Some misconceptions that some dividend investors fall into are that stocks with high yields are a better buy.
Buying dividend growth stocks can produce years of steady income increases. Because of compounding, low-yield dividend stocks have a higher potential for increasing annual payouts.
Even though the income is nice for high-yield dividend stocks where the payout is flat, the higher yield will increase the stock’s interest rate risk. The high yield can also be a sign that the company is struggling, and the dividend could be in jeopardy.
The objective is to find companies on the verge to outperform the overall market and are growing their dividends faster than the market average.
Apple (AAPL) is a stock with good earnings as well as dividend growth. Although the current dividend rate is 0.7%, it has an expected five-year growth rate of 10%.
Along with the growth of the stock as one of the top stocks in the S&P 500, analysts expect the earnings growth rate to be 11%. The last dividend increase for AAPL was in May of 2020 to 6.5% and, with its large cash position, there is plenty of opportunities to continue raising the payout.
Microsoft (MSFT) has had an excellent performance for share-price performance. The software company has grown its dividend for 16 consecutive years.
With a dividend yield of 1.1%, it has an expected growth rate of 10% over the next five years. The company generates more than $30 billion in free cash flow and holds $138 billion in cash reserves.
AbbVie (ABBV) has the highest yield on this list with 6.4%. The company has increased its dividend every year since its spin-off from Abbott Labs in 2013.
It has increased its dividend announced that it will increase the payout by 10.2% in 2021. Humira, Its top-selling arthritis drug, is quickly overtaking Lipitor as the best-ever sold drug.