I’m a huge fan of dividend growth investing.
I’ve been using the strategy for more than a decade, and it’s helped me to build pretty serious wealth and passive income at a young age.
This strategy is all about buying and holding shares in world-class businesses that pay safe, growing dividends to shareholders.
It takes a special kind of business to be able to routinely pay and raise cash dividends to shareholders, quarter after quarter, year after year.
When you identify special businesses, you’re identifying special stocks.
But when these stocks are on sale – when they’re undervalued – that’s when they can be even more special.
See, price and yield are inversely correlated.
All else equal, lower prices result in higher yields.
This means more dividend income on the same invested dollar, making financial independence an easier and faster target to reach.
Now, lower valuations often come when there’s volatility.
But I always see short-term volatility as a long-term opportunity.
That perspective helped me to go from below broke at age 27 to financially free at 33.
By the way, I explain exactly how I achieved financial freedom in just six years in my Early Retirement Blueprint. If you’re interested, you can download a free copy of my Early Retirement Blueprint.
With all of that out of the way, it’s a big market, and some ideas are better than others.
Focusing on the very best long-term ideas right now is what this article is all about.
Today, I want to tell you my top five dividend growth stocks for May 2024.
Ready? Let’s dig in
My first dividend growth stock for May 2024 is D.R. Horton (DHI). D.R. Horton is an American home construction company. This company has a trifecta of tailwinds blowing its way. First, there’s a structural imbalance between supply and demand of single-family homes, due to a chronic shortage of homes in the US.
Second, it has immense scale in an industry where scale is extremely helpful. Third, the company focuses on the lower end of the market where most of the action and demand is. Arguably, the US homebuilders used to be somewhat poor long-term investments. Too capital intensive and cyclical. But there has been a renaissance here. Fundamentals are better than ever. That includes growth. This company has compounded its revenue at an annual rate of 18% over the last decade, while EPS has a CAGR of 28%. Truly impressive.
That impressive business growth has led to impressive dividend growth. D.R. Horton has increased its dividend for 10 consecutive years. That dates back to the bottoming of this business and stock in the GFC era.
Since then, it’s been on a tear. The five-year DGR is 14.9%. And there’s even been a recent acceleration off of that already-high base – the most recent dividend raise was a full 20%. Now, the yield is 0.8%. Not uncommonly low for a business growing and compounding so quickly, but it might not appeal to income seekers. However, with a payout ratio of just 8.6%, the dividend has plenty of room to head higher.
This is a very high-quality business. And that quality doesn’t seem to be fully priced in. D.R. Horton is growing like a tech company and priced like a tobacco business. I don’t get it. It seems like a large portion of the market is still scarred from a GFC-era housing crash, but the 2024 US housing market is totally different.
With a structural imbalance between supply and demand that will take many years to work out, D.R. Horton and its $7 billion backlog should do quite well. And at less than 10 times earnings, one isn’t paying much for the prosperity. I recently put together a full analysis and valuation piece on D.R. Horton that just goes to show what a gem this business is and why it’s potentially undervalued, so make sure to check that out.
My second dividend growth stock for May 2024 is Magna International (MGA). Magna is a multinational mobility solutions and technology company. What’s great about Magna is its unparalleled scale and breadth.
For an OEM looking for a capable manufacturing partner, Magna has to be the first choice. Indeed, Magna works with pretty much every major OEM in the auto industry. Magna is so capable and broad, it could practically manufacture complete vehicles all by itself. And in an age where mobility is becoming more complex, competitive, and important, Magna is positioned well.
The 2.5% CAGR for revenue and flat EPS growth over the last decade doesn’t inspire confidence, but much of that is due to the massive industry disruptions during the pandemic. Over the next three years, though, Magna is forecasted to compound its EPS at an annual rate of 22%. That’s more like it.
Despite tough industry dynamics over the last few years, Magna kept paying and raising its dividend. I think that speaks volumes about this company’s commitment to its dividend and shareholders. I don’t think anyone would have blamed management for temporarily cutting or suspending the dividend, but they plowed through.
The company has increased its dividend for 15 consecutive years. A 10-year DGR of 11.1% is surprisingly high for this kind of business, but more recent dividend raises have, understandably, been in a low-single-digit range. Still, there’s growth. And the stock yields 3.8% to keep you paid while you wait for better days. Not bad. And the payout ratio, at 44.9%, is reasonable enough to keep the dividend covered and growing until the business fully recovers.
This is the kind of stock that tends to always be kind of cheap. But it looks especially cheap right now.
The P/E ratio is only 12. Yes, 12. And that low earnings multiple is on depressed earnings. So it lower-than-usual earnings, and a lower-than-usual multiple of earnings. If EPS starts to recover and the market starts to apply a slightly higher multiple, you’ve got two engines powering this stock a lot higher.
I recently put together a full analysis and valuation piece on Magna, and the fair value estimate came out to $61.27/share. The stock is currently priced at about $48. Quite a bit of upside potential, and you get a near-4% yield while that attempts to play out. I think one could do a lot worse than that.
My third dividend growth stock for May 2024 is Old Dominion Freight Line (ODFL). Old Dominion is an American LTL trucking freight company.
Old Dominion is one of the best businesses I’ve ever come across. The balance sheet has almost no debt and is sitting on net cash. The returns on capital are outstanding. Return on equity and return on invested capital are both regularly over 30%.
Net margin is coming in at over 20%. How does a trucking company do this? Well, it comes down to a number of factors, including efficiency. The company runs more than 200 service centers across the US, which allows it to profitably scale its network. Another arrow in the quality quiver is the growth. We’re talking about an 11.6% CAGR for revenue and 25.4% CAGR for EPS over the last decade.
