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As an income investor I am always on the lookout for dividend growth stocks.
Over the past decade, I have purchased shares in over 50 companies that pay dividends. I’ve also invested in a handful of dividend ETFs as a way to diversify my portfolio.
Over this time, I have sold off some stocks in the portfolio (although rarely) when the company makes a dividend cut.
Most of the stocks I own I don’t ever plan on selling.
So how do I go about hunting down the best dividend growth stocks?
Today, I will share the process I use to identify these companies. Then I will share the 7 stocks with solid dividend growth that I will be buying this year.
I have narrowed down to 7 dividend growth stocks that I think are great investments for 2021 (and beyond).
These 7 companies represent a few “old school” classic stocks as well as some newcomers to the dividend income world.
Finding the Best Dividend Stocks to Buy and Hold
There are plenty of ways investors can find dividend growth stocks to invest in.
These types of companies are usually very well managed, have been around for a long time, and have a long history of dividend growth.
Dividend stocks can usually be identified in groups based on their characteristics.
Some investors may prefer companies with a high dividend yield. A few of those companies could include AT&T (T) and Altria (MO). At the time of this writing, both companies were paying a yield greater than 7%.
I own both of those companies in my dividend income portfolio.
One could also invest in Real Estate Investment Trusts (REITs). For example, I own shares of Realty Income (O) that pays monthly dividend income.
Then there are a group of companies that may not seem like dividend growth stocks because they have a low yield. For example, a company like Apple (AAPL) may be overlooked as a dividend stock because it has a yield under 1%.
I make sure to invest in dividend growth stocks from each of these categories.
When I first started out with dividend investing, I focused mostly on high yield stocks. There is a place for those stocks in my portfolio, but I think dividend stocks with the potential for high growth are often overlooked.
Below I have provided a brief summary of the steps I use to identify the best dividend growth stocks.
Step 1 – 10+ Years of Dividend Growth
For me to consider a stock to be included in the best dividend growth stocks … they need to have a good history of raising dividends every year.
I look for companies that have at least 10 or more years of consistent dividend increases.
There can be exceptions, but not very often.
Step 2 – Payout Ratio Less than 60%
The next thing to look for are companies with a payout ratio under 60%.
You can check out my article on how to calculate the dividend payout ratio for more information.
Anything over 60% is a bit risky for me to consider a company as a dividend growth stock.
Step 3 – Dividend Growth Rates (DGR) Greater then 6%
This is where most companies get weeded out from my search.
I am looking for companies that have consistently raised their dividends each year (for at least 10+ years) by an average of 6% or more. Most of the companies on my list average double digit increases.
The 5 year dividend growth rate and 10 year dividend growth rate calculations are helpful in this step.
Now let’s take a look at my top 7 dividend growth stocks for 2021!
Check out my article on calculating dividend growth rate for more information.
The steps and criteria I outlined above are not cut in stone. They simply serve as a guide or template to help me find quality companies to add to my dividend income portfolio.
You may be wondering about a few other commonly used criteria to identify dividend paying companies.
For example, the current dividend yield is not mentioned. That is because the majority of high growth dividend stocks have very low yields. If I filtered out stocks with low yields, I’d be missing out on some great buying opportunities.
Note – Normally I filter out companies with a yield less than 2.5%, but not for these types of stocks.
Another factor is companies with relatively high P/E Ratios. In the past, I would try and limit my stock purchases focusing on value. So in my filter criteria, I would only purchase stocks with a P/E under 20.
Many of these companies on the list of dividend growth stocks have a P/E well over 20 … although some do not. The point here is that I am not as focused on P/E as a factor when buying high growth dividend stocks.
All of the numbers referenced below were taken from The DRiP Investing Resource Center with data compiled on January 3, 2021.
7 Best Dividend Growth Stocks for 2021
Now that we know how I identify the best stocks with dividend growth, I’d like to share my list for 2021.
Please don’t take this as advice to buy these companies. It is important to do your own research before investing.
These are the 7 best dividend growth stocks for 2021 for my portfolio. I plan to use this list to help guide my investment purchases throughout the year.
Some of these companies I have owned for years, while others are recent newcomers.
These are not the only stocks that I will be buying either. They are just a list of what I consider the best dividend growth stocks to fit MY portfolio.
Note – If something changes throughout the year (good or bad), I will certainly update my list.
1. Costco (COST)
This company was a newcomer to my portfolio in 2020 and I would like to continue adding more shares this year.
Last April (2020), Costco announced a 7.69% dividend increase, which is impressive considering we were in the start of the pandemic.
I don’t know if you happen to live near a Costco, but the one in my town is always packed when I drive by.
Not only did the company have a solid annual increase last year, they have a solid dividend history too.
Take a look at some of the dividend metrics I like to use in my analysis below –
COST Dividend Growth Metrics
- Years of Dividend Growth – 17
- Current Yield – 0.74%
- Payout Ratio – 28.75%
- 5 Year DGR – 12.1%
- 10 Year DGR – 13.2%
Now some dividend investors may want to shy away from the company’s low current yield (below 1%), and I used to be one. However, as I build out my portfolio, I’ve realized there is a place for these types of companies.
