Dividend Growth Stocks: Avoid the Dividend Aristocrat Trap
Dividend investing has a proven track record of outperforming non-dividend-paying stocks, leading many investors to rely on Dividend Aristocrats, stocks on the S&P 500 that have consistently raised their dividends for 25 years or more. Studies show stocks that initiate a dividend and then raise them over time have outperformed all other stocks over time.
However, there are limits to this strategy. Even companies with long histories of dividend increases can run into trouble, as Walgreens Boots Alliance (WBA) and AT&T (T) demonstrated by cutting their dividends in recent years.
To avoid such pitfalls, investors need to focus on dividend growth stocks that can afford to keep making their payouts. Growing a dividend at double-digit rates and generating enough free cash flow (FCF) to maintain the payout ensures a business will keep sharing its wealth with investors.
Seven Dividend Growth Stocks with Strong FCF
The following seven dividend growth stocks also have the free cash flow (FCF) to back up the payments:
1.
LVMH Moet Hennessy Louis Vuitton (LVMUY)
: Luxury goods retailer LVMH Moet Hennessy Louis Vuitton (OTCMKTS: LVMUY) is one of the first dividend growth stocks to consider for your portfolio. The owner of Fendi, Dior, and Dom Perignon has a 10-year compounded annual growth rate (CAGR) for its dividend of 12.59% while growing FCF at a 13.9% CAGR.2.
UnitedHealth Group (UNH)
: Health insurer UnitedHealth Group (NYSE: UNH) is the next dividend growth stock investors should have on their list. It’s another recession-resistant issue because healthcare is something you can’t ignore, at least not for very long. Doctor visits, prescriptions, and emergency services are all vital for survival, meaning the insurer will always be in demand.3.
Dick’s Sporting Goods (DKS)
: Outdoor action retailer Dick’s Sporting Goods (NYSE: DKS) continues building on its impressive record of dividend growth. Its average payout was 27% for the last 10 years, while it generated FCF at the white-hot rate of 33% annually.4.
Domino’s (DPZ)
: Pizza delivery specialist Domino’s (NYSE: DPZ) has a history of raising its payout at high double-digit rates for the past decade, but recently announced it was increasing the payout by nearly 25% this year.5.
AbbVie (ABBV)
: Pharmaceutical stock AbbVie (NYSE: ABBV) was granted Dividend Aristocrat status because it was spun off from Abbott Labs (NYSE: ABT) a decade ago. However, the offspring has gone on to outshine the former parent since then. Where Abbott Labs has a solid 9.6% dividend CAGR for the last decade, AbbVie has a 13.9% CAGR over the same period.6.
Automatic Data Processing (ADP)
: Payroll leader Automatic Data Processing (NYSE: ADP) may be a surprise stock for some. It seems such a sleepy business to have a decade-long run growing its dividend and FCF at double-digit rates.7.
Home Depot (HD)
: Last, but investors shouldn’t think of as least, is home improvement center Home Depot (NYSE: HD). Although the retailer gets overshadowed by rival Lowe’s (NYSE: LOW) 50-plus year history of increasing its own payout, Home Depot’s recent record of raising its dividend is worth noting.These companies have demonstrated consistent dividend growth, high FCF generation, and resilience to economic challenges. They are all worthy of consideration for investors seeking dividend growth and long-term wealth creation.
