For long-term investors, dividend growth stocks can be key to unlocking great returns. Did you know that if a stock were to raise its dividend by 5% every year, your dividend income from it would double in 14 years?
Three stocks that last raised their payouts by more than 5% are Nike (NKE 0.19%), Merck (MRK 0.37%), and Automatic Data Processing (ADP -1.33%). And they could once again increase their payouts this month.
1. Nike
Sports apparel and footwear company Nike pays a modest dividend which at the current share price yields 1.3%, slightly lower than the S&P 500 average of 1.7%. But, to its credit, the company has consistently boosted its payouts over the years.
In November of last year, Nike announced an 11% dividend increase that brought its quarterly payment to $0.34 per share. That marked the 21st straight year that Nike increased its dividend.
Nike's business remained fairly resilient this year, with consumers' loyalty to its brand contributing to its strong results. For its fiscal 2024 first quarter, which ended Aug. 31, Nike reported revenue of $12.9 billion, up 2% year over year. Net income declined by just 1% to $1.5 billion.
Given those results and Nike's modest payout ratio of 42%, it's likely that the company will raise its payouts again this month.
However, I'd be cautious about investing in the stock as it trades at more than 30 times earnings, its growth rate is slowing, and it could face headwinds as consumers' discretionary income diminishes now that student loan repayments resumed.
2. Merck
Pharmaceutical giant Merck provides investors with a higher yield of 2.8% at its current share price. However, Merck's annual dividend-hiking streak isn't as impressive as Nike's; it only stretches back to 2011.
Last November, Merck increased its dividend payment by just under 6% to $0.73 per share. Although the company's payout ratio looks unsustainable at over 100%, it's earnings were weighed down a couple of quarters ago by a non-recurring charge related to an acquisition.
In the third quarter, Merck reported earnings per share of $1.86, which was easily high enough to support its dividend and leave room for increases. Total sales rose 7% year over year to just under $16 billion as the company benefited from strong growth from its leading cancer drug, Keytruda -- its sales totaled $6.3 billion and grew by 17%.
Merck is another company that looks likely to raise its dividend this month, as its business isn't in bad shape despite the seemingly high payout ratio. Trading at only 12 times its estimated future earnings, the stock could make for an excellent buy right now.
3. Automatic Data Processing
Automatic Data Processing, better known as ADP, is a big name in human resources and payroll management. Many businesses rely on its payroll services, and that makes its operations fairly stable, with a great deal of recurring revenue. Income investors have also come to rely on it for its dividend, which at today's share price yields 2.3%.
Last November, ADP announced a 20% increase in its quarterly dividend. Not only was it a large increase in the payout, but it also marked the 48th consecutive year that the company raised its dividend. With a streak like that, the business would have to be in serious trouble for it to fail to boost its payout in a given year.
And there's really no reason to suggest that there are problems. In its most recently reported quarter, which ended Sept. 30, the company reported $4.5 billion in revenue, up 7% year over year. Net earnings were also up by more than 10% to $859.4 million.
ADP's business looks solid. Investors are paying a multiple of 26 times earnings for the stock, which isn't low. But for dividend investors looking for an excellent investment they can rely on, ADP could make for a solid stock to buy and hold for decades.