These are the dividend growth stocks that may have a low current yield but have high dividend growth. For example, take a look at their 5 year growth rate of 12.1% and the 10 year growth rate of 13.2%.
On top of that, Costco has a very low payout ratio of just under 30%!
I don’t want to own just stocks with high dividend growth … but I want a good mix of companies with high growth and high yields.
Costco is certainly one that fits with my portfolio, which is why I will be building my shares in 2021!
2. Lowe’s (LOW)
Lowe’s was one of my first ever dividend growth stocks I purchased when I started to build my portfolio.
Over the years, I’ve actually kinda forgot about it to be honest. Except for every quarter when my dividend payment comes in to my portfolio.
But now that I am focused on dividend growth more than yield, I have found a new appreciation for adding more shares of LOW to my portfolio.
Just this past August (2020), the company announced a 9.09% dividend increase … which is actually a lot lower than their historical averages.
Here is a look at some of the dividend metrics I have been looking at for Lowe’s stock –
LOW Dividend Growth Metrics
- Years of Dividend Growth – 58
- Current Yield – 1.50%
- Payout Ratio – 33.90%
- 5 Year DGR – 17.1%
- 10 Year DGR – 18.9%
Just look at the historical dividend growth rate – 17% average for 5 years and almost 19% over the past decade!
Even more impressive is the track record that the company has had for raising dividends annually – 58 years straight!
As you might have noticed though, the current yield is pretty low at 1.5% … but that really isn’t my focus with this group of stocks. I am more focused on those historical increases each year.
To round out the metrics, look at that low payout ratio under 35%.
Lowe’s is one of the best dividend growth stocks for 2021 and I will certainly be adding shares over the next year.
3. Microsoft (MSFT)
When it comes to the best dividend growth stocks, some investors may not think of Microsoft.
Not because it isn’t a great company, but rather some may not realize Microsoft is an awesome dividend growth investment!
Just last September (2020), the company announced an awesome 9.80% dividend increase! Not too bad for a “tech stock”.
And did you know that the company has been consistently raising dividends for almost two decades (19 years to be exact) now?
Here are some of the dividend metrics I like to track for this awesome technology dividend growth stock –
MSFT Dividend Growth Metrics
- Years of Dividend Growth – 19
- Current Yield – 1.01%
- Payout Ratio – 36.13%
- 5 Year DGR – 10.1%
- 10 Year DGR – 14.3%
Some dividend investors may get scared away with such a low current yield around 1%. But as I have experienced, you get past that rather quickly to be honest.
I have owned shares of MSFT for almost 8 years now and have experienced awesome dividend growth in that time. So when it comes to a low yield, after a couple years you won’t even notice!
Speaking of growth … just look at the company’s 5 year DGR of 10% and the 10 year DGR even higher at 14%!
You can also look at a very low payout ratio (around 36%) and realize this company has plenty of room to continue growing that dividend!
Similar to a few other stocks on the list … I want to continue adding more shares of Microsoft to my portfolio in 2021!
4. General Dynamics (GD)
I didn’t start buying shares of General Dynamics until very late 2019. Even into 2020, I purchased a few shares, but not enough to make an impact to my portfolio.
Well in 2021, I am focused on building up my shares of GD in my dividend growth portfolio.
After an impressive 7.84% dividend increase last March (2020) from the company, I am excited to see what is in store for this year.
There is a lot to like about General Dynamics, which is why I considered it one of the best dividend growth stocks for 2021.
Here are a few of the metrics I like to track for the company –
GD Dividend Growth Metrics
- Years of Dividend Growth – 29
- Current Yield – 2.96%
- Payout Ratio – 39.93%
- 5 Year DGR – 9.9%
- 10 Year DGR – 10.2%
If you analyze the numbers for General Dynamics, you can see that it is in the sweet spot for dividend income.
The company has a solid current yield around 3% … while at the same time offers double digit dividend growth. For example, the 5 year dividend growth rate averages up to a whopping 10% and the 10 year is at 10.2%.
The combination of a solid current yield with double digit year growth is the best of both worlds for a dividend investor.
And did I mention the company has raised dividends for 29 consecutive years and sports a low 40% payout ratio!
When it comes to my dividend growth portfolio, I am putting a lot of focus on building my General Dynamics position in 2021.
5. T. Rowe Price (TROW)
2021 Dividend Income – Updated 2/9/2021
This is another recent addition to my portfolio (started buying back in 2019). I liked the dividend growth potential back then for T. Rowe Price.
In February (2021), the company announced a 20.00% dividend increase!
This was on top of the 18.42% dividend increase that was announced last year (2020). That is some serious growth over the past couple of years.
Below you will see some of the dividend metrics I look at when analyzing T. Rowe Price for my portfolio.
