Buying and holding high-quality stocks is arguably the most effective way to predictably generate wealth over the long term. To expand on that concept, the smartest investors know that dividend stocks can further bolster your returns -- especially if you can find solid companies that are likely to increase their payouts for years to come.
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To that end, we asked three Motley Fool investors to each pick a growth dividend stock investors would be wise to buy this month. Read on to learn why they chose Universal Display (NASDAQ: OLED), Las Vegas Sands (NYSE: LVS), and Pattern Energy Group (NASDAQ: PEGI)
Universal Display has more room to run
Steve Symington (Universal Display): Universal Display likely isn't the first name most investors think of when they're looking for dividend stocks. After all, it's easy to dismiss the OLED technologist's tiny $0.03-per-share quarterly payout -- which the company initiated earlier this year along with its fourth-quarter 2016 report -- yielding just 0.07% annually as of this writing.
But Universal Display management also has made it clear that they have every intention to boost that payout going forward, calling it "a good place to start" with the OLED industry still in its early stages.
Universal Display stock hit an all-time high last week after the company's third-quarter results absolutely crushed expectations. Revenue more than doubled on a year-over-year basis, thanks both to strong sales of OLED emitter materials as OLED displays become more pervasive in smartphones and TVs, and to higher royalty and license fees on Universal Display's portfolio of thousands of OLED-centric patents. Earnings fared even better, swinging from a $0.03-per-share loss in last year's third quarter to net income of $0.28 per share.
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But as Universal Display management reminded investors during last quarter's call -- and as fellow Fool Anders Bylund recently wrote -- another even more exciting catalyst is beginning to materialize with the advent of affordable OLED lighting solutions, opening the door for its technology to disrupt another multi-billion-dollar industry in the coming years.
For investors willing to buy now and watch Universal Display's story continue to play out, I think the stock's recent gains are only the beginning.
The world's biggest casino operator
Leo Sun (Las Vegas Sands): Las Vegas Sands is the biggest casino operator in the world. It was the first U.S. company to open casinos in Macau, a region that posted 14 straight months of year-over-year gaming revenue growth. Japanese brokerage Nomura expects that streak to continue with up to 15% growth in October -- which is great news for Sands' five properties in the region.
Sands generated 54% of its adjusted property earnings before interest, taxes, depreciation, and amortization (EBITDA) from Macau last quarter, with 36% coming from Singapore and just 10% coming from the US. The bears argue that ongoing crackdowns on corruption and money laundering, as well as competition from aggressive Macau-based rivals, could derail Sands' growth.
Yet Sands repeatedly proved them wrong, with five-straight quarters of positive sales growth. Wall Street expects Sands' revenue and earnings to respectively rise 11% and 22% this year, and the company plans to expand into Japan and other overseas markets over the next few years. The stock is also reasonably priced at 24 times earnings, which is much lower than the industry average of 85 for casino operators.
Sands also pays the highest dividend of its industry peers with a forward yield of 4.7%. Its earnings-based payout ratio of 112% might seem unsustainable, but it spent just 89% of its free cash flow on those payments over the past 12 months -- so it won't slash its payments anytime soon. Sands also hiked that dividend annually for four straight years -- so it's smart to bet on this house winning over the long term.
A wonderful yield and a tailwind for years of growth
Jason Hall (Pattern Energy Group): Over the past five years, twice as much money has been invested in developing renewables than fossil fuels. Renewables are becoming cheaper, and technology is improving to the point where wind and solar will be able to outcompete fossil fuels on a cost basis everywhere in the world within a few years.
This is going to put pressure on coal and natural gas-fueled power plants in coming years: They'll find themselves paying more for fuels than it would cost to replace them with renewables. Factor in the acceleration of energy storage via batteries and hydrogen -- both of which are on track to be less than half as expensive within five years and as much as 90% cheaper within a decade -- and even the "baseload" advantage of traditional fuels is on track for disruption.
This has Pattern Energy in a perfect situation for years of growth. The company already has a portfolio of 20 renewable facilities generating 2.7 GW, generating strong cash flows under long-term contracts -- 14 years remaining on average -- that support a dividend yielding over 7% at recent prices. Management has a pipeline with more than 10 GW of projects under development, with expectations it will grow its capacity to 5 GW by 2020.
If management continues investing in projects that generate strong incremental returns, Pattern should make for a wonderful investment. We're in the early stages of the renewables disruption of the energy industry, and Pattern is set to be a key part of the future of energy.
10 stocks we like better than Universal Display
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Jason Hall owns shares of Pattern Energy Group. Leo Sun owns shares of Las Vegas Sands. Steve Symington owns shares of Universal Display. The Motley Fool owns shares of and recommends Universal Display. The Motley Fool has a disclosure policy.