My Top 5 Dividend Growth Stocks (and one bonus pick)

One of the greatest parts of the dividend growth investing community is the wide range of interests, opinions, and insights that are provided.  While we are all dividend growth investors, we can approach investing in varied ways and still appreciate each other and root for each other.

We all have our preferred methods of investing and have our favorite companies.  The majority of the picks mentioned across the community are solid and the owners have valid reasons why they are the favorites.  I was recently asked what my Top 3 stocks are, so I gave it some thought and came up with my Top 5 instead, with one bonus pick for good measure.

These are my favorites, not because of the return that I have achieved, but because I believe in the company, they have strong financials, stability, and growth prospects, particularly dividend growth prospects.  These may not be the best values today so make sure you take a look at the metrics and also determine if their business model and risks match your needs before you make a purchase decision.

Pick 1:  Blackrock (BLK)

The largest asset manager in the world, with approximately $10 trillion in assets under management (AUM).  Ten Trillion!  That number is almost incomprehensible but it just proves how strong and respected this company is.  BLK owns and manages the iShares brand of ETFs and has hundreds of funds available.  They also provide Closed End Funds, private equity, corporate financing, and investment software called Aladdin.

Their CEO, Larry Fink, is one of the best CEOs in the world and is very transparent to shareholders and the investing public at large.  His annual letters to CEOs and Shareholders are anticipated and widely read.  As the CEO of the largest asset manager, his words carry significant weight in the industry, and in the past few years, have targeted clean energy and shareholder friendly policies in the companies that BLK holds investments in.  (Note: BLK owns the shares of the companies in your ETFs and mutual funds, so they have immense voting rights and can influence their agenda with their votes.  They vote your shares for you.)

Financials and Dividend info include:

Dividend Safety score of 98 out of 99 (very safe)

Debt to Equity of 0.18

Dividend Payout ratio of 43.10%

Dividend Yield – 2.17%

Years of dividend growth – 12 years

Dividend Growth Rate (5 years) – 12.52%

Estimated Fair Value (DCF Model) – $760.19

Pick 2: NextEra Energy Partners (NEP)

The global energy supply is rapidly becoming more sustainable and NEP is a leader in the renewable energy space and can capitalize on this growing trend.  NEP owns and runs utility scale renewable energy projects like wind and solar.  They are a subsidiary of NextEra Energy (NEE), one of the largest utilities in the country and the largest producer of renewable energy.  NEE develops the renewable energy resources and then sells them to NEP who in turn signs multi-decade power agreements with municipalities to provide clean energy.  This long term contract allows a steady flow of income which is then provided to shareholders as dividends.  

NEP is structured as a Limited Partnership which initially may turn off some investors, but they have their structure arranged so that they do not give you a K-1, which will make tax time much easier.

Historically, NEP raises their dividend every quarter and has grown around 15% a year.

Financials and Dividend info include:

Dividend Safety score of 42 out of 99 (safe)

Debt to Equity of 1.72

Dividend Payout ratio of 71.30%

Dividend Yield – 3.77%

Years of dividend growth – 7 years

Dividend Growth Rate (5 years) – 14.93%

Estimated Fair Value (DCF Model) – $85.79

Pick 3: Broadcom (AVGO)

AVGO is a global semiconductor and infrastructure supplier that provides broadband, data center, mainframe and other solutions.  They are a serial acquirer of companies and has done a great job integrating them into the existing operations.

They are committed to the dividend and have it highlighted as part of their investor presentations.  The 5 year compound average growth rate (CAGR) is 42.68% which is insane.  A few years ago the CEO, Hock Tan, stated in an interview that the company’s dividend policy is to pay out 50% of free cash flow as a dividend.  This provides the ideal balance of paying current shareholders and still gives the company plenty of cash to expand and grow. 

Financials and Dividend info include:

Dividend Safety score of 67 out of 99 (safe)

Debt to Equity of 1.59

Dividend Payout ratio of 53.21%

Dividend Yield – 2.75%

Years of dividend growth – 10 years

Dividend Growth Rate (5 years) – 42.68%

Estimated Fair Value (DCF Model) – $642.92

Pick 4: American Tower Corp (AMT)

AMT is a REIT that specializes in cell towers and other communication services.  They have approximately 219,000 towers in 25 countries around the world.  Cell service has become like a utility, every one needs it, so there is stability in being a provider of the infrastructure that supports the service.  Their towers can host multiple providers, so they are akin to a “picks and shovel” provider for the growing cell service companies like Verizon and AT&T..  

They also recently expanded to data centers with their acquisition of CoreSite Realty.  This further diversified their assets and revenue base.

Their dividend growth has been very impressive and have historically raised the dividend every quarter.  The current yield is low for a REIT but the growth has made up for it.  As a REIT they finance their properties so the Debt to Equity appears high at first glance but is expected and allows them to grow their revenue by purchasing new locations. 

Financials and Dividend info include:

Dividend Safety score of 78 out of 99 (safe)

Debt to Equity of 6.2

Dividend Payout ratio of 88.10%

Dividend Yield – 2.39%

Years of dividend growth – 9 years

Dividend Growth Rate (5 years) – 19.14%

Estimated Fair Value (DCF Model) – $245.01

Pick 5: Johnson and Johnson (JNJ)

Everyone has heard of JNJ but as a summary they are a global provider of medical devices, pharmaceuticals, and consumer health products.  My guess is there is at least a handful of their products in your house right now.

What many don’t know is that JNJ is a major player in the medical device industry for doctors and dentists.  This section of their business is growing much faster than the consumer side.

They have raised their dividend for 59 years now and have paid it consistently for many years prior.  This is the ultimate sleep well at night stock.  Steady compounding over time and the consistency is very impressive over such a long time period. 

The company recently announced they are splitting off their consumer business so there will be some changes coming for JNJ but shareholders will get shares in both companies so I plan on continuing to hold both.  This split should allow the medical device and pharma business to continue to grow as management will be able to focus on these areas more.

Financials and Dividend info include:

Dividend Safety score of 99 out of 99 (very safe)

Debt to Equity of 0.48

Dividend Payout ratio of 42.76%

Dividend Yield – 2.54%

Years of dividend growth – 59 years

Dividend Growth Rate (5 years) – 5.87%

Estimated Fair Value (DCF Model) – $173.16

Bonus Pick:  Microsoft (MSFT)

MSFT is my bonus pick solely due to the low dividend.  As a dividend investor I like to see a higher starting yield but the reason it is so low is the share price has exploded over the past decade. 

This is one of the best run, financially stable, and diverse company in the world.  They are one of only two companies that have a higher credit rating than the U.S. government (JNJ is the other). 

Their computer software, gaming platforms, and cloud business provide a diverse revenue base and a place in practically every home and business around the world. 

Their CEO Satya Nadella is an amazing leader and one of the best minds in business in the world.  He has really taken Microsoft to new levels during his tenure. 

The company is consistently profitable and has growing free cash flow 

Financials and Dividend info include:

Dividend Safety score of 99 out of 99 (very safe)

Debt to Equity of 0.42

Dividend Payout ratio of 26.61%

Dividend Yield – 0.83%

Years of dividend growth – 18 years

Dividend Growth Rate (5 years) – 9.49%

Estimated Fair Value (DCF Model) – $245.89

I have a lot of holdings in my portfolio so it was a little hard to narrow it down.  All of my holdings have a part to play on my DGI team but these are the ones that rose to the top.  Let me know what you think and if you have any of these as well.