Last Updated on 18/10/2024 by Carl-Peter Lehmann
For South African investors interested in building a tax-efficient income stream through dividend growth investing, global stocks can provide attractive opportunities, and hedge some of your Rand-based income sources. In this article, we’ll explore the key factors that make dividend growth stocks valuable, highlight specific stocks, and provide insights into their performance, helping you determine when the right time to invest might be. We’ve focused on 17 US Blue Chip dividend growth stocks to buy (or at least add to your short-list).
Dividend Growth Investing: What Makes a Good Different Growth Stock?
Dividend growth stocks are those that not only pay regular dividends but also consistently increase them over time. For investors focused on income, rising dividends help hedge against inflation, offer a growing income stream, and enhance overall returns. Several key metrics we’ve used when evaluating these dividend growth stocks:
Forward Dividend Yield: The expected dividend payment over the next year, expressed as a percentage of the current stock price. It is important to monitor whether the forward dividend yield is above or below the company’s historical averages to determine the optimal entry point.
5-Year Total Return: This includes both dividends and price appreciation, giving a sense of how the stock has performed. Many companies with higher dividend yields have less attractive total returns than pure growth stocks for example, but remain attractive for income-orientated investors.
5-Year Compounded Dividend Growth Rate: The annualized rate at which the company’s dividends have grown over the past five years.
Payout Ratio: The percentage of earnings a company distributes as dividends. A moderate payout ratio suggests that the dividend is sustainable, with room for future increases.
However, it’s essential to remember that companies with appealing dividend yields are often cyclical in nature – such as those in the oil and gas sector, banks, or consumer staples. This cyclicality can lead to dividend suspensions during economic downturns. The best time to buy these stocks is typically when their forward dividend yields are higher than their historic average (which for the most part isn’t now with markets at all-time highs). Timing does matter for these types of shares!
Some Top US Blue-Chip Dividend Growth Stocks to Buy (when the price is right)
Let’s take a closer look at some top US-based blue-chip dividend growth stocks to buy when their yields become more attractive again, and which could be ideal for South African investors looking to create a global, dividend-focused portfolio. Our short-list was based on having a minimum forward dividend yield of 2%. Normally we’d like that to be 3% but that is hard to do right now with the big share prices moves we’ve generally seen over the last couple of years. Source: Seeking Alpha. Data as at 16 October 2024
1. AbbVie Inc (ABBV)
AbbVie, the Biotech and pharmaceutical giant offers a nice dividend yield and has shown significant price appreciation over the last five years. Its healthy payout ratio of 57% suggests that dividends are well-covered, leaving room for reinvestment and future increases. Its 4-year average dividend yield is 3.97% so the best time to buy it is when the share price drops and offers you an initial yield of over 4%.
- 5-Year Price Return: 157%
- Forward Dividend Yield: 3.23%
- 5-Year Total Return: 216%
- 5-Year Dividend Growth Rate: 7.69%
- Payout Ratio: 57%
2. Exxon Mobil Corporation (XOM)
Exxon Mobil is part of the cyclical energy sector, where dividends can fluctuate with the commodity cycle. At present, its dividend yield is solid, but this is a prime example of a company whose yield is more attractive during market corrections, making it important to monitor when its yield surpasses historical averages (4.47% being the average 4-year yield).
- 5-Year Price Return: 73%
- Forward Dividend Yield: 3.16%
- 5-Year Total Return: 127%
- 5-Year Dividend Growth Rate: 2.37%
- Payout Ratio: 42%
3. AGCO Corporation (AGCO)
AGCO, the agricultural equipment manufacturer, has demonstrated impressive dividend growth, with a 13.35% compounded growth rate over the past five years. Its low payout ratio of 9% suggests the company is retaining a large portion of its earnings for growth, making future dividend increases highly likely.
- 5-Year Price Return: 38%
- Forward Dividend Yield: 3.71% (4-year average 3.83%)
- 5-Year Total Return: 63%
- 5-Year Dividend Growth Rate: 13.35%
- Payout Ratio: 9%
4. Texas Instruments (TXN)
Texas Instruments, the semiconductor manufacturer, has been a reliable performer, with steady price growth and a strong dividend increase over the years. However, its 90% payout ratio may limit future growth in dividends, as most of its earnings are already being distributed. Its 4-year average yield is 2.60% making it a potential buy at current levels.
