4 Dividend-Growth Stocks to Own for the Next 10 Years

Michael Foster, Investment Strategist
Updated: February 14, 2017

In my last article, I talked about Apple’s (AAPL) destiny as a Dividend Aristocrat. The company doesn’t have even five years’ worth of payouts under its belt, but there are clear indicators that it will never struggle to pay dividends.

In a moment, I’ll show you how you can combine Tim Cook’s company with 3 other stocks and get a 4.6% yield in 10 years or less—and triple-digit upside in the meantime.

First, back to Apple.

The company’s strong—and rising—free cash flow and its operating margin, which has surged over the last 20 years and stayed at historically high levels, indicate that Apple has turned into a cash-producing machine investors should not ignore.

Ironically, many people don’t see Apple as a cash machine when they buy or sell the stock; instead, they obsess over iPhone and iPad sales. This leads to a panic when these sales are weak and euphoria when they’re strong.

But this short-termism is destined to lose because buying and holding Apple will mean collecting a dividend that will grow faster than those of supposedly “safer” and more boring stocks like General Electric (GE), AT&T (T), Johnson & Johnson (JNJ), Chevron (CVX), Consolidated Edison (ED) and Exxon Mobil (XOM). Yet Apple is the cheapest stock among this group when we look at its price-to-earnings (P/E) ratio:

Apple’s a Bargain

With a P/E ratio less than half that of XOM, you’d expect Apple’s dividend to be more at risk, right? This is where the story really gets wild. Take a look at this chart:

Whose Dividend Is Safe?

Here’s what this chart is telling us: Apple paid 23% of its free cash flow as dividends in the last 12 months, while XOM’s dividend was 18.9 times greater than its free cash flow. And you’re paying more than twice the price for that negative dividend coverage.

It’s clear that Apple is a much better stock to buy for dividend growth than the best-known large-cap dividend payers, including some of the most respected and beloved Dividend Aristocrats (or companies that have increased their payouts for 25 straight years or more).

Now I want to show how you can create a portfolio with Apple and some other, lesser-known stocks with equal or better dividend coverage and stronger dividend-growth potential. That, in turn, will help you get a portfolio yielding nearly 5% in the next 10 years, while delivering big upside potential.

In addition to Apple, I’m eyeing Banner (BANR), Amphenol (APH) and MB Financial (MBFI) I’ve chosen these companies because they have ridiculous dividend growth. While Amphenol “only” saw its dividend rise by 204% in the last five years, MBFI’s went up by 1,800% and BANR’s rose 2,200%.

This is partly due to the fact that these companies started off with one-cent dividends, so for my future projections, I’m going to be much more conservative and look only at the dividend-growth rate over the last three years, which is much more modest, at 60% or less. Here’s how the numbers look:

Reaching High Yields Fast

It takes just a decade to get to a 4.6% yield for this portfolio, given our modest assumptions. In reality, we’ll likely see much stronger dividend growth because each of these companies has a really low payout ratio, or the percentage of the last 12 months’ worth of earnings paid out as dividends. (MBFI’s is the highest, at just 28%, while APH’s sits at 21%). These companies could triple their payouts and still have enough cash to cover those dividends.

Additionally, these companies have a strong history of price growth, thanks to improving revenues and/or earnings, meaning triple-digit returns in a few years:

Years of Strong Returns

Note also that these stocks aren’t correlated to each other (AAPL went down when BANR soared; APH was strong when MBFI was flat and BANR was correcting). That’s because we’ve got two regional banks and two electronics companies—exposing us to entirely separate sectors.

This Portfolio Yields 8.0% Now

A 4.6% yield is nice, but why wait up to 10 years for that when you can get a safe 8.0% right now?

I’m talking about the reliable group of income generators we’ve gathered together in our new “No-Withdrawal” retirement portfolio. They throw off rock-solid yields of 6%, 8%, 9% and up!

Like Apple, these income powerhouses boast payouts backed by rock-solid balance sheets and soaring free cash flows. Also like Apple, they’re cheap now, but I don’t expect that to last—so you need to make your move soon.

These no-drama plays are perfect for 2017, with trade wars, a market correction after Dow 20,000 and big changes in US tax policy all on the table—making uncertainty the buzzword for the months ahead.

Don’t miss out. Click here and I’ll share our 6 top picks for high income and double-digit upside.