3 Stocks Growing Their Dividends By 10% or More

Some income-oriented investors make their investment decisions based primarily on the current dividend yield of stocks. However, a stock’s dividend growth rate is sometimes more important than its dividend yield. Companies that grow their dividends at a fast pace usually signal strong business momentum as well as bright outlook.

Below, we will discuss the prospects of three companies that have recently raised their dividends by 10% or more. These stocks have low payout ratios and promising growth prospects and hence they can continue raising their dividends at a fast pace for many more years.

This Aristocrat Has ‘Recession Immunity’

Founded in 1925, NextEra Energy (NEE) is an electric utility with three operating segments, namely Florida Power & Light, NextEra Energy Resources and Gulf Power.

Florida Power & Light and Gulf Power are state-regulated electric utilities that together serve more than 5.7 million customer accounts, supporting more than 11 million residents in Florida. NextEra Energy Resources is the largest generator of wind and solar energy in the world. NextEra Energy generates approximately 80% of its revenues from its electric utilities and the rest of its revenues from NextEra Energy Resources.

Thanks to the high barriers to entry to potential new competitors that state-regulated utilities enjoy, NextEra Energy has a wide business moat. In addition, thanks to its focus on renewable energy projects, the utility is essentially immune to the secular shift from fossil fuels to clean energy sources, which has accelerated in the last three years. Moreover, as a utility, NextEra Energy has repeatedly proved immune to recessions. This is especially important in the current investing environment, as the economy has remarkably slowed down due to fast-rising interest rates.

NextEra Energy has exhibited a strong performance record. During the last decade, the company has grown its earnings per share by 10.2% per year on average. Even better, NextEra Energy does not rest on its laurels. Instead, it continues to invest in future growth at full throttle.

It also greatly benefits from the secular shift from fossil fuels to renewable energy sources. In 2022, the company grew its backlog from about 11,000 MW of renewable energy projects to 19,000 MW. It is thus reasonable to expect NextEra Energy to keep growing its EPS at a meaningful rate for many more years.

Moreover, NextEra Energy is a Dividend Aristocrat, with 27 consecutive years of dividend growth. Most income-oriented investors dismiss the stock for its uninspiring current dividend yield of 2.5%. However, the company has grown its dividend by 11.0% per year on average over the last decade and by 11.6% per year on average over the last five years.

Given also its healthy payout ratio of 56% and its promising growth prospects, NextEra Energy is likely to continue raising its dividend at a fast pace for many more years. It is thus likely to compensate patient investors, with a long-term perspective, for its lackluster current yield.

A Wide Business Moat

Home Depot (HD) is a home improvement retailer, with more than 2,300 stores in the U.S., Canada and Mexico. It was founded in 1978 and has grown to a gigantic retailer, which has reached a market capitalization of $301 billion and thus it is one of the 30 stocks of Dow Jones.

As competition has heated to the extreme in almost every sector, it has become challenging to identify stocks with a wide business moat. Home Depot is a bright exception to this rule.

The company operates in an essential duopoly, as its primary competitor is Lowe’s (LOW) . Neither of the two companies is interested in a price war or opening too many new stores. As a result, Home Depot enjoys a wide business moat. It also enjoys strong brand recognition and great economies of scale thanks to its immense network.

The merits of operating in an essential duopoly are clearly reflected in the exceptional performance record of Home Depot. During the last decade, the company has grown its EPS every year, at an eye-opening 18.3% average annual rate. The outstanding growth record and the consistent performance are testaments to the rock-solid business model of Home Depot.

Home Depot is currently offering a 2.8% dividend yield, which may appear lackluster for most income-oriented investors. However, investors should note that this is a 10-year high dividend yield for this high-growth stock. Even better, the company has grown its dividend by 20.7% per year on average over the last decade and by 16.4% per year on average over the last five years.

Thanks to its healthy payout ratio of 46%, its exciting growth potential and its rock-solid balance sheet, Home Depot is likely to continue raising its dividend at a double-digit rate for many more years. It will thus compensate patient investors for its modest current dividend yield.

Yield at a 10-Year High

Huntsman Corp. (HUN) manufactures and sells differentiated organic chemical products worldwide. The company operates in four segments: Polyurethanes, Performance Products, Advanced Materials and Textile Effects. The products of the company are utilized in various industries, such as aerospace, automotive, construction, packaging and power generation.

Huntsman has successfully acquired other companies and has enhanced its margins thanks to great synergies. However, the company is subject to some risks, such as intense competition. Global giants such as BASF, Delamine, Dow and Evonik, are constantly competing for increased market share in low-margin products.

Investors should also be aware of the high cyclicality of the business of Huntsman and its vulnerability to recessions. During rough economic periods, industrial activity slows down and thus the demand for the products of the company decreases. Even during periods of strong economic growth, the performance of Huntsman has been volatile.

On the bright side, the company has grown its EPS by 7.4% per year on average over the last decade. It has also been doing its best to improve the factors of its business it can control. While volatile results are inevitable in this cyclical business, Huntsman is likely to continue growing its earnings per share in the long run, partly thanks to its cost-cutting initiatives.

Huntsman froze its dividend during 2013-2017 and during 2018-2020 and thus it does not have a notable dividend growth streak. On the other hand, the company recently raised its dividend by 12% and thus it is currently offering a nearly 10-year high dividend yield of 3.3%.

Given the low payout ratio of the stock, which is now standing at 24%, the dividend appears safe in the absence of a severe recession. On the other hand, investors should always keep in mind the high cyclicality of Huntsman and its vulnerability to recessions.

Final Thoughts

Income-oriented investors should not base their stock selections solely on the current dividend yield of stocks. Stocks that grow their dividends at a double-digit rate for years are likely to more than offset the handicap of a lackluster initial yield in the long run.

Although they have always offered modest dividend yields, Home Depot and NextEra Energy have offered excessive returns to their shareholders. During the last decade, they have outperformed the S&P 500 by an impressive margin, as they have rallied 329% and 307%, respectively (vs. only +162% of the S&P 500). Thanks to their robust business models, these two stocks have good chances of continuing to outperform the broader market in the long run.