- 5-Year Price Return: 55%
- Forward Dividend Yield: 2.72%
- 5-Year Total Return: 75%
- 5-Year Dividend Growth Rate: 11.04%
- Payout Ratio: 90%
5. Blackstone Inc (BX)
Blackstone stands out for its exceptional total return, driven by a 236% price return and solid dividend growth. Therefore at current levels, it sits well below its 4-year average yield of 3.55% making it a hold at current levels. Its high payout ratio may warrant attention, but the company’s growth potential in the private equity space remains strong.
- 5-Year Price Return: 236%
- Forward Dividend Yield: 2.10%
- 5-Year Total Return: 301%
- 5-Year Dividend Growth Rate: 10.37%
- Payout Ratio: 85%
6. EOG Resources (EOG)
EOG, another cyclical natural gas and oil producer, has combined strong price performance with a high dividend yield and remarkable dividend growth the past few years. Its low payout ratio of 28% allows plenty of room for future increases, making it an attractive stock for dividend investors.
- 5-Year Price Return: 87%
- Forward Dividend Yield: 4.04% (4-year average 4.77%)
- 5-Year Total Return: 132%
- 5-Year Dividend Growth Rate: 30.27%
- Payout Ratio: 28%
7. Goldman Sachs (GS)
Investment banking giant, Goldman Sachs delivers a very good total return and has maintained a very low payout ratio of 8%, meaning it retains most of its earnings for growth, while also delivering impressive dividend growth. It’s forward dividend yield is in line with its 4-year average making this name fairly valued but certainly not a screaming buy.
- 5-Year Price Return: 158%
- Forward Dividend Yield: 2.30% (4-year average 2.30%)
- 5-Year Total Return: 192%
- 5-Year Dividend Growth Rate: 24.91%
- Payout Ratio: 8%
8. Home Depot (HD)
Home Depot, the home improvement retailer, provides a balanced mix of price return and dividend growth. Its payout ratio is within a comfortable range, making it a solid candidate for dividend-focused investors.
- 5-Year Price Return: 76%
- Forward Dividend Yield: 2.17% (4-year average 2.31%)
- 5-Year Total Return: 99%
- 5-Year Dividend Growth Rate: 11.59%
- Payout Ratio: 59%
9. Johnson & Johnson (JNJ)
While Johnson & Johnson’s total returns of late have been lacklustre, it has 61 consistent years of dividend growth (giving it status as a Dividend King.) It offers a strong forward dividend yield with consistent dividend growth. Its payout ratio of 47% indicates a sustainable dividend with room for future increases.
- 5-Year Price Return: 21%
- Forward Dividend Yield: 3.02% (4-year average of 2.72%)
- 5-Year Total Return: 42%
- 5-Year Dividend Growth Rate: 5.61%
- Payout Ratio: 47%
10.JP Morgan Chase & Co (JPM)
Banks are notoriously cyclical but JP Morgan is one of the world’s best and combines a solid total return with a relatively low payout ratio of 26%, indicating a strong balance between dividend payments and reinvestment in growth.
- 5-Year Price Return: 86%
- Forward Dividend Yield: 2.25% (4-year average 2.66%)
- 5-Year Total Return: 114%
- 5-Year Dividend Growth Rate: 6.87%
- Payout Ratio: 26%
11. The Coca-Cola Company (KO)
Coke’s days as a growth story are long over. But these days, Coca-Cola (another Dividend King) offers a steady dividend yield and consistent dividend growth, though its payout ratio of 68% suggests it’s closer to the upper range of what’s sustainable for long-term growth. The time to buy it is when the yield increases to over 3%.
- 5-Year Price Return: 31%
- Forward Dividend Yield: 2.76% (4-year average 2.97%)
- 5-Year Total Return: 54%
- 5-Year Dividend Growth Rate: 3.79%
- Payout Ratio: 68%
12. Lockheed Martin (LMT)
The maker of F-35 jets, missiles, and other defence applications is always in the mix as part of any dividend growth portfolio. Lockheed Martin’s low payout ratio of 44% allows it to maintain its strong dividend growth while reinvesting in its business for continued long-term growth. This name can often be bought at yields above 3%, with its 4-year average being 2.66%, so patience is a virtue on this one.
- 5-Year Price Return: 59%
- Forward Dividend Yield: 2.18%
- 5-Year Total Return: 81%
- 5-Year Dividend Growth Rate: 7.44%
- Payout Ratio: 44%
13. McDonald's Corporation (MCD)
Our favourite hamburger franchise with a global footprint offers an underwhelming total return relative to the market – but is a consistent dividend grower, with a manageable payout ratio of 55%, balancing income distribution and reinvestment.
