The famed Italian economist and philosopher Vilfredo Pareto is best known for the observation called the Pareto Principle, which states 80% of outcomes are from just 20% of actions.
Applied to investing, investors will notice over time that many of their stocks will lose money or not make very much money. But some of the picks that are profitable tend to be lucrative enough to be life-changing.
Here are two dividend growth stocks to consider for your portfolio that could make you richer over the long run.
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1. Costco: A colossal membership retailer
With 850 warehouse locations in the U.S. and 12 other countries, Costco Wholesale (COST 0.17%) is a major membership-based retailer. The company uses its massive size and scale in negotiations with suppliers to buy in bulk, leading to cost savings. Through the second quarter of its current fiscal year, 71.6% of Costco's $2.8 billion in net income was generated from membership fees, allowing it to pass savings on to members with minimal markup on products. This is what makes the company a very compelling value for customers.
As much as this business model has helped members save money, it also made a lot of money for shareholders: A $10,000 investment in Costco 10 years ago would now be valued at $57,000 with dividends reinvested. That is far greater than the $30,000 that the same amount would have generated if invested in an S&P 500 index fund.
As Costco continues to add warehouses to new markets and gain more members as a result, earnings should keep growing at a healthy clip: The analyst consensus of 9.3% annual diluted earnings per share (EPS) growth over the next five years could arguably prove to be conservative given the company's ability to consistently exceed expectations. Costco's 0.7% dividend yield is significantly below the S&P 500 index's 1.7% yield. But with the dividend payout ratio likely to be around 26% for the current fiscal year, the company's dividend growth is just getting started. Also, Costco has a history of occasionally paying special dividends.
Costco's forward price-to-earnings (P/E) ratio of 31.5 is far higher than the discount stores industry average of 22.7. But given the company's world-class quality, dividend growth investors would be wise to consider buying Costco stock and adding on any dips.
2. Williams-Sonoma: Tons of room for future upside for this premium home retailer
Logging $8.7 billion in total revenue in 2022, Williams-Sonoma (WSM 0.15%) is a well-established home retailer of products such as kitchenware and home furnishings. The company's strategy of in-house design and digital-first sales (two-thirds of revenue in 2022 was derived from e-commerce) to its affluent customer base has paid off for shareholders.
A $10,000 investment in Williams-Sonoma stock 10 years ago would now be worth $29,000 with dividends reinvested. And this is even considering that the stock is currently 33% off its 52-week high.
As large as Williams-Sonoma is as a business, the potential for huge growth remains. That's because the company's market share of the $830 billion industry is just above 1%. This is why analysts believe that Williams-Sonoma's earnings will compound by 8.9% each year through the next five years. Putting this into perspective, that is just below the specialty retail industry average of 9.6%.
Income investors will appreciate the stock's market-beating 3% dividend yield. And with the dividend payout ratio at approximately 24% in 2023, Williams-Sonoma's dividend should keep growing in the years ahead.
Best of all, the stock's forward P/E ratio of 8.2 is far less than the specialty retail industry average forward P/E ratio of 15.6. This presents dividend growth investors with a no-brainer buying opportunity.
