Despite the heavy economic toll, last year’s recession was one of the shortest in history. Due to quick action by the Federal Reserve, the stock markets have recovered handily from the novel coronavirus pandemic, and the first quarter was marked by intense price momentum for growth stocks.
However, despite a pretty quick economic recovery, dividend stocks suffered massive hits last year. Understandably, with businesses suffering due to prolonged lockdowns, companies had to make tough decisions, including dividend suspensions that could cause some hurt to income investors.
Now that the dust has settled, though, it seems that it’s a perfect time to look at the dividend stocks that weathered this storm and came out on top. Although the occasions were rare, there were several companies that not only maintained their payouts but boosted dividends. If that isn’t a hallmark of a great dividend stock, then I don’t know what is.
But before we take a deep dive into these individual names, it’s also worth noting that we have compiled this list to include companies that are high growth names as well. This is because unlike bonds that pay a fixed principal and interest, dividend growers need to keep increasing payouts. And they can only do that if they have a high degree of financial soundness that can help maintain the dividend payouts year after year.
With those factors in mind, here are seven companies that are growing their payouts alongside giving a solid bottom-line performance:
- McDonald’s (NYSE:MCD)
- Automatic Data Processing (NASDAQ:ADP)
- Lowe’s Companies (NYSE:LOW)
- Franklin Resources (NYSE:BEN)
- Domino’s Pizza (NYSE:DPZ)
- Invitation Homes (NYSE:INVH)
- CVS Health (NYSE:CVS)
Growth Stocks to Buy: McDonald’s (MCD)
Dividend Yield: 2.3%
The restaurant industry had a pretty bad 2020. However, food chains that had existing drive-thru capability and robust delivery options fared better than most expected. No surprises then that McDonald’s saw steady sales last year, despite the pandemic. And the markets have rewarded the company in kind.
Earnings fell 24%, and revenue fell 9% last year. Still, shares have rebounded and are up 29.9% in the last 12 months. Guess you could put that to two things.
First, MCD is a very strong and safe performer. It is the bellwether of the world restaurant industry. No matter the short-term hiccups, it always performs well in the long term, both on the bottom line and in trading. Second, now that things are finally improving, McDonald’s can take advantage of pent-up demand for outdoor dining.
Now let’s talk about the dividend. MCD stock has hiked its distribution for more than 10 consecutive years. As a result, the dividend payout ratio — the percentage of earnings paid to shareholders in dividends — stands at 73.9%, very healthy, both overall and in its peer group.
Automatic Data Processing (ADP)
Dividend Yield: 2.0%
Automatic Data Processing is one of the biggest names in human resources management software and services.
A leading payroll processor has an asset-light model, exactly what you need in a recession. As a result, earnings per share has grown by 12.6% on average for the last five years, and revenues are up 5.0% during the same period.
The last year, though, was not great for the large-cap dividend growth stock. And it is understandable. Companies all over the world furloughed or let go millions of employees. And in the process, HR firms like ADP suffered heavy losses.
However, it’s a temporary blip. It has has managed to beat earnings estimates nine times in the last 12 quarters.
Considering the company’s solid record, investors are backing this one with full force. Shares are up 16.6% in the last three months alone. And in the 12 months, ADP stock is up 34.0%.
Much like the preceding entry on this list, the company has hiked dividends consecutively for more than 10 years. Despite a tough year, the payout ratio is very healthy at 64.4%. Considering that ADP is a recovery play, I rate shares very highly moving into the coming 12 months.
Dividend Yield: 1.2%
Much like ADP, Lowe’s is a recovery play. However, in the home improvement market. If you are looking to invest in that space, I had written about good picks in the sector a while ago, considering the industry is on fire.
The reason for their resurgence, along with Lowe’s, is not surprising. These companies actually did very well during the pandemic and continue to do so now that construction activities are in full swing.
To give you some perspective on the matter, the fiscal year 2020 sales of nearly $90 billion are approximately a 24% increase over the year-earlier period. Meanwhile, in Q4 2020, total sales were $20.3 billion compared to $16.0 billion in Q4 2019, and comparable sales grew 28.1%.
You know why this is happening, don’t you?
The pandemic led to a surge in desire for home improvement products. And with the housing market red hot at the moment, there is no end to the momentum for LOW stock and its ilk.
