Dividend growth stocks are an excellent choice for long-term investors. Mostly, this is due to their potential to generate above-average total returns over a multi-year time frame. There are two reasons for this.
First, stocks with consistently growing dividends typically have earnings that are consistently growing as well. Stocks with steady earnings growth typically appreciate in value in tandem with increases in earnings per share.
Second, the steadily increasing payouts from dividend growth names provide an extra boost to gains. If you reinvest these dividends into additional shares, down the road your initial investment into these types of stocks can ultimately result in a fairly large nest egg.
Besides potentially resulting in a large pool of wealth, this dividend growth portfolio could also throw off considerable cash each year, which could help fund your retirement.
Looking at stocks with a track record of consistent earnings and annual dividend increases, I have identified these seven dividend growth stocks as solid buys at current prices.
Automatic Data Processing (ADP)
Automatic Data Processing (NASDAQ:ADP) is a dividend growth stock to own for all seasons. Shares in the payroll and managed HR services company have a sound track record of producing above-average total returns over a multi-decade time frame.
A “dividend aristocrat,” with 25 consecutive years of dividend growth under its belt, ADP stock has increased its quarterly dividend payouts by an average of 12.36% annually over the past five years. The company’s most recent dividend increase, raised the quarterly payout by 12%, from $1.25 to $1.40 per share.
Yes, ADP’s forward yield of 2.29% may not seem low at a time of high interest rates. However, earnings forecasts for this recession-resistant company suggest plenty more room for both price appreciation and dividend increases. Sell-side estimates call for ADP’s earnings to increase by around 10% in 2025, and by another 8.36% in 2026.
American States Water (AWR)
American States Water (NYSE:AWR) isn’t a mere dividend aristocrat. Rather, this water utilities holding company is one of the dividend growth stocks holding “dividend king” status.
“Dividend kings” are stocks with a more than 50 year track record of dividend growth. AWR stock meets and exceeds this mark. American States Water has increased its dividend 68 years in a row. Over the past five years, payouts have increased by an average of 9.34% annually. AWR’s current forward yield is 2.58%.
Although shares have pulled back considerably since early 2023, this sell-off could work in your favor, if you’ve yet to enter a position.
As Seeking Alpha commentator Kody’s Dividends has recently argued, AWR currently trades at a discount relative to its historic valuation. As the commentator also argued, the stock could experience a strong rally when the Federal Reserve begins to cut interest rates.
Cincinnati Financial (CINF)
Cincinnati Financial (NASDAQ:CINF) is another “dividend king,” with a dividend growth track record spanning 63 years. Over the past five years, the property and casualty insurer has increased payouts by an average of 7.31% annually.
The most dividend increase for CINF stock came earlier this year, when the company raised its quarterly payout from 75 cents to 81 cents per share. This represented an 8% increase. At current prices, Cincinnati Financial trades for 18.3 times forward earnings. Among insurance stocks in general, I’ll admit this may appear a little pricey.
However, CINF’s valuation is in line with other well-capitalized property and casualty insurance stocks, like Markel Group (NYSE:MKL). MKL sports a similar high-teens forward multiple. If you’re looking for high-quality dividend growth stock at a reasonable price, Cincinnati Financial is, and likely will continue to be, one of your best choices.
Home Depot (HD)
Home Depot (NYSE:HD) is not yet an “aristocrat,” but the home improvement retailer appears to be aiming to reach this status. HD’s quarterly payouts have increased each year for the past 14 years.
Over the past five years, dividend increases have averaged 13.87% annually, yet payout growth is slowing down. The most dividend increase came in at only 7.7%. Even so, don’t assume this means weak returns from here for HD stock.
Expanding into verticals like construction supply wholesaling, Home Depot may be able to meet forecasts calling for 7-8% annual earnings growth.
If earnings keep growing at such levels, so too will HD’s quarterly dividends and stock price. Couple the prospect of high single-digit price appreciation with HD’s forward dividend yield of 2.69%, and it’s easy to see how this stock could produce annualized returns of 10% or more.
Hershey (HSY)
At first, you may question why I think Hershey (NYSE:HSY) is one of the best dividend growth stocks to buy right now. After all, the massive run-up in cocoa prices has had an outsized impact on the confectionary company’s fiscal results.
This headwind has also resulted in a steep declines for HSY stock. However, as Barron’s Jacob Sonenshine argued in March, now may be the time to scoop up this blue-chip stock on the cheap. HSY currently trades for just 20 times earnings. That’s well below its typical earnings multiple.
Much suggests that cocoa prices will normalize this year. The market has already walked back expectations, so Hershey may be in a position to positively surprise with its results in the coming quarters.
HSY is also likely to continue raising its dividend, as it’s done over the past 48 years. Post-selloff, shares sport a nearly 3% forward yield.
Interpublic Group (IPG)
Interpublic Group (NYSE:IPG) is one of the “big four” advertising agencies. The ad business can be a “feast or famine” type industry, but this titan of Madison Avenue has continued to generate steady earnings, even with the 2022-2023 ad market slowdown.
As a result, Interpublic has kept raising its quarterly dividend. IPG stock, which has a forward yield of 4.35%, now has 11 years of consecutive dividend growth under its belt. The most recent dividend increase came in at 6.5%, and was accompanied by a $320 million stock buyback.
Forecasts for future earnings growth range widely, but many factors signal a strong chance IPG could produce the earnings growth necessary to fund further dividend increases, not to mention push shares to higher prices.
The aforementioned buyback will provide a boost to EPS. Favorable digital ad demand trends also bode well for the company.
McDonald’s (MCD)
If “invest in what you know” is part of your approach, McDonald’s (NYSE:MCD) is one of the best dividend stocks to buy. The fast food giant is just three years away from reaching “dividend aristocrat” status.
Payouts have increased by an average of 8.01% annually over the past five years. Currently sporting a forward dividend yield of 2.52%, the most recent dividend increase came in at 10%. MCD stock has been under pressure lately.
Management has conceded that a variety of issues are currently affecting near-term fiscal performance.
However, don’t assume this means further 10% dividend increases from the “Golden Arches” are off the table. Forecasts still call for MCD to report high single-digit earnings growth in 2025 and 2026.
Headwinds ranging from inflation to Middle East boycotts may prove temporary. In turn, leaving room for results over the next two years to exceed current expectations.
On the date of publication, Thomas Niel did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.comPublishing Guidelines.