Often, the allure of a stock's dividend yield prompts investors to make a purchase. However, yield might not be the best characteristic to consider when evaluating a dividend stock. Many companies with yields surpassing the average of the benchmark S&P 500 often have low valuations and underperform the market over long time frames.
A frequently overlooked statistic in selecting dividend stocks is a company's dividend growth rate. Companies with annual growth rates exceeding 6% typically have high valuations and deliver market-crushing returns on capital over extended periods.
Image source: Getty Images.
The underlying reason is that a company's ability to consistently increase cash distributions to shareholders is a direct reflection of its business health. Companies facing difficulties often divert capital elsewhere, while flourishing businesses can afford to reward loyal shareholders with regular increases in their dividend payouts.
Parker-Hannifin Corporation (PH 0.78%) and Lowe's Corporation (LOW -0.04%) are prime examples. Both companies have been delivering market-beating results for shareholders, along with double-digit dividend growth in recent times. Here's why these two exceptional dividend growth stocks are worth considering for your portfolio.
The case for investing in Parker-Hannifin stock
Parker-Hannifin is an industrial powerhouse, with operations spanning two primary areas: diversified industrial and aerospace systems. The company is renowned for its expertise in motion and control technologies, including hydraulics and pneumatics.
Parker's industry dominance is reinforced by its unique patented offerings and its strategic "Win Strategy," which focuses on enhancing margins and optimizing working capital. Through a series of calculated acquisitions, Parker has also successfully broadened its total addressable market and diversified its revenue streams.
A standout attribute of Parker is its robust dividend program. The company has consistently increased its dividend payouts for an incredible 67 consecutive years, marking one of the longest streaks among companies listed on the S&P 500.
In addition, Parker has posted an exceptional dividend growth rate of 14.2% over the last five years, markedly exceeding the average for large-cap dividend stocks (according to the author's data). While Parker's yield of 1.11% may be considered modest by most income-oriented investors, the safety of its dividend is hard to beat.
Apart from its 67-year streak of consecutive dividend raises, the company sports a meager payout ratio of only 28%. Moreover, Parker is forecast to grow its annual revenue by mid-single digits in the years ahead.
Parker's shares have consistently outperformed the S&P 500 in the last half-decade (see graph below), underscoring the strength of its business model and dividend strategy. For investors in pursuit of a standout dividend growth stock, Parker screens as a truly worthy portfolio addition.
The case for investing in Lowe's stock
Lowe's, the second-largest entity in the home improvement retail sector, is well-positioned to benefit from the robust and growing demand for housing in the U.S., as well as the need for regular maintenance and updates due to an aging housing stock. However, Lowe's investment potential is somewhat hampered by its sensitivity to interest rates and economic cycles.
Despite the strong demand for housing in the U.S., affordability has become a significant headwind in the industry since the Federal Reserve initiated rate hikes in March 2022. Nevertheless, the long-term trend favors stocks in this sector, particularly Lowe's, given its extensive presence across the country.
Where Lowe's truly excels as an investing vehicle is in its dividend program. This home improvement retail stock boasts an above-average yield of 1.83%, a low payout ratio of 32.9%, and an incredible five-year dividend growth rate of 18%. Furthermore, Lowe's has consistently raised its dividend for more than half a century, highlighting the strength of its core business.
The rapid growth of Lowe's dividend has been a key factor behind its market outperformance over the past five years. Despite a projected decline in annual sales in fiscal 2024, the company's shares have continued to rise this year. As of this writing, Lowe's stock has outperformed the S&P 500 by 2 full percentage points.
Lowe's screens as one of the best dividend growth stocks in the market today. This makes it an excellent addition to any type of portfolio.