- 5-Year Price Return: 49%
- Forward Dividend Yield: 2.26% (4-year average 2.20%)
- 5-Year Total Return: 70%
- 5-Year Dividend Growth Rate: 7.56%
- Payout Ratio: 55%
14. Altria Group (MO)
With very little organic growth left in cigarette’s and tobacco, names like Altria distribute a large portion of their profits to keep investors interested. Altria’s high dividend yield of 8.18% makes it appealing for income-focused investors.
- 5-Year Price Return: 16%
- Forward Dividend Yield: 8.18%
- 5-Year Total Return: 73%
- 5-Year Dividend Growth Rate: 4.10%
- Payout Ratio: 80%
15. NextEra Energy (NEE)
NextEra Energy, the power utility with a clean energy focus, offers a decent starting yield and attractive dividend growth, with a solid payout ratio of 59%, ensuring both stability and growth potential.
- 5-Year Price Return: 45%
- Forward Dividend Yield: 2.49% (4-year average 2.28%)
- 5-Year Total Return: 65%
- 5-Year Dividend Growth Rate: 10.62%
- Payout Ratio: 59%
16. PepsiCo Inc (PEP)
Pep, another of the dividend kings, delivers an attractive dividends with a forward yield of 3.08% (which is fairly attractive relative to its 4-year average of 2.74%) and inflation-beating dividend growth over five years, making it a stable option in a dividend portfolio.
- 5-Year Price Return: 28%
- Forward Dividend Yield: 3.08%
- 5-Year Total Return: 47%
- 5-Year Dividend Growth Rate: 6.83%
- Payout Ratio: 66%
17. Philip Morris International Inc (PM)
Like its competitor in the tobacco sector, Altria, Philip Morris offers an attractive high forward dividend yield of 4.48% but less appealing dividend growth rates. It also returns the majority of its profits to shareholders via its dividend because growth prospects in this sector remain limited.
- 5-Year Price Return: 53%
- Forward Dividend Yield: 4.48%
- 5-Year Total Return: 101%
- 5-Year Dividend Growth Rate: 2.72%
- Payout Ratio: 85%
Importance of Timing: Sometimes Timing Does Matter
Unlike secular growth type companies (which today are typically found in the tech sector), where if you overpay for a stock, it can can often grow into its valuation, you definitely don’t want to be overpaying for most of the stocks on this list. And due to the cyclical nature of many of the industries these companies operate in, waiting for market corrections may provide better entry points. For example, during an economic downturn or sector-specific weakness, dividend yields often rise due to lower stock prices, making these companies even more attractive to long-term income investors. That’s why monitoring forward dividend yields relative to their historical averages can provide a good indication of when to buy.
Now Read: 10 of Our Top Global Growth Stock Ideas
Average Performance and Case Study
Now that we have all the information, let’s check the averages for the 17 companies based on the complete data:
- Average Forward Dividend Yield: 3.15%
- Average 5-Year Total Return: 113%
- Average 5-Year Compounded Dividend Growth Rate: 9.7%
So an equal weighting to the companies on this list, would have outperformed the S&P 500’s (SPY) 5-year total return of 110%, while giving you a solid dividend income stream, increasing at a very attractive rate.
Case Study:
- USD 1 million investment
- Starting Income (Dividend Yield): USD 31,500 increasing by almost 10% p.a.
- Dividends Withholding Tax (DWT) of 15% typically applied on US listed stocks depending on your brokerage/custodian
And when using dividends as an income source, you’re not depleting capital. Of course the value of the shares will fluctuate but you’re not selling shares to fund income. This is a strategy you can use to supplement your South African income sources and be used for everything from overseas travel, retirement, children’s tertiary education abroad, or simply peace of mind and diversification.
Dividend Growth Investing Using Best of Breed Dividend Growth Stocks
When the time is right, these are amongst the best dividend growth stocks to buy in the world, and allows South African investors with offshore portfolios to create a stable and growing income stream. By focusing on companies with strong payout ratios and consistent dividend growth, and timing purchases for when yields are attractive relative to historical averages, you can build a tax-efficient strategy to supplement other forms of income while benefiting from capital appreciation. This under-utilised approach helps investors take advantage of market fluctuations, making dividend growth investing a powerful tool for generating long-term wealth.
Disclaimer: The information provided in this article is for educational purposes only and does not constitute financial or investment advice. Past performance is not indicative of future results, and all investments carry risk. Investors should consider their own financial situation and objectives, and consult a qualified professional before making any investment decisions.
Now Read: Using Dividends and Shares From Your SA Share Portfolio to Create Income
Carl-Peter Lehmann
Carl-Peter is a Director and Partner at Henceforward with over 20 years experience. He believes dividend growth investing is an under-utilised strategy for South African investors aiming to diversify their income streams.