So, it’s not a problem for the home improvement retailer to maintain its 29.7% payout ratio. Plus, it has five-year average dividend growth of 16.5%, which is the best within this list of dividend growth stocks.
Franklin Resources (BEN)
Dividend Yield: 3.4%
Franklin Resources, formerly Franklin Templeton Investments, is one of the largest asset management companies in the world. It manages $1.5 trillion in assets for retail, institutional and high net-worth clients.
Sometimes, the company can seem boring when you compare it to seemingly sexier alternatives, like the litany of “special purpose acquisition company,” or SPAC plays out there. But the global investment management company provides safety and security that any investor craves.
Plus, much like the other companies on this list, BEN stock is a solid performer. In the last three years, it has an average sales growth rate of 2.4%, and EPS has grown by 21.4%. In addition, Franklin Resources has reported a “negative” surprise just once in the last six quarters.
With that kind of performance, it’s no surprise that BEN has outperformed the S&P 500 index by 34.3% and its sector by 3.3% in the past year.
Now let’s talk about the dividend, one of the main reasons for this stock’s appeal. In the last five years, the distribution has grown by 9.2% on average. And at a 51.2% payout ratio, the company repays a ton of its profits to its loyal stockholders. That makes it one of my favorite dividend growth stocks.
Domino’s Pizza (DPZ)
Dividend Yield: 0.9%
Much like McDonald’s, Domino’s Pizza was able to capitalize on the pandemic due to its substantial investments in online and mobile ordering and delivery and drive-thru pickup services.
In fiscal 2020, global retail sales jumped 12.5% or 13.2%, excluding the negative impact of foreign currency. In addition, U.S. same-store sales grew 11.5% for the full year and 11.2% during the fourth quarter. Overall, these results exemplify what can be accomplished if you have a forward-looking strategy.
The icing on the cake (or the extra topping on the pie, if you prefer) were the dividends and share repurchases. Domino’s Pizza repurchased and retired 567,807 shares during the fourth quarter under its approximately $225.0 million stock repurchase program.
Post quarter through Feb. 18, an additional 65,870 shares of common stock for a total of around $25.0 million were bought back.
In addition, the company declared a quarterly dividend of 94 cents per share on March 30, a 20.5% increase over the previous distribution. It continues a strong tradition of regular dividend growth for the restaurant operator and franchisor.
For seven consecutive years, the company has hiked the dividend and has a relatively stable payout ratio of 27.9%. However, considering that it has grown sales and EPS at average rates of 13.4% and 28.2% in the last five years, stable dividend growth for DPZ stock is a foregone conclusion.
Invitation Homes (INVH)
Dividend Yield: 2.0%
Invitation Homes is the biggest owner of single-family rental properties in the U.S., with around 80,000 homes for lease in 16 markets.
Since it focuses on the lower-end housing market, it stands to see many years of rental growth due to millennials starting families in the next decade, many of whom will find downpayments or outright purchases unaffordable. In addition, since the pandemic started, there has been an exodus from urban centers like New York City for suburban and rural areas — and this will help Invitation Homes as millennials enter their prime home-buying age.
To that end, the company has an exceptional portfolio with several properties close to urban centers, providing access to quality jobs and schools.
Last year, the company increased its dividend distribution by 14.8%. It has done this for three consecutive years, and with a dividend coverage ratio of 2.2 times, it doesn’t look like INVH stock is in danger of cutting or suspending the distribution any time soon. That makes it one of the top dividend growth stocks.
CVS Health (CVS)
Dividend Yield: 2.4%
CVS Health has a vision of becoming “the most customer-centric health company in the United States.” However, it has had trouble attaining this goal since it acquired health insurance giant Aetna in 2018 in a $69 billion merger. It will take time for the company to absorb the business assets of Aetna. However, there is hope that next year will see the American healthcare company return to greener pastures.
CVS stock analyst data tracked by Refinitiv is certainly bullish. For fiscal 2021 and 2022, revenues are forecast to grow 4.9% and 9.2%, respectively. That may not sound like much. But for a company that is returning to growth, it is a step in the right direction. The Aetna merger aside, the company has done well for itself; CVS has averaged 14% revenue growth over the past three years.
The dividend payout is conservative at 35.6%, meaning there is room to grow significantly once CVS absorbs all the assets of the Aetna acquisition. Moreover, the 10-year dividend growth rate stands at almost 15%, very respectable, considering the recent bump in the road.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.