Battle of Dividends: Walt Disney Co. vs. Starbucks Corporation

By Daniel Sparks Markets Fool.com

Sometimes the best dividend stocks don't have juicy dividend yields. Instead of boasting fat, 3%-plus dividend yields, they shine when it comes to dividend-growth prospects and even potential for share-price appreciation. Two companies that fit this description are Walt Disney (NYSE: DIS) and Starbucks (NASDAQ: SBUX). With dividend yields below 2%, some income investors might be tempted to gloss over these opportunities. But a quick overview of these two companies' dividends reveals promising long-term prospects.

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To get a better look at these two dividend stocks, let's face them off head-to-head.

Image source: Getty Images.

Starbucks

Company

Dividend Yield

Payout Ratio

5-Year Dividend Compound Annual Growth Rate

Starbucks

1.7%

44.2%

10.4%

Data for table retrieved from Reuters. Chart by author.

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Of these two stocks, Starbucks has the higher dividend yield. However, at 1.7% it's still lower than the average dividend yield of stocks in the S&P 500, which is about 2.15%. But Starbucks' dividend yield is still notable, especially when considering that the coffee retailer's dividend payments are just going to get better.

During the past five years, Starbucks' dividend has increased at an average rate of about 10.4% annually, and there's no reason the company can't continue increasing its payout at a similar rate over the next five years. Not only is the company paying out just 44% of its earnings in dividends, leaving meaningful wiggle room for further increases, but Starbucks' profits are growing strongly, too. So, if profits continue to increase, Starbucks' dividend can grow each year without the company needing to increase its payout ratio.

Highlighting the company's growing financial strength, earnings per share (EPS) increased 26% in the company's most recent quarter. And non-GAAP EPS for the quarter, adjusted to exclude an extra week, grew 16% year over year. This excellent recent financial performance gave management the confidence to increase the dividend by a whopping 25% in November.

Walt Disney

Company

Dividend Yield

Payout Ratio

5-Year Dividend Compound Annual Growth Rate

Walt Disney

1.4%

24.6%

18.8%

Data for table retrieved from Reuters. Chart by author.

Walt Disney's dividend yield, at 1.4%, is low enough that many investors might not even consider the media giant as a possible dividend investment. But the dividend's growth potential makes this a stock that income investors shouldn't pass up.

Two fundamental aspects of Disney's business jump out to support the case for strong dividend growth in the coming years. First, Disney's payout ratio, or the percentage of earnings being paid out in dividends, is exceptionally low. With a payout ratio of just 24.6%, the company has significant room to increase its dividend in the coming years even if earnings don't grow. This brings us to the second reason to expect big growth from Disney's dividend in the coming years: The company is experiencing very strong earnings-per-share growth, and this growth is likely to continue. In Disney's most recent quarter, EPS increased 16% year over year. And for the entire year, EPS was up 17%. Furthermore, Disney CEO Robert Iger specifically said in the company's fourth-quarter earnings release he is "confident that Disney will continue to deliver strong growth over the long-term," pointing to efforts to further strengthen its brands and franchises, increase technological capabilities, and grow its international presence as catalysts.

Overall, both Starbucks and Walt Disney offer strong dividends, despite their fairly low dividend yields. But Walt Disney may look like a slightly better bet just because of its significantly lower payout ratio. Still, investors looking for a higher initial dividend yield than Disney's wouldn't be making a mistake by betting on Starbucks.

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Daniel Sparks owns shares of Walt Disney. The Motley Fool owns shares of and recommends Starbucks and Walt Disney. The Motley Fool has a disclosure policy.