-forever investors. That's because many high yields are unsustainable. And the remaining group that is well-funded can often only afford tiny payout raises -- just enough to keep their annual dividend increase streak intact.
With this in mind, let's focus on four fast-growing dividends that may offer more long-term passive income potential than their high-yield counterparts. Posting annual dividend growth rates between 25% and 46% since 2018, ASML (ASML -7.09%), Old Dominion Freight Line (ODFL -4.39%), Tractor Supply Company (TSCO 1.04%), and Zoetis (ZTS -0.71%) could make sense for investors looking to maximize their future passive income.
1. ASML
While ASML's lithography technology -- using light to make patterns on the silicon wafers used in semiconductor chips -- is undeniably complex, its investment thesis is far more straightforward. Do you believe the need for semiconductor chips will grow over the next few decades?
If you answered yes, ASML's dominant leadership position in its niche might make it a classic buy-and-hold-forever investment. Holding a monopoly with its bleeding-edge extreme ultraviolet (EUV) lithography system and a roughly 80% share of the more mature deep ultraviolet (DUV) market, ASML is of paramount importance to the semiconductor industry.
Thanks to this dominant positioning, the company has averaged a 26% free cash flow (FCF) margin across the last decade. With this incredible cash generation, ASML handsomely rewards its shareholders, as evidenced by its annual dividends skyrocketing 1,600% from its first payment in 2008.
In fact, using the last 12 months' figures, ASML could triple its 0.8% dividend and still have excess free cash flow. Going forward, ASML plans to make quarterly dividend payments, as opposed to their semi-annual payments in the last few years. This is great news for dividend reinvestment plans as they will now receive ASML shares at various price points throughout the year via its quarterly payouts.
As countries weigh becoming more technologically independent, the company's lithography systems should continue to see healthy demand. Trading at 27 times FCF, ASML brings incredible dividend growth potential at a reasonable price.
2. Old Dominion Freight Line
Boasting a total return north of 1,200% over the last decade, less-than-truckload (LTL) hauling specialist Old Dominion Freight Line has smashed the market.
Almost exactly as it sounds, LTL hauling consists of picking up partial loads from multiple locations and delivering them to one or many drop-offs. While far more complicated than traditional truckload hauling, this complexity acts like a moat for Old Dominion. With nearly 11,000 tractors, 43,000 trailers, 24,000 employees, 255 service centers, and linehaul dispatchers and software needed to coordinate everything, successful new entrants to the industry are rare.
Equally as important for investors, Old Dominion's operations are best in class. Consider its profit margin and return on invested capital (ROIC) -- a measure of a company's profitability from its debt and equity -- compared to its LTL peers.
ODFL Profit Margin data by YCharts.
Thanks to this outsized profitability, Old Dominion decided to initiate a dividend in 2017 and has raised it by 284% in the years since. Though the company's dividend yield of 0.4% may seem diminutive, it only amounts to 9% of its net income -- leaving an incredible runway for future increases.
To top everything off, Old Dominion's price-to-earnings (P/E) ratio of 27 is well below the 40 level it often saw in 2022. Posting 43% earnings per share (EPS) growth through the first three quarters of 2022, Old Dominion looks more enticing than ever.
3. Tractor Supply Company
With 27 million members in its Neighbor's Club rewards program, Tractor Supply and its 2,100 stores are a dividend growth success story in the footsteps of Home Depot and Lowe's. Since 2010, Tractor Supply has boosted its quarterly dividend payments from $0.035 per share to $0.92 today, an increase of over 2,200%. Buoyed partly by these dividends, the company has outpaced the market over the last five years.
So how exactly does Tractor Supply do it with behemoths like Home Depot and Lowe's in its backyard? In the simplest terms, it's by being the rural version of its giant peers. Consider that almost half of the company's sales come from its livestock and pet category. Through this niche offering, Tractor Supply draws millions of farmers, ranchers, and even suburban gardeners to its stores with its adjacent, yet quite distinct, product offering and hometown feel.
Once in the company's ecosystem, these customers often sign up for its rewards program and become loyal members. For example, since the pandemic's start, Tractor Supply saw 19 million new customers -- 55% of which became repeat purchasers.
The shares trade at just 23 times earnings, and the company's 1.8% dividend only uses 35% of its total net income. Raising its last dividend by 77%, Tractor Supply makes for a fascinating dividend-growth selection to hold forever.
4. Zoetis
In a recent survey by The Human Animal Bond Research Institute and Zoetis, 86% of pet owners and veterinarians said they would pay whatever was necessary for extensive vet care. While it is sad to consider any adverse outcomes concerning our beloved pets, the fact remains that Zoetis and its array of pet and livestock vaccines and medicines should only continue growing in importance.
In fact, since going public via a spinoff from Pfizer in 2013, Zoetis posted a total return of nearly 500%. Over the last five years, the company has almost tripled the returns of the S&P 500 Index despite falling by 19% in the previous year.
In the $45 billion animal health industry, Zoetis generates 61% of its sales from companion animals (cats and dogs) and 39% from livestock. Boasting a leadership position in pets, cattle, and swine (not to mention North America, Latin America, and Asia -- geographically speaking), the company maintains a portfolio of over 300 products.
Riding this success, Zoetis has grown sales and EPS by 9% and 13%, respectively, over the last three years. Over this same time, the company raised its dividend by 25% annually and now yields 0.9% with a small payout ratio of 26%. Thanks to the megatrends working in its favor and its steady growth, Zoetis trades at a rich 37 times earnings but makes for an outstanding dividend growth stock.
