3 High-Growth Dividend Stocks to Buy for the Long Run
Investors have so many different choices in the market today that it can be difficult to know which is the best route for one’s capital. However, we believe that the best path to compounding wealth — and securing financial freedom — is through prudent, long-term allocation to dividend stocks. Even still, the types of dividend stocks a particular investor favors may differ depending on their individual goals, which can be heavily influenced by their age.
Older investors that are closer to retirement, for instance, may favor stocks with stable earnings and higher current payouts. Stocks that fit this description will offer these characteristics at the expense of potential growth.
For younger investors, we see the best way to invest for the future — given younger investors have time to wait for growth — as allocating to higher growth dividend stocks. In this article, we’ll take a look at why that’s the favored strategy, and some examples of stocks we like that fit this description. These stocks include the following:
Younger Investors Should Favor Growth
Before breaking down the dividend stocks listed above, let’s take a quick look at why younger investors should focus on growth.
The idea behind younger investors favoring growth over current levels of income is simple: investors with longer time horizons have more time for wealth to compound, and generally don’t need the higher levels of current income. In practice, this means that younger investors can find companies that are less mature, which can include sectors like consumer discretionary or even technology, rather than more stable, income-oriented stocks like those in the utilities group, for instance.
This gives the investor’s capital a chance to grow while providing dividend income that can be reinvested over the long term. The key is to find great companies that have the ability to pay a consistently rising dividend, while producing strong earnings growth over many years. To find such companies, we need to look for those with sustainable competitive advantages, track records of earnings growth and a willingness by management to return capital to shareholders.
The following dividend stocks fit this set of criteria for younger investors to consider.
High-Growth Dividend Stocks: Home Depot (HD)
First, let’s take a look at home improvement giant Home Depot. Home Depot was founded in 1978, but it has grown rapidly in that period of time. Today, the company has about 2,000 stores that employ about half a million people.
Home Depot is expected to produce about $145 billion in revenue this year. Additionally, HD stock trades with a market capitalization of $348 billion, making it one of the largest retailers in the country by either measure.
The advantage for Home Depot is that it operates in a duopoly in home improvement retail with rival Lowe’s (NYSE:LOW). The two companies control an overwhelming majority of home improvement revenue in the U.S. and Home Depot has the larger of the two market shares. That gives the company an entrenched position in the lucrative market that continues to grow year-over-year on construction and home improvement spending that has persisted since the Financial Crisis ended.
Indeed, Home Depot’s ten-year earnings-per-share growth rate is approaching 20%. Its dividend has grown by even more. We don’t see 20% EPS growth as sustainable, but we expect 9% growth from Home Depot in the years to come. We also expect similar rates of dividend growth.
Apple (AAPL)
Next up is tech giant Apple, which was founded in 1976. The company has transformed itself in recent years from a hardware supplier to one that has several lucrative lines of business. These businesses include a massive app store and services business that produces more than $60 billion in high-margin revenue annually.
In total, Apple produces more than $365 billion in annual revenue. AAPL stock trades with a market capitalization of $2.5 trillion. That makes it one of the largest companies that has ever existed globally.
Apple’s moat is in its enormous installed base of iPhones, as well as Macs and iPads. These devices not only provide Apple with revenue on the front end at device purchase, but access to the customer’s app store spending, which Apple takes a cut of from developers. Apple’s popularity among consumers and businesses is well proven at this point. We expect to see 8% annual growth in the coming years in terms of EPS.
That’s well below the 19% average rate that Apple has grown at in the past decade. However, the company’s transformation to a services provider has been responsible for much of that growth, which we do not believe can be easily repeated. Dividend growth has averaged almost 29% in the 9 years since the company began paying a dividend. But we expect low-double digit annual dividend growth presently.
High-Growth Dividend Stocks: Mastercard (MA)
Our final dividend stock is payments behemoth Mastercard. Mastercard was founded in 1966. The company provides consumers and businesses with a variety of digital payment options globally. Mastercard generates nearly $19 billion in revenue annually. MA stock trades with a market capitalization of $356 billion.
Mastercard’s moat is in its payments infrastructure that is part of the daily lives of hundreds of millions of consumers globally. Mastercard has the internal plumbing, so to speak, of digital payments globally, a moat that would be extremely difficult for a newcomer to supplant.
Furthermore, Mastercard has grown EPS at an average rate of nearly 16% annually in the past decade. Its dividends have grown at more than double that rate.
We expect Mastercard to build earnings at a rate of 15% annually for the foreseeable future. Meanwhile, we expect dividends to follow suit at least with double-digit annual increases.
Final Thoughts
Younger investors have the benefit of time when selecting their dividend stocks. Companies like Home Depot, Apple and Mastercard have been proven, long-term winners, providing shareholders with not only spectacular price returns, but very high levels of dividend growth as well.
We expect to see all three of these companies continue to do very well in the years to come. As such, shareholders should be rewarded with not only higher stock prices, but ever-rising levels of dividend income as well.
We reiterate that younger investors should focus on high-quality dividend growth stocks that afford them the ability to reinvest proceeds into companies with long-term competitive advantages. This will allow their wealth to compound for the decades to come.
Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.
