The goal of every dividend growth investor is to build a stream of passive income that can rise through just about any economic environment. This can be accomplished by picking businesses that sell goods and/or services that are in high demand, with well-covered dividends and a proven track record of dividend growth.
Here are three companies that have been reliably growing their dividends for decades that dividend growth investors should consider for their portfolios.
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1. McDonald's: A legendary business known around the world
With over 40,000 restaurants in 100-plus countries, McDonald's (MCD 0.10%) is the most dominant fast-food chain in the world. McDonald's essentially has three levers that it has pulled over the decades to achieve its success that should continue to help it grow in the future.
First, the company's name alone is synonymous with the fast food industry because of its incredible brand recognition. Second, this has allowed McDonald's to leverage its unprecedented brand power to draw in franchisees to put up their own capital. The company's dominance in the industry and established blueprint for its restaurants inspires confidence in prospective franchisees, which explains how 95% of its restaurants are franchisee owned and operated. That allows McDonald's to put up little to no capital of their own to open additional stores, while they also reap the financial benefits of selling the rights to their brand to franchisees.
Finally, the company's dollar menu makes it a cheap and convenient option difficult for consumers to pass up, regardless of the economic environment. These factors are why analysts believe McDonald's non-GAAP, or generally accepted accounting principles, (adjusted) diluted earnings per share (EPS) will grow by 7.3% annually over the next five years.
The stock's 2.3% dividend yield is relatively attractive compared to the S&P 500 index's 1.7% yield. And with the dividend payout ratio coming in at just 56% in 2022, McDonald's should keep building on its nearly half-century dividend growth streak. Best of all, the stock's forward price-to-earnings (P/E) ratio of 23.1 is basically in line with the restaurant industry average forward P/E ratio of 22.9.
2. A.O. Smith: Selling life-sustaining products
Water is the most important ingredient in the world to supporting life. By extension, this makes A.O. Smith (AOS -0.11%) a business that is essential to its customers. The company is a leading manufacturer of residential and commercial water heaters and boilers. These products allow individuals to shower, wash dishes, and do laundry, and businesses to complete critical business functions.
As more of the world becomes economically developed, demand for water heaters and boilers has almost nowhere to go but up. And thanks to A.O. Smith's status as an industry leader, analysts expect its earnings to compound 8% annually through the next five years.
The company's 1.8% dividend yield provides above-average income to its shareholders. And given that the dividend payout ratio was only a bit higher than 36% last year, the payout is quite safe. Investors can scoop up shares of the stock at a forward P/E ratio of 18.8, which is close to the specialty industrial machinery industry average forward P/E ratio of 18.2.
3. NextEra Energy: Power up your dividend income with this world-class utility
Just as an abundance of water is paramount to the industrialized world, so is electricity. NextEra Energy's (NEE 1.13%) base of 12 million electric customers in Florida alone makes it the largest electric utility in the country.
As economic activity increases and the population of its service areas grows, the demand for the company's electricity will also go up. That's why analysts believe that NextEra Energy's earnings will expand by 10.2% annually over the next five years.
Robust earnings growth prospects and a dividend payout ratio of just 58.6% in 2022 should lead to double-digit annual payout growth moving forward. Paired with a 2.5% dividend yield, the company offers solid starting income with healthy growth potential.
Considering NextEra Energy's impressive growth profile, the stock's forward P/E ratio of 22.7 isn't unreasonable. This is why analysts have an average 12-month price target of $94, which is 25% upside from the current $75 share price.
