In a capitalistic society, opportunities to generate (mostly) passive income are all around us. Dividend growth investing is one of the most common and arguably effective ways to do so. The most effective type of dividend growth investing focuses on buying well-run businesses that provide customers with necessary products and also have room for further growth.
Here are three businesses with countless consecutive years of dividend growth to their credit that are poised to extend their streaks.
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1. Air Products & Chemicals: The industrial gases industry is booming
There are many businesses that most people don't know are pivotal to our standard of living. Supplying industrial gases such as nitrogen, carbon dioxide, and oxygen to over 200,000 customers around the world, Air Products & Chemicals (APD 0.43%) is a leader in the industrial gases industry. These gases are used in the manufacturing processes of many products that we frequently use, including gasoline, medicines, consumer electronics, and light bulbs.
As more people are lifted into the global middle class by economic growth, demand for these products should rise. That explains why analysts predict that Air Products & Chemicals' earnings will compound by 9.6% annually for the next five years. Put into perspective, that is a bit better than the specialty chemicals industry average of 9.1%.
On top of its powerful growth profile, Air Products & Chemicals' 2.4% dividend yield is much higher than the S&P 500 index's 1.6% yield. And considering that its dividend payout ratio is poised to come in below 60% in 2023, Air Products & Chemicals should have little difficulty extending its 40-plus-year dividend growth streak.
Priced at a forward price-to-earnings (P/E) ratio of 22.5, the stock isn't necessarily cheap compared to the industry average forward P/E ratio of 17.5. However, Air Products & Chemicals' premium valuation can be defended by its admirable track record of dividend growth.
2. WEC Energy Group: Turbocharge your income with this utility
Of all the services provided to individuals and businesses, some of the most important are electricity and natural gas. And with approximately 4.6 million retail electric and natural gas customers spread throughout Minnesota, Michigan, Illinois, and Wisconsin, WEC Energy Group (WEC -1.59%) plays a key role in its industry.
The utility plans on spending roughly $20 billion on expanding and modernizing its infrastructure between 2023 and 2027. Thanks to this capital allocation plan, WEC Energy Group thinks that its earnings will grow by around 6.5% to 7% annually through the next five years.
If these promising growth prospects aren't enough to grab your attention as a dividend growth investor, the 3.7% dividend yield may do the trick. The estimated dividend payout ratio of 66.5% for 2023 is within the targeted range of 65% to 70%. This is why WEC Energy Group should be able to prolong its 20-year dividend growth streak with solid dividend growth to boot.
The stock's forward P/E ratio of 18.4 is more than the utility sector average forward P/E ratio of 16.5. But this isn't an unreasonable valuation for a utility of WEC Energy Group's quality.
3. L3Harris Technologies: Defense spending is here to stay
There are few guarantees in life. But nations spending on defense each year seems to be a given. Boasting a $25 billion backlog of projects as of June 30, L3Harris Technologies (LHX 3.46%) is an established player in the defense contractor industry.
Having just completed its acquisition of the aerospace and defense contractor Aerojet Rocketdyne last month, the company has further bolstered its scale and competitive positioning. This is why analysts expect high-single-digit annual earnings growth over the next few years from L3Harris.
The stock isn't lacking in its immediate income, sporting a 2.5% dividend yield. Coupled with a dividend payout ratio that should come in around 37% in 2023, this provides room for future dividend growth beyond its current 20-year streak. Best of all, L3Harris' shares trade at a forward P/E ratio of 13.7 -- well below the aerospace and defense industry average forward P/E ratio of 20.6. This could make the stock an interesting buy for dividend growth investors at the current $184 share price.
