The investment universe is filled with options for investors seeking dividend income. But since the goal of dividend investing is to boost your income and wealth significantly over the long haul, there are fewer viable investments than you'd think.
Costco Wholesale (COST 1.01%) and Domino's Pizza (DPZ 0.87%) are two dividend payers that investors owe to themselves to think about buying for their portfolios. Here's why.
1. Costco: The value proposition is a competitive advantage
If you're like most people, you're probably always looking to get the most bang for your buck. Few companies have seized upon this reality better than the membership-based retailer Costco Wholesale. Costco generates most of its profits from selling memberships. Because its massive buying leverage is used to buy product cheaply and in bulk from suppliers, the company often offers the best deals available on the market to its members.
This is precisely why a $10,000 investment made in Costco 10 years ago would now be $58,000 with dividends reinvested. For context, this dwarfs the $33,000 that the same investment amount in the S&P 500 index would now be worth 10 years later.
Due to elevated inflation and its unmatched prices, more people have signed up for Costco memberships. The company's total cardholder count grew by 7% year over year to 124.7 million as of the third quarter ended May 7.
As Costco rolls out more stores and attracts more members with its bargains, analysts think earnings could grow by 8.3% annually over the next five years. And based on Costco's track record of exceeding expectations, this could even prove to be a conservative growth estimate.
Paired with the 0.7% starting dividend yield, this should get investors in the ballpark of the 11.6% annual total returns that would be required over the next decade to triple an investment. When considering that Costco's dividend payout ratio will register at around 27% for the current fiscal year ending in August, the dividend should also have upside ahead of itself.
Shares of the retailer can be purchased at a forward price-to-earnings (P/E) ratio of 36.5. While that's much more than the discount stores industry average forward P/E ratio of 23.6, it's not that excessive a valuation for a business of Costco's caliber.
Image source: Getty Images.
2. Domino's: Pizza isn't going out of style
In a world that is technologically evolving at a rapid pace, there are still some things that won't ever become obsolete. Though the food as we know it today originated from 18th-century Naples, Italy, pizza dates back as far as the ancient Greeks and Romans, if using looser definitions. Whatever level of innovation occurs in the years to come, it's impossible to imagine the world ever phasing out pizza.
As the most dominant pizza chain in the world, Domino's Pizza has definitely satisfied the appetites of investors looking to build wealth: A $10,000 investment in the stock executed 10 years back would now be valued at $70,000 with dividends reinvested.
As well-established as Domino's is as a business, the company continues to open stores by the hundreds each year. Population growth and pricing power for its products explain why analysts are expecting 11.7% annual earnings growth over the next five years.
Tossing Domino's 1.2% starting dividend yield into the mix, the stock looks like it could deliver the double-digit annual total returns needed to 3x an investment from here by 2033.
With the payout ratio poised to clock in at about 36% in 2023, it's not unreasonable to anticipate strong dividend growth moving forward. Investors can pick up a slice of ownership in Domino's at a forward P/E ratio of 26.1, which is almost in line with the restaurants industry average forward P/E ratio of 24.9.
