Dividend growth investing is a fantastic long-term investment strategy. This strategy is all about buying and holding shares in world-class enterprises that pay reliable, rising dividends to their shareholders.
We’re talking about letting the world’s best businesses make you increasingly wealthy all while paying out ever-larger cash dividends along the way. You’re literally getting paid more and more money to become more and more rich. How can you not love this? What does this process actually look like?
That’s what this article is all about.
Today, I want to tell you about 6 dividend growth stocks that just increased their dividends. Ready? Let’s dig in.
The first dividend increase I have to highlight is the one that was announced by American States Water (AWR).
American States Water just increased its dividend by 8.2%. Collecting 8.2% more passive income for doing nothing other than holding shares in a great business? That’s awesome. You know what might be even more awesome? This company’s dividend growth track record.
The utility company has now increased its dividend for 69 consecutive years. That’s the record. There is no company that has increased its dividend for more consecutive years in a row than this company. Nearly 70 straight years of ever-higher dividends. Just imagine doing anything for 70 years in a row. That level of consistency is difficult and rare.
Now imagine writing ever-larger checks for that kind of time frame. It’s incredible. The 10-year DGR is 9.2%, so this latest dividend increase isn’t far off. You pair that with the stock’s yield of 2.1% and the payout ratio of 54.4%. This is a very appealing combination of yield, growth, safety, and consistency. The valuation, on the other hand, isn’t super appealing, but this stock isn’t super expensive.
When evaluating the valuation of this business, you have to remember what you’re looking at. A clue is right in the name of the company. We’re talking about water, right? A precious resource that human beings literally cannot live without. There is no future in which the demand for this company’s core offering will go away. There’s almost no risk of technological obsolescence.
Furthermore, American States Water has 50-year privatization contracts with the US government. Revenue and growth is almost guaranteed. Against all of that, the P/E ratio of 26.7 doesn’t seem all that high, although E in that ratio is higher than usual because of a one-time earnings gain. This is one of my favorite ultra-long-term investment ideas.
The second dividend increase I should bring up is the one that came courtesy of Capital Southwest (CSWC). Capital Southwest just increased its dividend by 3.7%.
A smaller dividend increase than some of the others that we’re featuring today, but it’s actually bigger and better than it sounds. This company tends to increase its dividend multiple times per year. Indeed, the current dividend is 12% higher than it was a year ago. That’s more like it, right? The business development company has now increased its dividend for eight consecutive years.
There is a lot to like about Capital Southwest, which is a BDC that offers alternative financing options for smaller, private companies. That YOY dividend growth of 12% sounds nice, right? Well, it gets better. That huge dividend growth comes on top of the stock’s massive starting yield of 10.1%. And that massive yield is before factoring in supplemental dividends, which are frequent and recurring. If we extrapolate the current supplemental out to an annual run-rate, the yield jumps to over 11%.
I mean, how often are you going to get a double-digit dividend growth rate with a double-digit yield? Almost never. Net investment income of $0.67 per share for the last quarter easily covered the $0.56/share quarterly dividend and the $0.06/share supplemental dividend. We’re at a premium to NAV on this one, but the premium seems justified.
When valuing a BDC like this, you want to look at NAV – net asset value – as your barometer. We judge price against that. It’s price against value. NAV for Capital Southwest ended the most recent quarter at $16.38/share. The stock is currently priced at right about $22. A pretty decent premium there.
However, what I’ve personally observed over more than a decade of investing is that the great BDCs – and there are only a few of them – tend to routinely capture premiums because of performance. Even with the premiums, the performance means that shareholders are getting a far better total return than the lower-quality BDCs that are often trading for discounts to NAV. I don’t usually like yield plays like this one. Most yield plays are terrible when it comes to total return, which is what ultimately matters.
We’re here to make money. But Capital Southwest is one of the very, very few high-yield dividend growth stocks that I like. This recent dividend increase makes me like it even more, and I see more action coming this BDC’s way as banks continue to get regulated into oblivion.
The third dividend increase we have to talk about is the one that came from Illinois Tool Works (ITW). Illinois Tool Works just increased its dividend by 6.9%. Illinois Tool Works just keeps working for dividend growth investors, as evidenced by yet another high-single-digit dividend raise for its shareholders. This is the 49th consecutive year of dividend increases for the specialty products company.
Illinois Tool Works is a Dividend Aristocrat. It’s one more dividend increase away from becoming a Dividend King. This business flies under the radar, despite putting up strong numbers for decades. The 10-year DGR is 13%, although more recent dividend raises have clustered around this 7% area.
Still, that’s enough inflation-beating dividend growth to keep you ahead of the game. The yield of 2.3% easily beats what the broader market offers. And the payout ratio is a comfortable 55.4%. This will be a Dividend King in one year’s time.
In my view, Illinois Tool Works is pretty fairly valued here. Warren Buffett has noted that it’s better to buy a wonderful business for a fair price than a fair business for a wonderful price. Investing in Illinois Tool Works would be a great example of executing on that concept. Every single basic valuation metric I look at is very close to its respective recent historical average. For instance, the P/E ratio of 24.5 is just under its own five-year average of 25.
