I'll be the first to admit that I like really big dividend yields. Those fat payouts can lead to really great long-term returns if the payouts can be maintained. That said, those of us that focus on yield alone tend to only get yield as our reward. An even better reward is awaiting investors that look past yield and instead focus on a growing dividend. That's exactly the advice we find in the following quote,
The thing is, if you're just oogling fat current dividend yields, you are missing the more profitable boat. When it comes to dividend investing, the far smarter play is to zero in on companies that consistently increase their dividend payouts. -- Wealthifi
A history of great dividend growth
One company that meets this criteria is Phillips 66 (PSX 1.80%). With a dividend yield of around 3% it's not an eye-catching income stock by any means, though it does yield higher than the market at the moment. That said, the energy manufacturing and logistics company does have a history of rewarding its investors twice since being spun off of ConocoPhillips (COP 0.12%) in 2012. We see this in the following chart, which shows that the stock price has risen along with the company's dividend payout.
That chart alone makes the company a great dividend stock. As we can see as the dividend has increased so has the stock price, which basically rewards investors twice. In fact, the company has actually increased its payout four times in just the past two years and the quarterly dividend has gone from $0.20 per share all the way to $0.50 per share. That's a 150% increase in income, which when combined with the company's 112% increase in stock price over that same time frame has pushed the total return up to 124%.
PSX Total Return Price data by YCharts
Future dividend growth already in the works
While investors shouldn't expect those triple digit returns to continue over the next two years, there still is plenty of upside potential left because Phillips 66 isn't finished growing its dividend. In fact, the company recently released its 2015 growth plan, which it expects will deliver double-digit dividend growth again for at least the next two years. As this dividend growth materializes at Phillips 66, it is likely to yield strong total returns for investors. As we saw in the previous chart, those total returns, which factor in dividends, can really juice an investor's returns over time.
One of the reasons why the company is so certain that its dividend will grow in the future is because of where it's investing its money to drive this growth. This year the company is spending $3.2 billion, of its $4.6 billion capital budget, on midstream projects. These assets, which include constructing an NGL processing plant as well as an LPG export terminal, are typically built to operate under long-term fee-based contracts. What this means is that the profits are pretty much locked in from the start, which provides a lot of support for the company's current and future dividends.
Investor takeaway
A great dividend stock doesn't necessarily mean that its current dividend yield is high. Instead, some of the greatest dividend stocks, like Phillips 66, offer smaller current yields along with strong dividend growth. This rewards investors twice as the combination of dividends and capital gains can deliver very compelling total returns over the long-term.
