Dividend growth investing is one of the most popular and time-proven strategies for superior long-term returns. However, simply extrapolating past dividend growth into the future is hardly enough to make sound investment decisions; investors need to understand the fundamental qualities of a business in order to identify companies that can effectively sustain growing payments over the years. Apple (NASDAQ:AAPL), Nike (NYSE:NKE), Coca-Cola (NYSE:KO), Starbucks (NASDAQ:SBUX), and Tiffany (NYSE:TIF) offer strong dividend growth prospects supported by powerful brands.
Growing iDividends from Apple
Apple owns the most valuable brand in the world, according to Interbrand. This leadership position in the high-end segment of the market provides superior pricing power for the company and above-average profit margins for shareholders. Besides, Apple has more than $147 billion in cash and liquid investments on its balance sheet as of the end of the third quarter of 2013, and it generates tons of cash on a regular basis.
Apple reinstated its dividends in 2012 and raised payments by 15% in 2013. The company pays a 2.2% dividend yield and has a comfortable dividend payout ratio of roughly 30% of earnings.
A dividend marathon with Nike
After decades sponsoring the most renowned athletes in various sports and creating memorable marketing campaigns on a global scale, Nike has positioned its brand as the undisputed heavyweight champion in the global sports shoes and apparel business. The Nike swoosh is one of the most recognizable logos on the planet, and the company benefits from a remarkably profitable business because of its economies of scale and brand differentiation.
The company has returned more than $15 billion to shareholders through dividend payments and share repurchases in the last 10 years and has raised dividends over the last 12 consecutive years; this includes a 14% increase announced on Nov. 21. Nike has a safe payout ratio near 27% of earnings and yields 1.2% in dividends.
Sweet dividends from Coca-Cola
Coca-Cola owns a rock-solid leadership position in the global soft drinks market thanks to a unique portfolio of brands featuring 16 billion-dollar names -- including brands like Diet Coke, Fanta, Sprite, Coca-Cola Zero, vitaminwater, Powerade, and Minute Maid, among many others. An unparalleled distribution network and deep global reach provide formidable competitive strengths for the company.
Even if size and market saturation can be a drawback when it comes to generating growth, financial strength is not for this global juggernaut. Coca-Cola has raised dividends over the last 51 consecutive years; this includes an increase of 10% to $0.28 per share for 2013. The company pays a dividend yield of 2.9% and has a sustainable payout ratio near 55% of earnings.
Brewing dividend growth with Starbucks
Starbucks is about much more than coffee; the company benefits from one of the most valuable brands in the industry, and the Starbucks customer experience is a key differentiating factor generating strong competitive advantages for the company and superior pricing power for its products. International expansion and product innovation still offer abundant growth opportunities for the company over years to come.
The company has a relatively young history of dividends: Starbucks has paid a regular dividend since 2010. On the other hand, the coffee powerhouse has not been wasting any time when it comes to dividend growth: What started as a $0.10 quarterly dividend per share in 2010 has now turned into $0.26 per share, including a big increase of 24% for 2013. Its dividend yield is currently at 1.3%, and the payout ratio is still quite low, at 39% of earnings.
Tiffany's shining dividends
Tiffany stands out as arguably the most respected and well regarded jewelry and accessories brand in the world. Brand differentiation, retail locations, and exclusive designs provide superior profitability for the company in a fragmented industry in which most of its competitors don't have the same level of differentiation. In terms of growth prospects, Asia is looking like a particularly promising market for Tiffany in the middle and long term.
Tiffany has increased its dividend 12 times in the last 11 years, and payments have doubled through the last five years, including a moderate increase of 6% for 2013. This high-quality jeweler pays a 1.5% dividend yield, and the payout ratio around 37% of earnings provides plenty of room for further dividend increases in the future.
The bottom line
Dividends don't only provide income for investors; growing payments can be a clear and transparent reflection of business quality and fundamental strength. Apple, Nike, Coca-Cola, Starbucks, and Tiffany are very different companies operating in their own particular industries, but they have an important characteristic in common: healthy dividend growth prospects thanks to their valuable brands. Investors looking for solid dividend growth companies to hold for the long term may want to take a deeper look at these five high-quality names.