Like many investors, I love dividend stocks. After all, who doesn't want to get paid for buying and holding a stock for the long term? However, I care about more than just dividends. I want my investment to outperform the average return of the stock market as well.
Rural lifestyle retailer Tractor Supply Company (TSCO 1.02%), discount chain Dollar General (DG -0.08%), and equipment-rental company United Rentals (URI 5.09%) are three companies that pay dividends that I believe can also be better-than-average performers over the long term -- let's say over the next five years.
What basis do I have for believing these three dividend-paying stocks could outperform the stock market average over the next five years? Well, I'll start by pointing out that all three have outperformed the S&P 500 over the past five years.
Read on to find out why each can beat the market over the next five years. And if you read to the end, I'll also share a simple reason why each company could easily double how much they're paying to shareholders in dividends.
1. Tractor Supply Company
Grocery stores are amazingly consistent businesses because no matter what consumers cut from their budgets, they'll still buy food. Think of Tractor Supply as a grocery store for animals. According to management, it's a top five retailer in the U.S. for pet food. And many customers own livestock -- one in four own chickens, for example. For this reason, it sells more feed than anyone else, with a whopping 25% market share.
People shop at Tractor Supply (and its pet-store brand Petsense) to feed their animals, and this creates a consistent and reliable foundation for the business. And once people are in the stores, the company is consistently able to grow sales by selling everything else rural -- tools, apparel, garden supplies, and more.
As far as revenue growth, Tractor Supply's prospects are modest. Same-store sales consistently increase and management expects a 3.5% to 5.5% gain in 2023. And it will open new stores, including 70 new locations in 2023 to go with the 2,066 it already has. But this doesn't point to a high revenue growth rate.
Profit growth should also be modest for Tractor Supply. The company's operating margin is already quite good at around 10%, which is where it's hovered for the past decade.
However, Tractor Supply's earnings per share (EPS) can grow at a more robust rate. As mentioned, the company is quite profitable and expenditures are reasonably low, leaving plenty of cash for share repurchases. Management used $700 million on share repurchases in 2022 and its share count has decreased by 11% over the last five years, boosting EPS.
TSCO Stock Buybacks (Quarterly) data by YCharts
I expect all of this to continue for Tractor Supply, leading to future market-beating gains for the stock.
2. Dollar General
Are items at Dollar General cheaper than those found at larger merchants? Not if management accomplishes its goal. During the conference call to discuss financial results for the fourth quarter of 2022, CEO Jeff Owen said, "We remain focused on our goal to be priced at relative parity with mass merchants."
Items at Dollar General aren't necessarily cheaper than those of competitors. And yet, consumers continue to shop more from Dollar General. Same-store sales increased 4.3% in 2022 compared to 2021, increasing like they have almost every year going back decades.
Dollar General doesn't win because of price. It wins because it's more convenient. With over 19,000 locations now, there's a store right around the corner from most of small-town USA, giving this business incredible long-term resilience and consistency.
Looking ahead, Dollar General has multiple paths to profit growth. It intends to open over 1,000 new stores in 2023. Moreover, the company is introducing self-checkout options at thousands of locations, potentially reducing labor expenses and increasing throughput. And management is in the process of bringing more logistics in-house to save even more money -- it handled 40% of its outbound transportation in 2022 but hopes to increase that to 50% in 2023.
Finally, like Tractor Supply, Dollar General is repurchasing shares to boost EPS. In 2022, it spent $2.7 billion on share repurchases, which is nothing to sneeze at.
3. United Rentals
Finally, we come to United Rentals -- the newest dividend payer on this list. The company started this year by declaring its first-ever quarterly dividend of $1.48 per share, giving the stock a forward dividend yield of about 1.6% -- not bad for just getting started.
For clarity, United Rentals didn't just start paying a dividend because it suddenly came into money. To the contrary, this company -- the largest equipment-rental provider in the U.S. -- is a cash-cow business, generating $5.7 billion in cumulative free cash flow over just the past three years.
Usually, United Rentals' management does one of two things with its free cash flow. If it can find an acquisition opportunity that can grow its market share at a reasonable price, it takes it -- for example, it completed its $2 billion acquisition of Ahern Rentals in December. But when it doesn't have an acquisition opportunity, it repurchases shares -- management has reduced the company's share count by 34% over the past decade.
I expect more acquisitions and share repurchases from United Rentals over the next five years. And that's a big reason I believe it can beat the market. But additionally, United Rentals stock trades at just 12 times trailing earnings, which is below its five-year average and its 10-year average. In other words, right now is an opportune entry point for long-term investors, considering the ongoing prospects for the business.
Indeed, of these three, I believe United Rentals is the most attractive investment right now.
Why all three dividends can double
Finally, here's why Tractor Supply Company, Dollar General, and United Rentals could realistically double their dividends over the next five years (for perspective, that would be about a 15% annual increase, which is within reason).
All three of these companies have low payout ratios right now -- the amount of earnings they're giving back to shareholders in the form of dividends. The chart below doesn't reflect United Rentals' recent dividend policy. But it had EPS of nearly $30 in 2022. Therefore, its annualized dividend of $5.92 per share is a small amount of its earnings.
URI Payout Ratio data by YCharts
Tractor Supply, Dollar General, and United Rentals are paying out a small percentage of earnings now as dividends. But -- more importantly -- all three are poised to grow earnings over the next five years. They have room to raise the dividend now but will have even more room for raises as earnings increase.
Therefore, Tractor Supply, Dollar General, and United Rentals all offer investors a rare opportunity: market-beating stock appreciation and impressive dividend growth at the same time. And this is why I believe all three are buys today, with United Rentals being the most opportune of the three.