Old Dominion is a dividend growth machine. The track record for dividend growth is still young, but this company is just getting started with what is likely to become a lengthy and extremely impressive dividend growth track record.
The company has already increased its dividend for eight consecutive years, but I think there’s a lot more where that came from. Check this out. The five-year DGR is a monstrous 35.8%. And the most recent dividend raise was 30% even, indicating not much of a slowdown off of lofty levels. Now, the yield is only 0.5%.
This is a high-quality compounder, not an income play. With a low payout ratio of only 18.4%, in spite of so much dividend growth, we can be pretty confident that double-digit dividend growth will continue for the foreseeable future.
This stock isn’t cheap, nor should it be. But I think the price is fair. Before I get into the multiples, let’s just remember something. This is a high-quality compounder. It’s not some slow-growth, mature business that deserves a low valuation. It’s a premium freight business.
This stock has compounded at an annual rate of 28% over the last 10 years, including reinvested dividends. It’s a total return monster. So the P/E ratio of 37.7 has to be looked at with this in mind. That puts the PEG ratio, which factors in growth, at about 1.5. Really quite reasonable, in my view. After the 2:1 split, the stock’s priced at about $211 as I write this article. If it goes below $200, it starts to get a lot more interesting. Meantime, I’m always okay to pay a fair price for a wonderful business. Take a good look at this one.
My fourth dividend growth stock for May 2024 is Visa (V). Visa is a multinational financial services corporation. Visa is an amazing business. The fundamentals here are outstanding.
Almost no net debt on the balance sheet. Return on equity has averaged more than 40% over the last five years. Net margin is coming in at over 50%. And with the secular transition away from cash and toward digital payments, Visa, being the leader in digital payments, is poised to take the lion’s share of the benefit. This has been a terrific investment since its 2008 IPO, and a lot of the success has been driven by huge growth. The 10-year CAGR for revenue is 11.1%, and the 10-year CAGR for EPS is 16.1%.
Visa has been, and likely will remain, a dividend growth monster. The company has increased its dividend for 16 consecutive years, which dates all the way back to the IPO.
So Visa has been paying and increasing the dividend for as long as it possibly could be. The 10-year DGR is 18.3%, which is incredible, and you can see how closely that lines up with EPS growth – meaning there’s been very little payout ratio expansion. Indeed, the payout ratio is still only at 24%, so there’s plenty of dividend growth firepower here. Now, Visa’s stock yields just 0.8%. This is another high-quality compounder. For those who have the time to let compounding do its magic, Visa is a world-class builder of wealth and passive income.
Visa’s not cheap. Never really has been. Probably never will be. But I think there’s just a dash of value here. The stock’s P/E ratio is a bit over 30. Is that high? For a business compounding its bottom line at over 15%/year? I don’t really think so. Keep in mind, this stock’s own five-year average P/E ratio is nearly 35.
We’re not quite at that level right now. I recently put together a full analysis and valuation piece on Visa, showing why the business could be worth almost $281/share. The stock’s current pricing, as I write this article, is $272. Not super undervalued, but it looks better than fairly priced. And I think that’s about all you can ask for from a name like Visa.
My fifth dividend growth stock for May 2024 is WEC Energy Group (WEC). WEC Energy is an American energy company.
This is a large power utility business in the upper Midwest, serving a total of about 4.6 million customers by providing electricity and natural gas. What it provides those customers is a basic necessity in life. Can’t live without power.
Not only that, but WEC Energy runs local monopolies. When you have a monopoly on something that people can’t live without, you can get very favorable economics. However, because of that, these power utilities are heavily regulated. Still, WEC Energy managed to produce a 6.6% CAGR for revenue over the last decade and a 6.7% CAGR for EPS. That’s actually not bad for a utility.
Most utility dividends grow very slowly. This is a bit of an outlier. This company has increased its dividend for 21 consecutive years, so it’s been a very consistent giver of safe, growing dividends.
What’s even better is the rate at which those dividends have been growing – it’s a 10-year DGR of 8%. That’s unusually high for a power utility, and it’s a key reason why this is one of the few power utilities I’m a fan of. The faster growth is a product of a few ingredients, including a favorable regulatory backdrop.
Meantime, even with the faster-than-average growth, you still get a decidedly utility-like yield of 4.1%. Nice. The payout ratio is 79.1%. That’s slightly elevated, but it’s not terribly high for a power utility. Overall, surprisingly good dividend metrics for this Midwestern utility.
I don’t really like power utilities. Too much debt. Too little growth. But I think WEC Energy is a bit of a gem. And the valuation is pretty undemanding. The P/E ratio of 19.4 compares favorably to its own five-year average of 22.9. Now, to be honest, that five-year average looks high to me.
I just don’t think it makes sense to pay 23 times earnings for a power utility. But 19 times? That’s getting more reasonable. I recently put together a full writeup on this business, and the fair value estimate worked out to $94.54/share. The stock’s priced at $82 now. It’s a below-average valuation on a better-than-average utility business. After the stock’s 16% slide over the last year, it’s worth considering.
Call To Action: Thanks so much for watching. I hope you enjoyed today’s article. Give us a like if you did. And let us know in the comments what you think about these top five dividend growth stocks for May 2024.
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This six-figure portfolio, which I call the FIRE Fund, generates enough passive dividend income for me to live off of. It allowed me to retire in my early 30s. I’ve made my portfolio entirely accessible over at Patreon – and I post alerts there whenever I buy or sell a stock. I put my money where my mouth is and am often invested in the same high-quality dividend growth stocks that I write about.
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I’ll see you next time.
— Jason Fieber
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