As a class, dividend growth stocks consistently outperformed all other classes of stocks over decades-long periods. One reason for this is that dividend-paying companies tend to be more disciplined with acquisitions and investments because management teams know that breaking their dividend commitment to shareholders generally has very negative consequences.
Here are two stocks that have both crushed the S&P 500 index in the past 10 years. Each appears to be a savvy buy for dividend growth investors.
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1. Broadcom: A giant of the rapidly growing chip industry
There has arguably been no better industry to be an established leader in recent years than the semiconductor industry. This is because semiconductor chips are critical components in just about every consumer product these days, including vehicles, laptops, smartphones, TVs, lighting fixtures, medical equipment, and newer home appliances. Quite simply, modern life is very much reliant on semiconductor chips.
And with a $266 billion market capitalization, Broadcom (AVGO 0.71%) is among the largest players in its industry. So perhaps it's no surprise that the stock has been one of the greatest investments of the last decade: A $10,000 investment in Broadcom made 10 years ago would now be valued at $236,000 with dividends reinvested. For context, that is much greater than the $30,000 that the same investment amount put into the S&P 500 index would be worth today.
Because of the necessity of semiconductor chips, the consulting firm McKinsey believes that the industry will grow from $600 billion in 2021 revenue to exceed $1 trillion by 2030. Coupling Broadcom's industry leadership status with this promising industry outlook, analysts project that the company's earnings will rise by 8.3% annually over the next five years.
Broadcom also sports a 2.9% dividend yield, well above the S&P 500 index's 1.6% yield. Income-oriented investors can also take comfort knowing that with the dividend payout ratio set to come in at around 46%, the payout is sustainable. Best of all, the stock is trading at a forward price-to-earnings (P/E) ratio of 14.6. That's considerably less than the semiconductor industry-average forward P/E ratio of 19.8.
To sum it up, Broadcom is an above-average business priced at a below-average valuation. At the current $659 share price, $400 would buy about three-fifths of a share of the stock. That can be a good start to help you get in on the next decade of growth.
2. NextEra Energy: An electric utility juggernaut
Just as semiconductor chips are vital to our modern economy, it wouldn't be possible to charge our consumer electronics or function in any aspect without electricity. This is what makes NextEra Energy (NEE 1.27%), the largest electric utility in the United States, an interesting pick for dividend investors. The company's customer base of more than 12 million electric customers in Florida alone has grown a $10,000 investment made 10 years ago into nearly $49,000 today.
Thanks to Florida's quickly growing popularity, it's reasonable to conclude that demand for NextEra Energy's utility services will also keep growing. This is why analysts anticipate the company's earnings will compound at 8.8% each year through the next five years.
The stock's 2.4% dividend yield is also reasonably attractive compared to the S&P 500 index. And considering that the dividend payout ratio is poised to clock in at approximately 60% in 2023, NextEra Energy is well positioned to build on its 27-year dividend growth streak in the years ahead. Along with a sensible forward P/E ratio of 22.3, this makes the stock a great buy for dividend growth investors. Investors with $400 set aside to invest could purchase just over five shares of the stock at the current $75 share price.