The sales multiple of 4.7, on the other hand, is slightly ahead of its own five-year average of 4.4. A pullback would be nice, sure. But long-term dividend growth investors willing to pay a fair price for a wonderful business can consider Illinois Tool Works right here.
The fourth dividend increase I have to go over is the one that was announced by Lam Research (LRCX).
Lam Research just increased its dividend by 15.9%. Bam. Lam Research coming through with yet another huge dividend raise. That’s all this company seems to do. This marks the 10th consecutive year in which the semiconductor manufacturing equipment company has increased its dividend.
Lam Research has the makings of something special for long-term dividend growth investors. The five-year DGR of 28.2% is a jaw-dropping number, but recent dividend raises, which have been clustered around the 15% area, seem to be a good indicator of what shareholders can expect.
Now, you do have to sacrifice some current income here. The yield is only 1.1%. But Lam Research is a high-quality compounder, not an income play. And with a payout ratio of just 24.1%, I suspect Lam Research will continue compounding that dividend at a double-digit rate for years to come.
This stock isn’t cheap, nor should it be. It’s not some junky, low-ROI loser. This is a terrific business. Price is what you pay. Value is what you get. The investors who only chase low multiples seem to forget that.
A low multiple isn’t great when you’re investing in a terrible business that deserves a low valuation and will likely perform poorly. Lam Research is none of that. This is a world-class business. We last analyzed and valued it last fall, estimating fair value at right about $600/share. The stock has moved up by about 65% since that video came out, and a lot of undervaluation has disappeared.
However, the dividend increase would improve the output of my DDM analysis. And most multiples aren’t egregious at all. The earnings multiple of 21.1 isn’t too rich for a business of this caliber, in my view, even though it is running ahead of its own five-year average of 18.1. One could argue that Lam Research simply hasn’t gotten the respect it deserves. Maybe the stock’s 31.6% CAGR over the last 10 years will change that going forward.
The fifth dividend increase I must cover is the one that came shareholders’ way from Skyworks Solutions (SWKS). Skyworks Solutions just increased its dividend by 9.7%.
Looking for a solution to having to work until you’re old? Looking for a solution to inflation causing the cost of everything to rise over time? Well, consider owning shares in high-quality businesses that pay safe, growing dividends – like Skyworks Solutions.
The semiconductor company has now increased its dividend for 10 consecutive years. We’ve got some really solid dividend metrics here. The five-year DGR is 14.5%. And the stock offers a pretty appealing starting yield of 2.5%. If you can get a 2.5% yield and grow that dividend at a 10% or so level, year in and year out, that cumulative dividend income is really going to add up. And you’re almost certainly going to see a very healthy annualized total return. With the payout ratio sitting at 29.1%, based on TTM adjusted EPS, this dividend can easily continue to grow at a double-digit clip.
This stock looks pretty cheap. Is it warranted? Based on that aforementioned TTM adjusted EPS, the P/E ratio is only 11.7. For a world-class semiconductor company, that’s absurdly low. However, there’s also the elephant in the room. Skyworks Solutions has extreme customer concentration risk.
Skyworks Solutions gets about 60% of its revenue from one customer: Apple Inc. – stock ticker AAPL. And Apple is clearly interested in as much vertical integration as possible. So that’s a huge question mark here. That said, we covered Skyworks Solutions late last year, estimating fair value for the firm at just over $145/share. Skyworks Solutions is at least worth a look, especially after this dividend raise.
The sixth dividend increase that we just have to talk about is the one that occurred from Westlake Corp. (WLK). Westlake just increased its dividend by 40.1%.
Wow. When’s the last time you got a 40% pay raise at work? Never, right? Exactly. Yet all Westlake shareholders had to in order to get a 40% boost in pay was not sell their shares. It just doesn’t get any easier or better than that. This is the 20th consecutive year in which the chemicals company ha increased its dividend.
Westlake flies under the radar. Maybe it shouldn’t. The 10-year DGR of 17.5% shows what a dividend growth monster this company has been. The 1.5% yield isn’t super high, nor would I expect it to be when there’s this much growth, but it is slightly higher than its own five-year average of 1.4%. Since the payout ratio is just 19.4%, Westlake is positioned to continue doing its thing when it comes to dividend growth. In my view, we’ve got a appealing valuation here.
Westlake never commands high multiples. That’s probably because of what it does. Chemical companies, like this one, don’t get high-flying premiums in the market. And that makes sense. It’s a capital-intensive, cyclical business model.
However, Westlake is putting up much better numbers than your typical chemical company. And the multiples don’t seem to be properly reflecting that. The P/E ratio is just 12.9. Is that appropriate for a company that’s been compounding its EPS at an annual rate of 16%? I don’t think so. The only question is whether or not Westlake can keep it up. If it can, it’s cheap.
— Jason Fieber