TROW Dividend Growth Metrics
- Years of Dividend Growth – 34
- Current Yield – 2.38%
- Payout Ratio – 40.31%
- 5 Year DGR – 11.6%
- 10 Year DGR – 12.8%
As you can see, the company has had a very long track record of consistently raising dividends each year … at 34!
The current yield is not horrible at around 2.4% and the payout ratio of 40% is well under my threshold (currently 60%).
TROW also averages double digit dividend growth averages. The 5 year DGR is at a healthy 11.6% while the 10 year average comes in at 12.8%.
This is definitely one of the best dividend stocks to buy and hold for my portfolio in 2021.
6. Visa (V)
A brand new addition to my dividend growth stock portfolio in 2020, Visa made my buy list again this year.
The company recently announced a 6.67% dividend increase back in October (2020), which is much lower than their longer term averages. However, I still feel that based on everything that has been going on the past 12+ months … that isn’t too bad of an annual increase.
Take a look at some of the dividend metrics that I check for Visa –
V Dividend Growth Metrics
- Years of Dividend Growth – 13
- Current Yield – 0.59%
- Payout Ratio – 28.13%
- 5 Year DGR – 19.5%
- 10 Year DGR – 25.0%
I would like to point something out … in the past I would have definitely excluded Visa from my best dividend growth stocks list. At the time of this writing, Visa has a current yield of around 0.6% … which I guess is slightly better than my Ally Savings account right now (currently at 0.5%).
But despite such a low yield, the company has a 10 year dividend growth rate average of 25.0%!
The 5 year dividend growth rate is at a healthy 19.5%.
So while I won’t be earning a ton of dividends initially with owning Visa stock, overtime I am expecting huge growth.
The company also has a very low payout ratio of under 30% and has been raising dividend for 13+ years.
All in all … I’d say buying shares of V throughout 2021 will be a good addition to my portfolio over the next decade.
7. AFLAC (AFL)
This was one of the first dividend growth stocks I ever purchased and has been a solid foundation to my portfolio. I honestly hadn’t paid a whole lot of attention to this company recently, because they were just so consistent in raising their dividends each year.
At one time, AFLAC made up a big percentage of my overall dividend income … but not anymore.
Over the years while I had been adding other stocks to my portfolio, this company made up less and less of my overall dividend income (which isn’t a bad thing).
But recently, the company grabbed my attention again. AFLAC knocked it out of the park with a huge 17.86% dividend increase announcement back in November (2020).
Based on the the most recent dividend increase (and past performance), AFL is one of the best stocks for dividend growth for my portfolio once again.
Here is a quick snapshot of some of the dividend metrics I looked at for AFLAC –
AFL Dividend Growth Metrics
- Years of Dividend Growth – 39
- Current Yield – 2.97%
- Payout Ratio – 20.63%
- 5 Year DGR – 7.2%
- 10 Year DGR – 7.0%
The dividend numbers speak for themselves really when it comes to this company.
AFLAC has a long history of raising dividends annually – 39 years in a row.
The 5 and 10 year dividend growth rates are above 7% on average.
They have a payout ratio well below 60% and their current yield is pretty good too at around 3%.
Throughout 2021, I plan to continue adding shares of this dividend growth stock to my portfolio.
Other Stocks with Dividend Growth Considerations
Keep in mind, the list of best dividend stocks I have provided here are what fits for my portfolio. These are 7 of the best dividend stocks I plan to buy in 2021. That doesn’t mean you should too.
There are plenty of other great companies I could have added to this list.
For example, two of my best dividend stocks are not found on this list – Lockheed Martin (LMT) and Johnson & Johnson (JNJ).
Why is that? Because the dividend income from both companies account for more than 5% of my total. So while I think both are great investments … neither make sense right now for me.
Another favorite of mine (and I am sure others) is Apple (AAPL). Yes, Apple pays a dividend and I consider them a great dividend stock.
But currently Apple has only raised their dividend for 9 consecutive years … not 10 like the criteria defined at the beginning.
So you see … these companies on the list of best dividend growth stocks for 2021 are what work for me. They may work for you too … but that is up to you to decide.
Building and Growing Dividend Income
I have a goal to build multiple sources of income. One of those income streams comes from my portfolio of stocks that pay dividends from a couple of taxable brokerage accounts.
The thing I like about earning dividend income is that it is mostly passive … but not completely. Once I purchase shares of a stock, then I sit back and let the income hit my account and reinvest.
Rarely do I need to spend much time on this income stream … except figuring out where to invest new money and reinvest those dividends hitting my account.
I also like this income stream because it is tax efficient. There is too much to cover here about how dividend income is tax friendly, but you can follow my tax optimization articles for more information.
Finally, one of the best things about dividend income is that more than likely, it will compound on its own without me lifting a finger.
Just look at those dividend growth numbers highlighted earlier. All of those companies have given shareholders a 6% or greater raise for the past 10 years!
I can’t remember the last time my W2 job gave me that type of annual raise.