Dividend growth is one of the stock market's mightiest forces. While high-yield stocks garner much of the market's dividend-related fanfare, I tend to prefer stocks with smaller dividend yields -- initially, at least.
As counterintuitive as this sounds, high-yield stocks often offer minimal dividend growth potential, whereas certain companies with lower yields may offer exponential dividend growth over the long haul.
A perfect example of this is rural lifestyle retailer Tractor Supply (TSCO 1.88%) and its 1.6% dividend yield. Though this 1.6% yield may sound underwhelming, Tractor Supply's dividend payments have grown by 31 times in size since 2010.
Had an investor bought $10,000 worth of the company's shares and held through these 15 years, they would already be receiving more than $3,000 in annual dividend income. Best yet for investors, this figure should continue growing thanks to Tractor Supply's robust operations and unique culture.
Here are four reasons why I believe Tractor Supply will continue beating the market and remain one of the best S&P 500 dividend growth stocks available.
NASDAQ: TSCO
Key Data Points
1. Tractor Supply's massive Neighbor's Club
Tractor Supply (TSC) caters to the rural lifestyle and dominates a niche with no direct competition, outside of much smaller regional peers. This differentiation pays dividends for the company, which has parlayed its uniqueness into a massive membership rewards program called Neighbor's Club.
Growing from 15 million members in 2019 to over 38 million today, Neighbor's Club has quickly become one of Tractor Supply's most powerful traits. Just six years ago, sales from members of its rewards program only accounted for less than 30% of the company's sales. Today, that figure is north of 80% of revenue.
This rapid uptake of its rewards program makes sense when you see Neighbor's Club's list of benefits, such as:
- Free standard shipping
- Free same-day shipping on two purchases each quarter
- Free trailer rentals
- A Tractor Supply card (if wanted) for 5% back in-store and 3% back out-of-store at gas stations, veterinary clinics, and grocery stores
- Access to TSC's farmer's market for buying or selling goods
- Personalized offers and member deals
Management states that it has improved customer satisfaction for 43 consecutive months, making TSC's goal of reaching 55 million members by 2030 quite attainable, especially considering its value proposition for new members.
Image source: Getty Images.
2. Its growth story is mid-book
Tractor Supply's store count has grown from just 323 in 2001 to over 2,300 as of its latest quarter. Despite this growth, there should still be plenty ahead, as management raised its long-term store count guidance to 3,200 after adding 80 new stores in 2024.
Furthermore, TSC's acquisitions of specialty pet retailer Petsense in 2016 and online pet and animal pharmacy Allivet in 2024 expand the company's presence in a niche that complements its existing operations. To highlight just how well Petsense coexists with Tractor Supply's stores, consider that 85% of the former's sales come from current Neighbor's Club members.
This ecosystem, now paired with the $1 billion worth of sales potential from online prescriptions and medicines via Allivet, combines to form an omnichannel, one-stop shop for animal healthcare. Opening 10 new Petsense stores in 2024, the unit is now over 200 locations strong and offers a promising growth lever for TSC.
3. Strong and improving profitability
While Tractor Supply's Neighbor's Club is probably my favorite part of the company, its steadily improving profitability comes in a close second place.
TSCO Gross Profit Margin, Operating Margin, and Return on Invested Capital data by YCharts
Not only have the company's gross profit and operating margins improved steadily over the last two decades, but its return on invested capital (ROIC) remains top-tier. Compared to the S&P 500's median ROIC of 9%, TSC's mark of 28% shows that it generates higher profits relative to its debt and equity than some of the most successful businesses in the world -- historically, a market-beating trait.
As Tractor Supply eyes new higher-profit areas such as retail media and private-label brands (which management believes could add $200 million of net income to TSC's current $1.1 billion), these figures could keep surging higher.
4. Shareholder-friendly cash returns at a fair price
Thanks in part to this improving profitability, Tractor Supply has raised its dividend for 15 consecutive years, yet only uses 43% of its net income to fund these payments. In addition to this well-funded and growing dividend, the company has consistently rewarded shareholders by lowering its total shares outstanding by 2% annually through share buybacks.
TSCO Shares Outstanding and Dividend data by YCharts
This "X" created by a declining share count and rising dividend payment is one of my favorite charts to see from a stock, as it shows a focus on taking care of shareholders by rewarding them with cash returns.
Thanks to these share repurchases, TSC's earnings per share have risen 1,060% since 2010, whereas its net income only jumped 748%. This disparity highlights the power of consistently buying back shares and is an excellent complement to a rising dividend.
Ultimately, Tractor Supply's combination of steady sales growth, improving margins, devoted members, and shareholder returns makes it a top stock to consider for a lifetime of passive income. This is particularly true as it trades at 26 times earnings, compared to the S&P 500's average of 29.
