High-quality dividend growth stocks are some of the best stocks in the world. That’s because they represent equity in some of the best businesses in the world.
How do we know this? Well, a multidecade track record of ever-rising dividends is an excellent initial litmus test for business quality.
After all, the only way to fund ever-rising dividends is to produce the ever-rising profits necessary to sustain that activity. And only truly great businesses can produce ever-rising profits.
That said, you have to be mindful about your age. How you invest at age 20 is going to be different than how you invest at age 60.
That’s because of the difference in things like time horizon, risk tolerance, and income need.
Indeed, if you’re in your 20s, you’re much more concerned about growth of your assets. That’s because you have decades ahead of you to let that compounding process play out.
So if you’re in your 20s, it could make a lot of sense to focus on high-quality dividend growth stocks that offer high growth rates, even if the yields are low.
You want to focus on extremely long-term trends that can unfold over decades. This can allow you to rack up an excellent long-term total return and a ton of aggregate dividend income.
Today, I want to tell you about three dividend growth stocks to consider buying if you’re in your 20s. Ready? Let’s dig in.
The first dividend growth stock I want to highlight today is Apple (AAPL).
Apple is a multinational technology company.
I’ve said it before. I’ll say it again. Apple is a must-own stock for serious dividend growth investors, especially if you’re young. I think you could argue that not investing in Apple is the bigger risk than investing in Apple.
Warren Buffett has called Apple the best business he’s ever seen.
And Buffett has seen a lot of businesses over the decades. If you’re young, you have to be in tech. Tech is taking over our entire world. Apple is a great play on tech because of its breadth. They’re in everything from smartphones to payments to healthcare to content.
Apple is involved in almost every facet of tech. And they do it better than almost anyone else.
Another thing they do better than almost anyone else? Compounding. That’s right. This stock has compounded at nearly 30% annually over the last 10 years. That kind of compound annual growth rate doubles your money every 2.5 years.
They’re also growing the dividend like crazy.
With a yield of 0.5%, this isn’t the kind of stock you’re looking to get into right now if you’re in your 60s and interested in producing income from your investments. But if you’re young and can let that dividend growth add up to substantial income production over the coming decades? It’s great. Apple has increased its dividend for 10 consecutive years, with a five-year dividend growth rate of 9.2%.
Even in an inflationary environment, that still kills the inflation rate. With a payout ratio of only 14.6%, this dividend is headed way, way higher. And that’s before even factoring in the $200 billion in total cash and marketable securities they have on the balance sheet.
The stock isn’t cheap, but why would it be cheap?
You don’t get a diamond for the price of cubic zirconia. The P/E ratio 27.1 isn’t super low. But for a company of this quality and compounding prowess, I don’t see that as unreasonable at all. Besides, if you’re in your 20s, getting super precise with valuation isn’t super critical.
Time and compounding will smooth out any small errors. Do you think someone who bought Apple 10 years ago is bummed out about paying $13.00/share instead of $12.00/share when we’re now at over $160/share? I don’t think so. If you’re in your 20s, Apple should strongly be considered for your portfolio.
Next up, let’s talk about A. O. Smith (AOS).
A. O. Smith is a leading provider of water heating and water treatment solutions.
Oil was the liquid gold of the last century. The liquid gold of this century could be water. It’s a critical and finite resource. If you’re in your 20s, you want to invest in everlasting trends. What could be more everlasting than the need for reliable water, water heating, water treatment, etc.
Almost anything to do with water will likely do well over the coming decades.
Before we get into the coming decades, let’s just consider the last decade. This stock has compounded at an annual rate of 23% over the last 10 years. Sure, not as high as Apple. But it beats the pants off of a lot of other stuff out there. And A. O. Smith is just getting warmed up. While Apple might have the law of large numbers working against them, with their $2.7 trillion market cap, A. O. Smith has a market cap of under $11 billion.
And the demand runway is nearly unlimited.
Is there any future world in which people will want less access to water, water heating, water treatment? Of course not. And that’s why I don’t see any future world in which this company and its stock will not perform at an extremely high level.
That goes for the dividend, too.
This is a vaunted Dividend Aristocrat, which is a special status reserved for stocks with 25 or more consecutive years of dividend increases. It’s the creme de la creme of dividend growth stocks, so you know you’re already set up with a high-quality platform here. A. O. Smith has increased its dividend for 28 consecutive years, with a 10-year dividend growth rate of 21.6%. Again, not a huge yield here – just 1.6%.
But if you’re in your 20s, you can be patient and wait for those dividend increases to keep moving that income production dial up. And with a payout ratio of only 37.1%, A. O. Smith has plenty of room to continue handing out generous dividend increases for years to come.
After a 21% drop from its recent high, this stock actually looks attractively valued.
It’s a high-growth asset in the water space. And a Dividend Aristocrat, no less. I think that’s worth paying up for. Yet you don’t have to. The P/E ratio of 22.7 is actually well below its own five-year average of 26.0. If you want excellent long-term compounding potential with a high degree of visibility and certainty while you’re in your 20s, all while you collect safe, growing dividend income from a Dividend Aristocrat, take a good look at A. O. Smith.
The third dividend growth stock I want to highlight is Innovative Industrial Properties (IIPR).
Innovative Industrial Properties is a real estate investment trust for the medical-use cannabis industry.
So we checked off tech and water for those in their 20s and looking for extremely durable, long-term trends. Well, how about we add cannabis to the list? Cannabis isn’t something that I’d ever personally get into, medical or otherwise, but there’s no denying its appeal, medical or otherwise, to a large percentage of the populace.
And what does wide appeal mean? Money. Lots of money.
Now, this company doesn’t have the kind of long operational history that you get with Apple or A. O. Smith. It’s a new kid on the block, largely because the medical-use cannabis industry is still fleshing itself out.
But wouldn’t you rather jump on that train early, while it’s still got a long way to go?
And what a locomotive this business has been. This company had its IPO in late 2016. Since its IPO, it’s compounded at an annual rate of nearly 60%. I’m not kidding. Of course, that includes reinvested dividends. And this is another area where it differs from Apple and A. O. Smith.
This stock actually offers a fairly appealing yield.
Usually, when you get a high growth rate, you have to sacrifice yield. Think of it like equalizer dials. You adjust the growth up, and the yield tends to fall in kind. That’s just how it goes. Well, except in this case. The company has increased its dividend for five consecutive years, dating pretty much right back to the IPO. The three-year dividend growth rate is an astounding 70.6%.
But the stock also yields 3.3%. You will almost never see a 3.3% yield paired with that kind of dividend growth. And their most recent quarter showed continued easy coverage of the dividend with adjusted funds from operations.
This stock’s recent tumble could be a great opportunity for a long-term 20-something dividend growth investor.
It’s down more than 35% from its 52-week high. That’s huge. And this is even though their most recent quarter showed 42.3% YOY growth in adjusted funds from operations per share. The price-to-AFFO ratio, which would be roughly analogous to a P/E ratio on a normal stock, is now at 27.4. For a company growing at this kind of level, that is not a high multiple, in my opinion.
This stock gives you exciting exposure to cannabis, and you also get a big dividend growing at a massive annual rate. All while the stock has been compounding like crazy, even after factoring in the recent drop. If you’re in your 20s and are okay with the risk profile, this is a very interesting dividend growth stock to consider adding to the portfolio.
— Jason Fieber
P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.
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