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3 of Our Favorite Dividend Growth Stocks in the S&P 500 Now

Dividend growth stocks tend to come from strong brands with numerous competitive advantages. Here are the three best dividend growth stocks in the S&P 500.

This is a guest contribution by Bob Ciura with Sure Dividend

Dividend growth investors are primarily concerned with buying high-quality stocks that have the ability to raise their dividends over time. There is good reason for this, as dividend growth stocks can generate excellent returns over the long run.

Investors looking for the dividend growth stocks that could outperform the market over the next 10 years should focus on companies with strong brands and competitive advantages. The following stocks represent three of our favorite dividend growth stocks in the S&P 500 Index right now.

All three stocks have solid current dividend yields, and all three have raised their dividends annually for many years. These are high-quality companies that lead their industries and are attractive long-term stocks for dividend growth investors.

Our 3 Favorite Dividend Growth Stocks in the S&P 500

  1. Microsoft Corp. (MSFT)

Tech giant Microsoft has proven to be an excellent dividend growth stock in the past 10 years, as it has rewarded shareholders with a rising stock price and high dividend increases. Microsoft develops, manufactures and sells both software and hardware to businesses and consumers. Its core offerings include the Windows operating system, Office business software, software development tools, video games and gaming hardware under the Xbox brand, and of course cloud services.

Microsoft stock has a fairly low current dividend yield of 1.4%, which is roughly 60 basis points below the broader S&P 500 Index average. However, Microsoft more than makes up for this, with a high dividend growth rate. Microsoft is a Dividend Achiever, having raised its dividend each year for over 10 years in a row, including a solid 9.5% increase in September 2018.

To be a quality dividend growth stock for the long-term, a company must generate high revenue and EPS growth over time. Microsoft is a prime example of this. The company released strong quarterly earnings on April 24. Revenue of $30.6 billion increased 14% from the same quarter last year. Growth was broad-based, as Productivity & Business Processes, Intelligent Cloud, and Personal Computing grew revenue by 14%, 22% and 8% respectively.

Microsoft’s current and future growth will be in the cloud, a major growth theme in technology right now. Azure, Microsoft’s high-growth cloud platform, grew by 73% last quarter, and has grown by at least 70% for 12 consecutive quarters. Microsoft’s cloud business is growing at a ~20% pace thanks to Azure, which combines IaaS, PaaS & SaaS. In all, Microsoft’s earnings rose 20% to $1.14 per share for the quarter.

Microsoft’s high earnings growth rate will allow it to continue increasing its dividend at a high rate. Its dividend growth is further strengthened by its fortress balance sheet. Microsoft has a AAA-rated balance sheet, and a huge amount of cash. As of the most recent quarterly report Microsoft held $132 billion in cash and marketable securities.

Microsoft has more than tripled its dividend in the past decade. It is likely to increase its dividend at a high rate for the next several years, thanks to its growth, low payout ratio, and strong balance sheet.

  1. Exxon Mobil (XOM)

Exxon Mobil is the largest U.S. oil stock by market capitalization, with a market cap of $320 billion. Exxon Mobil is an integrated company, meaning it has a large upstream exploration and production segment, a downstream refining segment, and a chemicals business.

Exxon Mobil has increased its dividend each year for over 30 years in a row, making it a member of the exclusive Dividend Aristocrats, a group of 57 stocks in the S&P 500 Index with 25+ consecutive years of dividend increases. Not only that, but Exxon Mobil stock offers a very high dividend yield of 4.5% right now.

The company has maintained a long history of steady dividend growth, despite the fact that it operates in a highly cyclical industry. Oil stocks tend to display high earnings volatility, due to the swings of commodity prices from year to year. In times when oil and gas prices decline, lesser-quality oil stocks have a hard time maintaining their dividends. But Exxon Mobil has a strong balance sheet and a global leadership position, which allows for steady dividend growth even when times are tough.

Exxon Mobil reported (4/26/19) financial results for the first quarter of fiscal 2019. Total production increased 2% to 4 million barrels per day, but weak refining margins led to a nearly 50% decline in earnings per share for the quarter. However, investors should remain positive regarding Exxon Mobil’s future growth. The company expects to continue growing production to 5 million barrels per day by 2025.

The Permian Basin will play a major role thanks to Exxon Mobil’s heavy presence in the high-quality oil field. Exxon Mobil has approximately 10 billion barrels of oil equivalents in the Permian Basin and expects to reach production of more than 1.0 million barrels per day there by 2024. Exxon Mobil’s long history of dividend growth and 4.5% dividend yield make the stock highly attractive.

  1. Johnson & Johnson (JNJ)

Johnson & Johnson is a diversified health care giant. It has a leadership position across the pharmaceutical, medical devices, and consumer products industries. The stock has a market cap of $373 billion, making it a mega-cap stock, and the company generates over $81 billion of annual revenue.

The company has faced an elevated level of headline risk in recent months. A report of possible contaminants in its talc powder has caused a certain amount of uncertainty, as Johnson & Johnson faces multiple lawsuits related to its baby powder. While there is risk of a significant financial penalty, Johnson & Johnson maintains that its talc powder has not caused cancer. The lingering risk poses a concern for investors, but the long-term health of the company is not in doubt.

Johnson & Johnson is a global giant, is highly profitable, and is still generating growth. In the 2019 first quarter, the company had earnings per share of $2.10, a 2% increase from the previous year. Revenue was flat, but Johnson & Johnson exceeded analyst expectations for revenue and earnings per share in the first quarter.

Johnson & Johnson’s future growth is focused primarily in its pharmaceutical business. Johnson & Johnson spends aggressively on research and development to build out its product pipeline, including over $10 billion of R&D expense in 2018. All this investment has paid off for the company in a big way. Pharmaceutical sales were the primary driver of growth in the most recent quarter. Immunology sales increased 7%, while Oncology revenue increased 9% for the quarter. New products such as inflammatory disease drug Stelara (up 36% last quarter) and multiple myeloma drug Darzalex (up 46%) will lead the way in the years ahead.

Johnson & Johnson currently pays an annual dividend of $3.80, representing a 2.7% dividend yield. Johnson & Johnson has an expected dividend payout ratio of 42% for 2019. This means the dividend is secure, barring a massive decline in EPS which is highly unlikely. Johnson & Johnson has increased its dividend for 57 years in a row, including a recent 5.6% increase.

Johnson & Johnson’s growth potential will help the company continue to increase its dividend each year, as will its strong balance sheet. Johnson & Johnson is one of just two U.S. stocks with a top credit rating of AAA from Standard & Poor’s, the other stock being previously-mentioned Microsoft. The company’s excellent financial position, dominance of its various business segments, and growth potential should provide for annual dividend increases each year over the long term.

Sure Dividend helps self-directed investors and investment professionals find high-quality dividend growth stocks for the long run. We specialize in long-term investing for rising passive income over time. Sure Dividend was founded in 2014 and is trusted by more than 100,000 investors who receive Sure Dividend’s free dividend information.

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Sure Dividend helps self-directed investors and investment professionals find high quality dividend growth stocks for the long run. We specialize in long-term investing for rising passive income over time. Sure Dividend was founded in 2014 and is trusted by more than 100,000 investors who receive Sure Dividend’s free dividend information.