Many dividend growth stocks can offer shareholders paltry raises every year just to keep their streak of annual dividend increases alive. Finding a stock that can provide ample increases to its dividend year after year is not only great for those seeking meaningful dividend income but also a great sign of the company's health.
A stock like that will likely produce significant and growing free cash flow with a management team in charge that's proven to be excellent stewards of capital. They invest only in high-return opportunities, and they're willing to return excess capital to shareholders.
One such company is quickly becoming a top-notch dividend growth stock, and it recently raised its dividend by 16%.
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Dialing in the dividends
The telecom industry is full of big dividend payers. Longtime dividend stocks AT&T and Verizon Communications might top the list, the latter increasing its dividend for 19 straight years. But Verizon is also one of those stocks that's barely bumping that dividend, giving shareholders a pay bump of 1.25 cents per share each quarter in its most recent raise. That's a 1.8% increase.
By comparison, T-Mobile (TMUS 0.18%) announced its second consecutive annual dividend increase earlier this month after initiating a dividend in 2023. The pay bump of $0.14 per share each quarter represents a 16% increase from last year's dividend. Importantly, T-Mobile is well positioned to keep the double-digit increases coming for years into the future.
T-Mobile grew aggressively last decade with customer-friendly pricing and service that helped it gain market share. That culminated with its merger with Sprint, which expanded its customer base and its wireless spectrum license portfolio. After spending heavily to integrate Sprint's assets with its own, T-Mobile eased off the gas when it comes to attracting new customers with promotions. That said, it continues to take share from AT&T and Verizon on the strength of its 5G network.
With its merger synergies now realized and operating on a much larger scale, T-Mobile has become a cash-generating machine. Operating cash flow climbed 27% in the second quarter, reaching $7 billion. While not quite as cash-generative as AT&T or Verizon, T-Mobile's growth is putting it on a path to meet its biggest rivals in just a few years.
That growth will likely stem from a combination of continued customer additions and higher average revenue per user (ARPU). The company has pushed new and existing customers to sign up for higher-priced plans with more features and benefits for several years. It recently started raising prices for existing customers on older plans as well. The results showed up in its second quarter results, when ARPU climbed 2.5% sequentially. The company notably didn't see any change in subscriber churn from the first quarter to the second quarter despite the price hike.
T-Mobile certainly meets the first criterion required for a great dividend growth stock: It possesses a strong and growing cash-generative business. But this second factor is just as important for dividend growth investors, if not more.
Management is on board
T-Mobile doesn't offer the high yields of Verizon or even AT&T. After the recent increase, the forward dividend yield is still just 1.7%.
But management is committed to raising the dividend and returning more capital to shareholders. In fact, when T-Mobile initiated its dividend, management said it planned to increase the payout by roughly 10% per year. So far, it's exceeded that mark, raising the dividend 35% last year.
Moreover, management committed to $50 billion in capital returns between late 2024 and the end of 2027. That's through a combination of dividends and share repurchases. So far, the vast majority of those returns have gone to share repurchases.
Front-loading the capital returns program with share repurchases enables the dividend to grow more quickly. If T-Mobile's paying the dividend on fewer shares, it can grow the dividend per share without a big increase in the total dividend payment. AT&T only recently started repurchasing its shares again, while Verizon hasn't repurchased shares in years as it works to pay down debt.
T-Mobile's aggressive share repurchases should set it up for another double-digit dividend raise next year. Management expects a $1.5 billion boost to free cash flow in 2026 thanks to new tax legislation. That's on top of continued growth from operating leverage. This could mean another 10% growth in free cash flow next year, supporting an even bigger dividend hike.
For investors who buy the stock now, another big dividend hike will compound for years to come, as T-Mobile looks poised to deliver many more dividend increases well into the future.
