One mistake investors make when buying dividend stocks is chasing yield. Stocks with the highest yield could be a sign a company is struggling, which could put the yield at risk. Particularly in high-interest-rate environments such as we’re in today, a company might have difficulty maintaining its payout.
Wellington Management looked at dividend stocks over 92 years between 1930 and 2022. It found stocks offering the highest level of payouts didn’t perform as well as those paying high, but not the very highest yields.
Even better, stocks that initiated and then raised their dividends were among the best stocks to buy. Ned Davis Research discovered they had the best returns of any group of stocks, whether they paid dividends or did not.
That’s not all that surprising. Dividend stocks represent companies that are typically successful and profitable. They have proven themselves. Investors should look for companies that are growing their payouts and providing rising income over time.
The following seven dividend stocks not only have a long history of increasing their dividends but have increased them on average at double-digit rates for at least five years.
Microsoft (MSFT)
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Tech giant Microsoft (NASDAQ:MSFT) just delivered impressive second quarter earnings. Sales surged 18% from the year ago period to $62 billion, an amazing performance considering Microsoft is a $3 trillion company.
It produced earnings of $2.93 per share, handily beating analyst estimates of $2.78 per share, and 26% above the year-ago figure. Wall Street might not have been impressed but you should be.
Microsoft’s gains were powered by artificial intelligence, which pushed revenue at its Azure cloud business 20% higher to $25.9 billion. OpenAI‘s ChatGPT generative AI model has been infused throughout Microsoft’s operations but especially at Azure.
It allows its cloud service customers to build their own AI models. Satya Nadella told analysts half of all Fortune 500 companies are using Azure AI models and Microsoft now has 53,000 Azure AI customers.
Microsoft raised its dividend last September to $0.75 a share, a 7-cent or 10% increase. The tech leader has a 22-year history of increasing its payout and over the past five years it has grown at a compounded rate of 10.3% annually. That makes it one of the dividend stocks to buy and hold for sure.
Costco (COST)
Short-Term Profit Taking May Take a Bite out of the Costco Stock Price
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Costco (NASDAQ:COST) is the epitome of the type of dividend growth stock investors need. Some may pass over the warehouse club because the payout yields just 0.6% annually. But they are missing out on a stock that has increased the dividend for 20 consecutive years and over the last five has hiked it by more than 12% a year.
The warehouse club is able to grow and support its dividend because it is a profit-producing machine. Earnings over the last five years are up 88% and they’ve more than tripled over the past decade. The stock itself is up 40% over the last 12 months.
Although it only operates 871 warehouse stores, it is the third largest retailer behind Walmart (NYSE:WMT) and Amazon (NASDAQ:AMZN). Walmart has 10,500 stores and Amazon operates hundreds of massive fulfillment centers. Costco’s total return to shareholders over the last five years is more than twice either rival.
That’s only going to continue. It has become a matter of when, not if it increases its membership fees again. The last one was in 2017, meaning it’s overdue. Those increased revenues flow right to Costco’s bottom line, boosting earnings further, and ultimately, making it one of the dividend stocks to buy for keeps.
Franklin Electric (FELE)
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It was just two weeks ago Franklin Electric (NASDAQ:FELE) announced its latest dividend increase. It hiked the payout 11% to $0.25 per share, the 32d straight year this Dividend Aristocrat raised the dividend. Franklin has a five-year dividend growth rate of 11.5% annually.
Founded in 1944, this stalwart has grown into a global powerhouse delivering equipment and machinery for pumping groundwater. It’s not as sexy as running AI in the cloud, but this is a solid business with a firm financial foundation.
Almost three-quarters of Franklin’s revenue is derived in the U.S. and Canada. These are more mature markets and most of its sales come from selling water systems. However, it also has a growing business in fueling systems and distribution.
As noted, it’s a mundane business, but a critical one that often flies under the radar of most investors. That’s just the sort of stock famed investor Peter Lynch sought out. Over the past five years, Franklin’s total return has surpassed even that of Amazon.
It is a company that will not have major growth spurts but will instead put in year-in, year-out growth. Coupled with a well-covered dividend that has a payout ratio of just 24%, there is plenty of future growth to come for the dividend payer.
United Parcel Service (UPS)
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Package delivery leader United Parcel Service (NYSE:UPS) recently delivered some bad news for investors. Shipping volumes were down in the fourth quarter causing revenue and net income to fall. The delivery expert would cut 12,000 jobs. Ouch!
Elevated inflation rates and interest rates that were jacked up to historic highs all throughout the year weighed on UPS. CEO Carol Tome said, “2023 was a unique and difficult year and through it all we remained focused on controlling what we could control, stayed on strategy, and strengthened our foundation for future growth.”
