Investing in companies with legendary brands is a proven method of growing your dividend income over time. This is because businesses with iconic brands enjoy competitive advantages, which allow profits to grow steadily. In turn, this often translates into dividend growth.
Here are two high-quality dividend stocks poised to deliver many more years of dividend growth in the future that income investors may want to consider buying.
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1. Philip Morris International: The tobacco company of the future
With approximately 70,000 employees and 180 markets where its products are sold, Philip Morris International (PM 2.27%) is the most dominant tobacco company in the world. The company's portfolio includes the world's leading cigarette brand, Marlboro, the L&M cigarette brand, and the heated tobacco (reduced-risk product) brand IQOS.
Philip Morris International's cigarettes still generate the majority of revenue for the company (70.4% as of the first nine months ended 2022). But with an IQOS user base of 19.5 million and growing as of Sept. 30, the tobacco company is positioning itself for a smoke-free future.
Thanks to the growing importance of reduced-risk products to its results, Philip Morris International arguably has a bright future ahead of itself. This is why analysts believe that the company's earnings will compound at 3.6% annually over the next five years.
Philip Morris International's 4.9% dividend yield is nearly triple the S&P 500 index's 1.7% yield. And with the dividend payout ratio set to come in around 88% in 2023, the dividend is reasonably well covered considering the minimal capital expenditures necessary to operate a tobacco company.
Yield-oriented investors can pick up shares of Philip Morris International at a forward price-to-earnings (P/E) ratio of 18.1. That may seem steep compared to the S&P 500 tobacco industry average of 13.2. But for the planet's preeminent tobacco company, this is arguably a buyable valuation.
2. McDonald's: A lucrative business model and growing digital sales
Few brands are more prevalent throughout the world than McDonald's (MCD 0.31%): The company has more than 40,000 locations sprawled out across 100-plus countries. A number of ingredients have contributed to McDonald's recipe of success as a business over the last several decades.
For one, the company's food is convenient and relatively cheap compared to its peers. Second, McDonald's high brand recognition rate has enticed countless franchisees to risk their own capital in exchange for the right to use the company's name and sell its products to consumers. And third, the company's digital sales via its app accounted for over 35% of systemwide sales in the most recent quarter.
As McDonald's continues to invest in its digital sales infrastructure and entice franchisees to open additional restaurants, healthy growth should continue. That's why analysts are expecting 7.4% annual earnings growth from the company through the next five years.
McDonald's 2.3% dividend yield is a plentiful meal for income investors. And with the dividend payout ratio clocking in at just 56% in 2022, strong future dividend growth could act as a dessert to sweeten the deal for investors.
Investors can scoop up shares of the fast-food giant at a forward price-to-earnings (P/E) ratio of 25. For context, that is below the S&P 500 restaurant industry average forward price-to-earnings (P/E) ratio of 26.7. As if a premier dividend stock at a fair valuation wasn't enough, McDonald's takes it one step further and trades at a discount to its peers. This is what makes it an interesting buy for dividend growth investors at the current $265 share price.
