Dividend growth stocks have a proven track record as value creators. Several factors contribute to this trend. First, Wall Street views a rapidly growing dividend as a positive sign for the underlying business's health. Academic studies support this notion, revealing that companies with increasing dividends tend to have stronger earnings power.
Additionally, investing in stocks with growing distributions and reinvesting those cash or stock payouts can lead to significant benefits through the power of compounding. When a rising dividend payout is automatically reinvested, it amplifies returns, creating a snowball effect.
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Which dividend growth stocks are worth buying and holding for the long term? Look no further than digital payments giant Visa (V +1.46%) and retail powerhouse Target (TGT +2.77%).
Both companies are known for consistently raising their dividend payments at impressive rates. With robust free cash flows and well-established brands, these two stocks are solid choices for investors. Read on to find out more.
Visa
Visa is a dominant force in the global payments-technology industry, facilitating monetary transactions across a vast network that spans over 200 countries and territories. Its platform serves a diverse clientele, including consumers, merchants, financial institutions, and government bodies.
The company is capitalizing on the worldwide transition from cash to digital payments, significantly boosting its financial metrics. In the past five years, Visa has seen a remarkable 68.2% surge in diluted earnings per share (EPS), a 42% increase in annual revenue, and a 56.6% uptick in its share price.
NYSE: V
Key Data Points
Reflecting these favorable developments, Visa has consistently increased its dividend payouts, averaging a 15.7% annual hike over the prior five-year period, more than double the average five-year dividend-growth rate of 6% among the world's leading income stocks (author's data). Moreover, with a trailing-12-month payout ratio of just 21.4%, Visa appears to have considerable potential for further dividend expansion.
However, the company's stock does not come without its drawbacks. Visa's shares are priced at a premium, trading over 27 times forward earnings, notably higher than the S&P 500's forward multiple of 21.5. The company's premium valuation is arguably justified due to the rarity of high double-digit dividend growth and its entrenched competitive position in the rapidly growing digital-payments market.
Target
Target Corporation, the sixth-largest retailer in the U.S., prides itself on delivering an exceptional shopping experience marked by luminous, tidy stores and fashionable merchandise.
NYSE: TGT
Key Data Points
Over the last decade, Target has made significant investments to enhance cost efficiencies, broaden its omnichannel fulfillment capabilities, and refurbish its stores.
Despite the share-price volatility, influenced by stiff competition from giants like Amazon and Walmart, these strategic moves have paid off, yielding a robust 45.5% increase in annual revenue, a 68.3% growth in diluted EPS, and a 97.1% rise in share value in the past 10 years.
TGT Revenue (Annual) data by YCharts.
When it comes to dividends, Target's performance is equally impressive. The company has a long-standing history of dividend growth, having raised its dividend consecutively for over fifty years.
In the recent five-year span, the retailer has leveled up its annual dividend by an average of 10.1%, positioning it among the top performers in the large-cap stock category. With a payout ratio standing at 49%, Target is well positioned to maintain, if not increase, its shareholder distributions well into the future.
Moreover, Target's stock presents a compelling value proposition, trading at less than 16 times forward earnings, making it a bargain compared to the broader market.
