For investors to double their money in six years or less, an investment needs to go up at a 12.2% compound annual rate or better. And there are certainly stocks out there capable of rising at this pace. After all, this is only a little better than the 10% average annual return for the S&P 500.
In my view, Universal Display (OLED 1.10%), Dollar General (DG -0.41%), and United Rentals (URI -0.02%) are three stocks that could double investors' money within six years. And as a cherry on top, all three pay a growing dividend.
1. Universal Display
When it comes to technology for organic light-emitting diodes (OLED), Universal Display is the top dog, holding over 6,000 patents worldwide. The company makes its money from licensing the tech and supplying the materials needed for manufacturing. And there's every reason to believe that we're on the cusp of an impressive OLED adoption cycle.
For just one example, consider foldable screens. More smartphones are being released that feature a foldable screen. And some companies are even working on foldable screens for laptops. The screens hitting the market are built on OLED technology, providing a growing use case for Universal Display's products.
Perhaps the fastest-growing use case for OLED is in screens for monitors and computers. This year, fewer than 8 million screens are estimated to ship using OLED technology. But in 2027, market research cited by Universal Display predicts there will be over 31 million OLED screens shipped in this category -- nearly quadrupling in three years.
In short, Universal Display's opportunity only looks to be getting bigger over the next six years. And I believe it will be more than enough growth for the stock to double over this time frame.
Universal Display is in its seventh year of paying a dividend every quarter. Management raised the dividend every year since the dividend started. And the dividend has more than doubled over just the last three years. So in six years, it's very likely that Universal Display's dividend will be much higher than it is today.
2. Dollar General
Never in the history of Dollar General stock has it dropped by 50% -- until now. DG stock is down 51% in the last 12 months. The stock now trades well below its long-term valuation averages for both the price-to-sales (P/S) ratio and the price-to-earnings (P/E) ratio, as the chart below shows.
DG PS Ratio data by YCharts
The market is concerned with specific problems for Dollar General, which is why the stock is trading at a deep discount. Therefore, if the company can fix its problems, shares could get back to a more normal valuation. And a normalization of its valuation suggests roughly 60% upside when looking at either the P/S ratio or the P/E ratio.
I believe Dollar General is on the path to fixing its issues.
Dollar General is battling inflated inventory, which is leading to markdowns, theft, and damage. To address these problems, the company recently replaced its head of supply chain. And the board of directors abruptly replaced its CEO by bringing back former CEO Todd Vasos.
Shareholders should expect Dollar General's profits to struggle for a season while Vasos leads the charge to straighten things out -- the company expects full-year EPS to drop 29% to 34% year over year in 2023. But assuming problems get fixed, it can return to EPS growth and the valuation can normalize, which could combine to allow the stock to double in six years.
Dollar General's dividend history is a little longer than Universal Display's -- it's paid and raised its dividend every year since 2015. Moreover, Dollar General's dividend has doubled in just the last five years. So again, there's an expectation this dividend will be meaningfully higher in six years.
3. United Rentals
If I could call any stock in my portfolio "Old Faithful," it would be United Rentals. Most investors have never even heard of it. And yet, the stock is up an astounding 600% in the last 10 years and still only trades at a paltry 14 times its trailing earnings.
United Rentals is the market-share leader when it comes to equipment rentals in the U.S., which happens to be a remarkably profitable venture. The company had a free-cash-flow margin of 30.7% in the third quarter of 2023, which is remarkable.
United Rentals' margin isn't normally as good as it was in Q3 but it's still usually outstanding. The company averaged a free-cash-flow margin of 16.3% over the last decade. For goodness' sake, there are software companies that dream of accomplishing something this good!
The path to creating long-term shareholder value with its profits is devilishly simple for United Rentals. The company often acquires other profitable rental businesses to increase its market share. And these smaller companies usually have low valuations, which shortens the payback period.
United Rentals also routinely repurchases its own shares for cheap. Over the last six years, the company's share count is down by 20%, which might be about what investors can expect over the next six years.
Besides buying other businesses and repurchasing shares, United Rentals also paid a dividend for the first time in 2023. The dividend yield is already respectable at 1.3%. But the company's payout ratio is less than 13%, meaning there is a lot of room for future dividend increases.
Of course, there's more to investing than the money returned to shareholders. United Rentals needs to grow as well. And here, management has big plans. Partly thanks to commitments to infrastructure spending, the company believes it can hit $20 billion in annual revenue by 2028, up from trailing 12-month revenue of $13.9 billion.
Between more than 40% top-line growth, share repurchases, and profit improvements, it seems United Rentals has what it takes to surpass the 12.2% compound annual returns. And it's why I have no intentions of selling my Old Faithful anytime soon.
