Before Robinhood Markets (HOOD -1.10%) came onto the scene with its commission-free stock trades in 2015, most brokers charged commissions in the range of $5 to $10 per trade. So retail investors generally avoided regular stock trading because you had to invest sizeable sums to justify the commission costs and because each trade could potentially eat up a significant portion of any profits made on short-term investments.
Now, investors can get started trading with very small initial investments and build up a portfolio with much less fear of commissions disrupting their investment strategy. This is especially true with the introduction of fractional shares years ago.
As a result, Robinhood's trading platform became quite popular with this new class of traders. The online broker also pioneered some other new marker features, like providing a running list of the 100 most popular holdings (as measured by share count) among its tens of millions of account holders. Here are three dividend stocks currently on that list. Let's look at why these three dividend stocks are worth buying.
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1. Costco: Offering customers an unmatched value proposition
Tracing its roots back to 1976, Costco Wholesale (COST -0.12%) transformed itself into a retail giant. In exchange for purchasing an annual $60 club membership, customers can access all of Costco's deals on the wide range of products it sells. The big box retailer now boasts 123 million cardholders as of Feb. 12 (its fiscal second quarter) and a $219 billion market capitalization.
The company can sell products with little to no markup because of its tremendous leverage in negotiations with suppliers. It manages to do that because the membership fees it receives account for most of its profits. Costco's value to its members is so compelling that its membership renewal rates regularly exceed 90% each quarter.
And as big as Costco already is as a retailer, it still has plenty of room for growth. Analysts believe the company's non-GAAP (adjusted) diluted earnings per share (EPS) can rise at a healthy clip of 9.3% annually over the next five years. For context, that is meaningfully better than the discount store industry's average annual earnings growth outlook of 5.9%.
Paired with a dividend payout ratio poised to come in around 27% for the fiscal year (which ends in August), double-digit percentage payout growth should continue in the years ahead. This makes up for Costco's 0.8% dividend yield, which is about half of the S&P 500 index's 1.7% yield. Growth investors can pick up shares of the stock at a forward price-to-earnings (P/E) ratio of 32.2, which is much higher than the discount stores industry average forward P/E ratio of 22.8. But if any stock is worthy of a huge premium over its peers, it is certainly Costco.
2. Energy Transfer: A business essential to the modern economy
Even with the gradual shift to alternative energy, oil and natural gas will remain important to the economy in the decades to come. And with a network of almost 120,000 miles of pipeline transporting 30% of all U.S. natural gas and 35% of all U.S. crude oil, Energy Transfer (ET 0.44%) will play a big role in fueling the U.S. economy.
Recently, the company announced plans to deliver 3% to 5% annual distribution growth. This generous capital allocation strategy is supported by Energy Transfer being a cash-flow machine. After paying its distribution and funding capital expenditures to both expand and maintain its infrastructure in the first quarter, the company still had over $400 million in free cash flow left over.
With a generous distribution yield of 9.9%, Energy Transfer is an exceptionally attractive investment for investors willing to tolerate the added work of K-1 tax forms come tax-filing season. Thanks to exceptionally steady fundamentals and unitholder-friendly objectives, analysts are quite optimistic toward Energy Transfer: The average analyst 12-month price target of $17 per unit would be nearly 40% upside from the current $12 unit price.
3. Starbucks: The big dog of its industry
For more than a thousand years, coffee has been a common beverage around the world. And with a $119 billion market cap, Starbucks (SBUX -1.02%) is the undisputed king of coffee and cold beverages.
Even with 36,000-plus stores worldwide, the franchise has plenty of room to expand its global footprint moving forward. This is demonstrated by the fact that Starbucks' global store count expanded by roughly 2,000 stores from the second quarter of 2022 to the second quarter of 2023. Along with expanding operating margin and share buybacks, this is why analysts believe the company's adjusted diluted EPS will grow by 18.1% each year through the next five years.
Aside from robust growth prospects, Starbucks' market-topping 2% dividend yield gives investors another reason to like the stock. And with the payout ratio poised to come in at less than 62% for this fiscal year, future dividend growth should be respectable. The stock's forward P/E ratio of 25.7 is only slightly more than the restaurant industry average forward P/E ratio of 24.5. In my opinion, such a reasonable valuation seals the deal to make it a buy for dividend growth investors.
