Dividend growth stocks are an attractive option for investors who want to enjoy steady income and capital gains. Companies that consistently raise their dividends tend to have strong fundamentals, above-average growth prospects, and a deep commitment to shareholder rewards.
By reinvesting these ever-growing dividends, investors can also take advantage of the awesome power of compounding to amplify their returns over time. Here are three supercharged dividend growth stocks that should deliver outstanding capital appreciation for patient investors.
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1. Microsoft
Microsoft (MSFT 0.31%) dominates the cloud computing, gaming, and productivity software markets. It has increased its dividend for 20 consecutive years at a compound annual rate of 11.3% over this period. The stock pays a quarterly dividend of $0.68 per share for an annualized yield of 0.79%.
The dividend is well covered by the company's free cash flow, which has increased by an astonishing 142% over the past 10 years. It has an exceptionally strong balance sheet, with approximately $104 billion in cash and short-term investments, along with roughly $42 billion in long-term debt as of March 31.
MSFT free cash flow data by YCharts.
With its diversified and rising revenue streams, Microsoft is poised to continue delivering solid earnings and dividend growth for years to come, making it an exceptional play.
2. Costco
Costco Wholesale (COST 0.90%) is a leading warehouse club operator that offers its members low prices on a wide range of products and services. It has increased its dividend for 19 consecutive years, at a compound annual rate of 12.6% over the past 10 years.
The company pays a quarterly dividend of $1.02 per share, yielding 0.75% at the current price. It also pays occasional special dividends, such as the $10-per-share distribution in December 2020.
The dividend is supported by the company's robust cash flow, which has increased by a staggering 330% over the prior 10 years. The healthy balance sheet has $12.9 billion in cash and equivalents and $6.5 billion in long-term debt as of Feb. 12.
With its loyal customer base, economies of scale, and ongoing international expansion, Costco is set up well to sustain its impressive sales and dividend growth.
3. Starbucks
Starbucks (SBUX -0.23%) is a global leader in specialty coffee and beverages. It has increased its dividend for 12 consecutive years at a compound annual rate of 19.9%. The company currently pays a quarterly dividend of $0.53 per share, yielding 2.2% annually at the current share price.
Its strong cash flow has risen by a healthy 56.7% over the last 10 years. The fairly solid balance sheet contains $3.4 billion in cash and equivalents and $13.5 billion in long-term debt as of April 2.
SBUX free cash flow data by YCharts.
Starbucks has also bounced back from the pandemic slowdown through digital initiatives, innovation in coffee brewing technology, and store optimization strategies. Management expects to grow its revenue by 11.4% and earnings per share by 19.8% in fiscal 2024, which should translate into further dividend increases.
