While dividend yields below 1.8% may not scream "passive income" potential to investors, Tractor Supply (TSCO 1.13%), Cintas (CTAS 1.38%), Zoetis (ZTS 7.44%), and Old Dominion Freight Line (ODFL 1.66%) aim to prove that dividend growth is more important than current yields.
Consider that if you had purchased any of these stocks 10 years ago and held them until today, they would now pay a dividend above 5% compared to your original cost basis. When you let time work its magic, compounding high dividend growth rates, these businesses become high-yield stocks (compared to the cost you paid).
Best yet for investors, these four S&P 500 index members may just be starting their journey toward unlocking long-term income potential for patient buy-to-hold investors.
NASDAQ: TSCO
Key Data Points
1. Tractor Supply
Paying a 1.8% dividend, rural lifestyle retailer Tractor Supply has the largest yield of this group. Over the last five years, Tractor Supply has seen annualized dividend growth of 28% and maintained a payout ratio of 39%. A company's payout ratio measures the percentage of net income used to pay its dividends each year -- highlighting that Tractor Supply has ample room for increases, even if net income doesn't grow.
However, the company has increased earnings per share (EPS) by 19% annually since 2013, so it isn't likely the company's profits will stagnate for an extended period. Led by a Neighbor's Rewards Club with over 31 million members -- a figure that grew by 19% from last year -- Tractor Supply's sales are steadier than one might think.
Even as consumer spending tightened in 2023, leading to a drop in seasonal and big-ticket purchases, the company eked out same-store sales growth of 3% thanks to its consumable, usable, and edible (CUE) sales rising by over 10%. These repeat sales help Tractor Supply generate consistent profitability, recording a return on invested capital (ROIC) of 34%. This ROIC places the company in the top decile of the S&P 500 and is an excellent sign for interested investors as stocks with higher ROICs outperform their less-profitable peers.
With a price-to-earnings (P/E) ratio of 22, Tractor Supply trades at a slight discount to its historical averages, making it an elite dividend growth stock to buy and hold forever.
NASDAQ: CTAS
Key Data Points
2. Cintas
Cintas provides companies with uniforms, garments, first aid and safety products, and other ancillary business services. Despite its incredible 39-year run of dividend increases, Cintas has grown its dividend by 24% annually since 2018 and still has a slim payout ratio of 35%.
With 1 million of the 16 million North American businesses as clients, the company is a market leader with over 11,000 distribution routes in a highly fragmented industry. Capitalizing on its larger size amid this fragmented market, Cintas has been a masterful serial acquirer, leading to a total return of over 77,000% since its initial public offering (IPO) in 1983.
Over this time, the company has averaged an ROIC of 14%, steadily increasing to 21% over the last few years. This high and rising ROIC highlights Cintas' ability to successfully integrate acquisitions and generate outsize profits over the longer term.
The company's track record of growth in an industry less susceptible to behemoths like Amazon, along with its leadership position, make it a brilliant holding for investors looking for stability. However, the stock trades at a premium valuation of 39 times earnings, so investors may want to build a position on short-term dips using dollar-cost averaging (DCA).
NYSE: ZTS
Key Data Points
3. Zoetis
Animal health specialist Zoetis has hit the ground running, more than quintupling its payouts since initiating its dividend in 2013. Zoetis is the largest business of its kind, creating vaccines, medicines, and diagnostics for pets and livestock, and generating $8.2 billion in sales and $2.2 billion in net income over the last year.
The company is incredibly well-balanced with its products ranging from dermatology and osteoarthritis pain treatments to parasitic medicines and medicated feed additives. Zoetis generates 64% of its revenue from pets and 36% from livestock. Meanwhile, U.S. sales account for 54% of total revenue, while international markets comprise 46%.
Best yet for investors, Zoetis has 15 drugs that each earn over $100 million in annual revenue, highlighting the depth of its product offering and the strength of its research and development (R&D) capabilities. With 11% of its 13,800 employees working in R&D, this innovation is well-funded and should maintain a robust pipeline for decades ahead.
With Zoetis' rising ROIC of 19% and small payout ratio of 29%, look for it to provide above-average dividend growth. But with the shares trading at 40 times earnings and offering a 0.8% dividend, it may be best to buy on drops or though dollar cost averaging.
4. Old Dominion Freight Line
Less-than-truckload (LTL) specialist Old Dominion Freight Line makes up for its small 0.3% yield with a blistering 35% annualized dividend growth rate over the last five years and a minuscule 12% payout ratio.
Despite being the second-largest LTL shipper in the U.S., it is the most efficient operator in its industry, with an ROIC of 34% and a net profit margin of 21%.
ODFL Return on Invested Capital data by YCharts
However, in its most recent quarter, revenue and EPS dropped a nerve-racking 15% and 20% amid softness in the U.S. trucking industry as it continued to rightsize from a pandemic-aided boom. Still, management believes it maintained its 12% market share in the quarter, highlighting that it is not a company-specific slowdown.
Furthermore, the third-largest LTL shipper, Yellow, recently filed for Chapter 11 bankruptcy protection, which could boost Old Dominion as it picks up incremental sales growth from its beleaguered peer. However, after posting total returns of over 1,400% over the last decade, the company trades at a lofty 38 times earnings -- making this another dividend-grower to consider dollar-cost averaging into over time.
