One of the facts of life is that it costs money to live. Every day brings with it another expense to pay.
Most people will not be willing or able to work for the rest of their life, and Social Security only replaces about 40% of the average worker's gross income. That's why it is never too early to start building an investment portfolio to pay for your expenses as you approach your later years.
Investing for income can be a great way to help fund your lifestyle as you either retire or work less. But you need to be sure that the stocks you buy can help you maintain your purchasing power with dividend raises big enough to keep pace with inflation.
Here are two stocks whose payouts have grown significantly over the last decade.
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1. CVS: Tailwinds could promote a bright future
Serving more than 100 million customers through its pharmacy benefit manager CVS Caremark and managed care company Aetna, CVS Health (CVS -2.44%) is a company critical to the healthcare sector. It's a safe bet that as long as there is still a need for prescriptions and health insurance, the company will likely do well for its shareholders.
And with the median age of the U.S. population rising for the last 50 years, demand for CVS Health's services should grow moving forward. For instance, the total number of retail prescriptions filled each year in the U.S. is expected to increase from 4.8 billion in 2022 to 5 billion by 2025. This is why analysts believe that CVS Health's non-GAAP (generally accepted accounting principles) adjusted diluted earnings per share (EPS) will compound by 5.9% annually over the next five years.
On top of its decent growth potential, yield-oriented investors will be impressed by the stock's dividend yield. CVS Health's 3.2% dividend yield is nearly double the S&P 500 index's 1.7%. The dividend payout ratio is poised to clock in around 27% in 2023, which leaves enough capital for acquisitions and debt repayment. That's why I predict that the company could come close to tripling its dividend again, just as it has in the past 10 years.
The cherry on top that makes CVS Health a buy for dividend growth investors is its modest valuation: The stock's forward price-to-earnings (P/E) ratio of 8.4 is well below the healthcare plans' industry average of 14.
2. Darden: Profit from a shift in consumer preferences
Americans are increasingly shifting away from possessions and toward experiences in terms of spending habits. Supporting this assertion is the fact that, in a recent survey, 74% of Americans said they preferred experiences to products.
Few experiences can be as memorable as dining out at a full-service restaurant with the ones you love the most. This could help Darden Restaurants (DRI -1.99%) build on its success in the future.
The company's portfolio consists of eight different restaurant brands, like Olive Garden and Longhorn Steakhouse. That's why investors can be confident that the company has the brand diversity needed to offer something for everyone. And it also explains how analysts believe the company's earnings will grow by 9.6% annually through the next five years.
Like CVS Health, Darden's 3.2% dividend yield is quite generous compared to the broader market. And with the payout ratio expected to come in at under 61% for the current fiscal year ending in May, the company has a viable path to double its dividend again in the next 10 years.
Darden's forward P/E ratio of 17.2 is far less than the restaurant industry average forward P/E ratio of 24.4. In my opinion, that should seal the deal for investors seeking a balance between immediate income, growth, and value.
