One of the most important traits that investors look for in a stock these days is whether it pays a healthy dividend. With so little income available from bonds and other traditional income investments, dividend stocks have become the go-to option for investors who need to draw cash regularly from their investment portfolios.
While many investors look solely at current yield as their gauge of whether a dividend stock is a smart buy, the better bet is to focus on long-term dividend growth. If a company can boost its payout consistently over the years, then it will eventually reward shareholders much more than a company that pays an unsustainably high dividend yield that shrinks in the near future.
1. UnitedHealth Group Inc. (NYSE:UNH), up 95% annually since 2008
Until a few years ago, health-insurance giant UnitedHealth made only a token annual payment of $0.03 per share, which equated to a dividend yield of about 0.1%. But beginning in 2010, UnitedHealth made a much greater commitment to letting investors share in its wealth by moving to much larger quarterly dividend payments. At the time, the move resulted in a payout increase of more than 1,500%.
Since then, UnitedHealth has stayed committed to its new strategy, with two consecutive annual increases of 30% each in 2011 and 2012. With the yield now at 1.6%, UnitedHealth still ranks among the lowest-yielding stocks in the Dow. But with Obamacare likely to expand the company’s rolls of insured customers greatly and a recent move to take a big stake in a major Brazilian health-insurance company, UnitedHealth stands to keep seeing growth in its core business, and that should equate to even higher payouts down the road. With the company currently paying just 15% of its earnings to shareholders, UnitedHealth has plenty of room for increases in the future.
2. International Business Machines Corp. (NYSE:IBM), up 17% annually since 2008
Big Blue also has a modest dividend yield of just 1.7%. But after years of token increases, International Business Machines Corp. (NYSE:IBM) started getting serious about its payouts back in 2006, when it announced a 50% jump in its quarterly dividend. Since then, growth has slowed somewhat, but steady $0.10-per-share quarterly increases in 2010, 2011, and 2012 have upped the overall payout by more than half in the past three years.
IBM’s strategy of broadening its business to incorporate a wider scope of IT products and services has served the company well so far. With plenty of growth initiatives still in the pipeline, IBM is poised to keep producing the greater profits that it will need to keep its dividend moving in the right direction.