Dividend growth investing is one of the most proven and time-tested strategies for superior long-term returns. CVS (CVS 0.35%), Disney (DIS 0.34%), Walgreen (WAG +0.00%), TJX (TJX +0.25%) and Target (TGT +1.46%) have increased dividends at 20% or more over the last five years. Perhaps more important, they have the fundamental strength to continue raising dividends for years to come.
Outstanding dividend growth from CVS
CVS has followed a two-tiered strategy, positioning itself as one of the largest U.S. pharmacy retailers and also as a premier pharmacy benefit manager, or PBM. Vertical integration creates diversification and multiple growth venues for the company, and it also provides negotiation and scale advantages for CVS versus smaller players.
The company has increased dividends at a remarkable rate of 30.3% annually through the last five years, including a big hike of 38% for 2013. CVS pays a dividend yield of 1.3% and the payout ratio below 25% leaves ample room for further dividend increases in the middle and long term.
Healthy dividends from Walgreen
With a gigantic chain of more than 8,500 drugstores in 50 states, Walgreen is benefiting from strong secular tailwinds like favorable demographic trends, the expansion of medical insurance coverage and technological innovation in the health care sector. A maturing store base can also be a positive factor when it comes to cash flows and profitability over the coming years.
The company has a rock-solid track record of dividend increases, as it has paid a dividend in 324 straight quarters -- more than 80 years -- and has raised its distributions for 38 consecutive years, including a 14.5% dividend hike for 2013. Walgreen has compounded dividend growth at 27% annually through the last five years and has a dividend payout ratio of 45%. The stock currently yields 2.2%.
Resilient dividends from Target
Mass merchants are facing a tough environment due to weak consumer spending and rising competitive pressure lately. On the other hand, Target has proven its ability to successfully sail through the storm by generating compounded sales growth of 7.7% annually and earnings-per-share growth of 9.9% per year over the last five years.
Target has uninterruptedly paid dividends since going public in 1967 and the company has increased distributions at a 22% per year through the last five years, this includes a 19.4% increase for 2013. Target has a payout ratio near 40% of earnings and pays a 2.7% dividend yield.
Magic dividends from Disney
Even if the entertainment industry can be cyclical and volatile, Disney benefits from unique intellectual properties like its endless catalog of fictional characters and a portfolio of renowned brands like Disney, ABC, ESPN and Pixar, among others. Disney gets to profit from these assets on multiple platforms: movies, shows, home videos, theme parks, merchandising, etc. This provides a lot of leverage when it comes to making money from its properties, and it´s an unparalleled advantage in the media and entertainment industry.
The company has paid uninterrupted dividends through the last 58 consecutive years and has raised payments at an average compounded rate of 20% per year over the last five years, including an increase of 15% for 2013. Disney pays a dividend yield of 1.2% and has a remarkably comfortable payout ratio of only 22% of earnings.
TJX for bargain hunters
TJX is a leading off-price retailer operating more than 3,200 discount stores in the U.S., Canada and Europe under different brands. The company´s scale and geographical reach provide significant negotiating advantages with suppliers which TJX translates into pricing discounts of between 20% and 60% off traditional retail prices. This resonates especially well among consumers through good and bad economic times: TJX has experienced only one year of negative comparable-store sales in its 36-year history
The company has consecutively increased dividends in the last 17 years, and over the last five-year period it has raised payments at a 21% annual rate, including a big increase of 26% during 2013. Considering its resilient business model and conservative payout ratio of only 18%, the company has plenty of room for increasing payments over the coming years. TJX pays a dividend yield of 0.9%.
Bottom line
Growing dividends don't only generate income for shareholders, they are also a positive sign when it comes to evaluating fundamental quality and management´s confidence in the future of the business. These five companies have delivered substantial dividend growth for investors over the last years, and they have what it takes to continue raising payments for years to come. This says a lot about their suitability as long-term portfolio holdings.
