It's tough not to like a good dividend stock. The best ones can offer growth prospects for both the stock price and dividend payments. Even more, some of the best dividend names in the stock market have consistently outperformed the broader market, in effect making them cash-paying growth investments. It doesn't get much better than that.
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But it's much easier to identify the best dividend-paying stocks in retrospect than it is to pinpoint which companies might offer this sort of potential. Still, there are at least some factors to look for that may help investors hone in on some possible candidates for a growing dividend yield and market-beating performance.
Walt Disney (NYSE: DIS), Apple (NASDAQ: AAPL), and Starbucks (NASDAQ: SBUX) are three stocks I believe possess the sort of characteristics qualifying them as top-notch dividend investments.
Here's a look at each of these stock picks.
Data for three-year dividend CAGR retrieved from Guru Focus. All other data retrieved from Reuters.
None of these stocks have impressive dividend yields. Apple, Starbucks, and Walt Disney's dividend yields (annual per-share dividend payments as a percentage of the current share price), currently sit at 2%, 1.8%, and 1.5%, respectively. With the average dividend yield of stocks in the S&P 500 currently at about 2.1%, Starbucks' and Disney's dividends are particularly low. Apple's dividend yield of 2%, however, may not be impressive, but it isn't low either.
But investors shouldn't overlook these dividend stocks just because the stocks' dividend yields don't stand out. As most dividend investors know, current dividend yield isn't everything -- especially when a dividend looks poised for solid growth.
And this brings us to one area where all three of these dividend stocks really shine.
Dividend growth potential
All three of these stocks' dividends possess outstanding growth potential.
Disney, with the smallest dividend yield of these three stocks, looks particularly well positioned for sustained, robust dividend growth. During the previous three years, Disney management has boosted its dividend at an average rate of about 24%. While growth likely can't continue at such a high rate over the long haul, there should be plenty more double-digit rate increases to come. Currently paying out only about a quarter of its earnings in dividends, Disney's dividend has plenty of breathing room for more increases. Further, the company's recent solid earnings-per-share growth means its profit available for dividends is only increasing.
Apple's and Starbucks' dividend growth potential stand out too, though to a lesser degree than Disney's. While both companies have seen their dividends increase by double-digit rates during the past three years, Apple's future dividend growth could be limited by its recent inability to grow earnings, and Starbucks' dividend growth rate could decelerate in the coming years given the stock's higher payout ratio of 44%.
That said, all three of these stocks look poised for more meaningful dividend increases.
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Each stock's overall prospects level out a bit once investors consider valuation. Starbucks, with its stand-out dividend growth narrative, happens to sport the priciest valuation of these three stocks. It trades with a price-to-earnings ratio of 30. And while Disney and Apple trade much more conservatively than Starbucks, Apple is easily the cheapest of the three stocks. Apple has a price-to-earnings ratio of about 13, undercutting Disney's ratio of 17.
While the outcome can never be certain, Walt Disney, Apple, and Starbucks certainly look poised for stock price appreciation and handsome dividend growth. In addition to each of these companies' market-leading competitive positions among their peers, they each possess solid dividend growth potential and sensible valuations relative to their recent business performance. Sure, their current dividend yields may not be very notable, but dividend growth should make up for the lower yield as investors hold on to these stocks.
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Daniel Sparks owns shares of Apple and Walt Disney. The Motley Fool owns shares of and recommends Apple, Starbucks, and Walt Disney. The Motley Fool has the following options: long January 2018 $90 calls on Apple and short January 2018 $95 calls on Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.