Dividend growth investing is a strategy that both new and seasoned investors alike could benefit from implementing in their portfolios. This is because only companies with rising revenue and profits can dole out bigger dividends with each passing year on a consistent basis.
Here are two stocks whose underlying businesses have done well enough to enable their dividends to soar three- to five-fold over the last 10 years.
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1. Costco: Delivering value to members like nobody else
Practically everybody derives a thrill from saving money. And there arguably isn't a company in the world that has sold as much great merchandise to customers at as deep a savings as the membership-based retailer Costco Wholesale (COST -0.39%). Thanks to its volume purchasing and no-frills approach, the company can sell tons of merchandise at little to no markup to members.
Costco has opened hundreds of additional warehouses in the past decade, which explains how it has grown significantly during that time. The company's total revenue rose by 128.9% from its fiscal 2012 (ended Sept. 2) to $227 billion in its fiscal 2022 (ended Aug. 28). Costco's diluted earnings per share (EPS) rocketed 237.8% higher during that time to $13.14. This explains how the company's quarterly dividend per share has grown by 229% in the last 10 years.
Looking toward the future, similarly strong payout growth should persist for two reasons. For one, analysts think that Costco's diluted EPS will compound by 8.3% annually over the next five years -- much more than the discount stores industry's growth outlook of 5.5%. The dividend payout ratio is poised to come in at around 27% for the current fiscal year ending in August. This should allow for double-digit annual dividend growth in the years ahead, which makes up for Costco's modest 0.8% yield compared to the S&P 500 index's 1.6% yield. Plus, the company pays a special dividend from time to time.
Shares of the retailer can be picked up at a forward price-to-earnings (P/E) ratio of about 34. While this is well above the discount stores industry average forward P/E ratio of around 23, such a premium valuation is justified by Costco's growth profile.
2. Starbucks: Selling both products and an experience
When investors think about Starbucks (SBUX 0.09%), they probably think about high-quality coffee and cold beverages. Combined with the relaxing and unrivaled experience that the company provides to millions of weekly customers, this is the formula behind its success as a business.
As a result, Starbucks' total net revenue surged higher by 142.5% from fiscal 2012 (ended Sept. 30) to $32.3 billion in fiscal 2022 (ended Oct. 2). Due to cost pressures in 2022, the company's non-GAAP (adjusted) diluted EPS climbed by 65% during that time to $2.96. But because the dividend payout ratio began the period so low, the payout was able to grow by 405% over that period.
Robust dividend growth should continue in the years to come. That's because the dividend payout ratio is expected to register at approximately 62% for fiscal 2023. Along with the analyst adjusted diluted EPS annual growth forecast of 16.3% for the next five years, this should support at least high single-digit annual dividend growth.
Shares of Starbucks can be purchased at a forward P/E ratio of 23.9 at the current $98 share price. Simply put, the above-average stock is trading just below the 24.1 average forward P/E ratio of the restaurants industry.
