As an investment class, dividend growth stocks tend to produce better investment outcomes than their non-dividend growth counterparts. This shouldn't come as a surprise considering that consistently handing out dividend raises requires growing profits, which leads to share price appreciation over time.
Here are two dividend growth stocks that have delivered market-beating returns in the past five years that allowed them to roughly double in value (based on total return). Let's dig into why each could keep it up in the future.
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1. AbbVie: So much more than Humira
The pharmaceutical company AbbVie (ABBV -4.58%) has done exceptionally well for shareholders in the past half-decade: A $10,000 investment made at this time in 2018 would now be worth about $19,760 with dividends reinvested. Put into perspective, this is well above the $17,600 that the same investment amount put into an S&P 500 index fund would have grown to in that period (with dividends reinvested).
Accounting for 36.8% of AbbVie's $58.1 billion in 2022 net revenue, the immunology smash hit Humira was instrumental in driving these impressive investment returns. But with numerous Humira biosimilars hitting the U.S. market this year, the company's returns will now have to come from somewhere else.
Fortunately, AbbVie should have the means to more than replace lost Humira revenue in the years ahead. For one, its Skyrizi and Rinvoq drugs continue to grow net revenue at double-digit annualized rates, with the duo predicted to haul in $11 billion in combined net revenue in 2023. Along with additional indications that the drugs are expected to snag in the future, AbbVie's management believes combined peak annual sales for the pair could top $21 billion as soon as 2027.
Other products like cancer medicine Venclexta and antipsychotic Vraylar are also routinely posting double-digit net revenue growth. Looking beyond just the next few years, AbbVie also has nearly 100 compounds or indications that are currently in different stages of clinical development. As some of these projects are eventually approved by regulatory authorities and launched, the company should have no trouble returning to growth beyond 2023.
The bonus for investors is that AbbVie currently sports a 4.2% dividend yield, which is well above the S&P 500 index's average 1.5% yield. Given the company's manageable dividend payout ratio, it should be able to hand out plenty more dividend raises in the years to come. AbbVie's forward price-to-earnings (P/E) ratio of 13 is just less than the drug manufacturers' industry average forward P/E ratio of 13.4, which makes it an especially savvy buy for income investors.
2. Elevance Health: A leader in a promising industry
The healthcare services company Elevance Health (ELV -0.45%) is another stock that has enriched shareholders. Like AbbVie, a $10,000 investment in Elevance Health made five years ago would now be valued north of $20,300 with dividends reinvested.
Looking forward, the company could extend its track record of market-topping total returns. Even with Elevance Health set to record $168.8 billion in revenue during 2023 (the second-most in its entire industry), this pales in comparison to the $2 trillion-plus global health insurance market. As the company grows its medical membership through acquisitions and rising demand for health insurance plans, robust earnings growth is projected to persist.
Analysts think Elevance Health's non-GAAP (adjusted) diluted earnings per share (EPS) will increase by 12.7% annually for the next five years. That is superior to the 11.7% healthcare plans industry average annual earnings growth forecast.
Elevance Health's 1.2% dividend yield is modest in comparison to the S&P 500 index's 1.5% yield. But combining these solid growth prospects with a low payout ratio, the company's dividend could soar going forward. Dividend growth investors can pick up shares of Elevance Health at a forward P/E ratio of 12.9, which is below the healthcare plans industry average forward P/E ratio of 13.9.