For the 15th consecutive year, though, Big Brown still delivered for shareholders, increasing its dividend to $1.63 per share. Now that’s less than 1% year over year, but UPS has a five-year history of 11.2% increases.
Considering the tough performance it had this time out it’s not surprising the meagerness of the increase. But the dividend yields 4.6% annually.
Still, investors will want to keep an eye on UPS going forward. With a high payout ratio of 83%, the delivery giant may struggle to sustain its dividend if it continues to struggle. But with 10% of its volume still tied to Amazon, it will likely straighten things out sooner rather than later.
Kroger (KR)
Kroger (KR) Supermarket. The Kroger Co. is One of the World's Largest Grocery Retailers.
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Kroger (NYSE:KR) is the largest pure-play supermarket chain with 2,750 stores across the country.
It had $34 billion in sales last year, including fuel sales (without fuel it had $29.6 billion in sales). Although supermarkets operator on very thin margins, they make up for it in volume and repeat customers.
Unfortunately, like UPS, inflation and interest rates can take a toll on a grocery retailer. Consumers become narrowly focused on their spending, buying only everyday essentials. Fiscal Q3 comparable sales were down 0.6% though underlying sales without fuel rose 1%.
Adjusted earnings increased 8% to $0.95 per share. Kroger said it still produces strong free cash flow which it intends to use to pay and grow its dividend. Kroger has an 18-year track record of hiking its dividend, which has grown 15.7% a year over the last five years. It paused its share buyback program, however, as it prepares to acquire rival chain Albertsons (NYSE:ACI).
Kroger announced the acquisition back in 2022 and expects to complete the deal early this year. It is divesting hundreds of stores to get the deal done. Once completed, Kroger will be a massive, sprawling grocery chain with over $100 billion in sales, making it one of the best dividend stocks for the long haul.
Oshkosh (OSK)
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Investors might find heavy equipment manufacturer Oshkosh (NYSE:OSK) a surprising stock to include on a list of companies with a robust history of double-digit dividend increases.
Yet it just announced its latest dividend hike of 12% taking the payout to $0.46 per share. It’s actually the 10th straight year Oshkosh increased the payout by double-digit rates.
Over the past five years, the dividend has grown by over 11% annually.
Oshkosh generates most of its sales from its access segment, which sells aerial work platforms and telehandlers. Revenue was $5 billion in 2023. It’s also a big defense contractor with $2.1 billion in sales from its Joint Light Tactical Vehicle designs.
It has served the military for over 100 years though it will lose out on the JLTV business in early 2025. It does have a new contract with the U.S. Postal Service for trucks, however. But the defense segment will come under pressure until that kicks in primarily in 2026.
The third arm of its business is vocational, which includes its fire equipment and apparatus business and garbage collection. Sales last year totaled $2.6 billion.
These are all critical industries it supports and for which there are comparatively limited numbers of competitors, although the competition is intense amongst them. As an innovative company that’s able to expand its expertise in seemingly unrelated industries, it is a solid pick for continued growth.
Abbott Labs (ABT)
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Abbott Labs (NYSE:ABT) has a long, illustrious history as a dividend stock raising its payout for 52 years. That makes it a Dividend King and one that shows no signs of letting up. It has a five year dividend growth rate of 11.4% annually.
As with Microsoft, despite reporting strong results, the market was less than impressed with the healthcare stock’s outlook.
It had been a strong performer during the pandemic because of its Covid-19 testing products but demand has dropped off. It’s not a business that’s going to go to zero, but it will be one well below the peak hysteria of the time.
Even so, it produced $1.5 billion in such sales last year and investors will likely see it come in below that in 2024 and beyond.
Abbott had the foresight to see Covid testing would deliver just a temporary boost to its business and invested in new products when the pandemic was at its height.
CEO Robert Ford now sees gross margin expansion as a big opportunity for the company and estimates margins will grow 75 basis points this year. Abbott still lags its rivals, and it has the challenge of continuing to innovate, as do all similar medtech companies.
Its Freestyle Libre glucose monitoring system, however, is a key franchise for continued growth.
Available in Europe for many years, it was approved by the FDA in 2018. It holds the promise of further development opportunities.
Tandem Diabetes Care (NASDAQ:TNDM) recently became the first automated insulin delivery system in the U.S. to integrate Abbott’s newest Freestyle sensor. It shows what this medical device company is still capable of.
On the date of publication, Rich Duprey 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.com Publishing Guidelines.
Rich Duprey has written about stocks and investing for the past 20 years. His articles have appeared on Nasdaq.com, The Motley Fool, and Yahoo! Finance, and he has been referenced by U.S. and international publications, including MarketWatch, Financial Times, Forbes, Fast Company, USA Today, Milwaukee Journal Sentinel, Cheddar News, The Boston Globe, L’Express, and numerous other news outlets.
