ZTS - 25 Stocks With Double Digit Dividend Growth Potential In 2024

2024-01-18 01:03:18 ET

Summary

• I make trades at the start of the new tax year to lock in gains and strengthen my portfolio.
• I focus on dividend growth stocks and have compiled a list of 25 stocks that I expect to provide double-digit dividend raises in 2024.
• I emphasize the importance of fundamental growth, stable balance sheets, and management dedication to shareholder returns when selecting dividend growth stocks.

The start of a new year is fun because it’s a great time to make predictions.

Being that it’s a new tax year, it’s also a time that I tend to make trades.

I’m usually happy to do a bit of tidying up across my portfolio, locking in gains on non-core, low-conviction, or potentially overvalued holdings that I didn’t want to pay taxes on during the previous year.

Recently, I’ve sold my positions in Cummins ( CMI ) because of its legal issue which was a thesis breaker for me (owning stocks is all about trusting management and when that trust is broken, I move on) and Digital Realty Trust ( DLR ) (because of dividend growth and valuation concerns).

I locked in gains of 10% and 170% on those positions, respectively. And I have a few other stocks on my potential sell-list that I may end up cutting ties with before the end of the month which could free up even more cash.

To me, January is all about strengthening my portfolio and setting myself up to meet my goals throughout the rest of the year.

But, this process isn’t just about selling. Anytime I sell a stock, I need to replace it. In any trade, I want to upgrade the quality of my holdings…and to me, that often revolves around my number one priority in the market: dividend growth.

Thankfully, there’s no rush for that to happen right now because of the high yields that I can generate with cash in money market funds. But, those yields don’t compound organically which is why I want to maintain my equity allocation. In other words, I don’t want to sit on excess cash for too long, even when “risk-free” rates are so high. The opportunity cost of sitting on the sidelines is still too great, in my opinion, when I take a long-term view of things.

With that in mind, I spent the weekend looking through my portfolio holdings and my watch list to come up with a list of my highest conviction dividend growth stocks for 2024.

That list includes 25 stocks that I believe will grow their dividends at a double-digit rate this year.

These companies, and why it is that I focus so much attention on dividend growth, will be the focus on today’s article.

The List

Now, before I share this list I should make a couple of things clear…

First of all, there is no guarantee that any of these companies provide investors with a double digit raise in 2023. Or, pay a dividend at all.

That’s the nature of equity dividends, there are no guarantees.

But, even though it’s impossible to make promises when it comes to dividends, I still sleep well at night with a financial freedom strategy that is based upon them because they tend to be predictable.

Unlike short-term market volatility, which is often irrational, dividend payments - and especially those that grow sustainably over time - are based upon underlying fundamentals.

A company can’t grow its dividend reliably, for years, or decades even, if it isn’t generating enough cash flows to support it.

Things like debt can only support a dividend for so long.

So, when I think about safe and reliably growing dividends, I think about fundamentals.

I need to see reliably increasing sales, earnings, and cash flows. I want to see stable (or expanding) margins. I want to see conservative balance sheets with manageable debt loads. And obviously, I want to see a dedication towards shareholder returns by management.

With all of that being said, I used fundamentals to compile a list of my highest conviction dividend growth stocks for 2024.

Looking at each company’s fundamentals in the present, their future guidance and expectations, and their past results, these are 25 stocks that I expect to provide generous raises to their shareholders this year.

I should also note that these likely won’t be the only companies providing double digit raises.

I cover dozens of extremely high quality dividend growers as a part of my portfolio management strategy; however, I certainly don’t cover every stock in the market.

What’s more, there’s definitely the potential for one of the stocks that I own/cover that didn’t make this list to outperform my expectations and provide a 10%+ raise.

There are a lot of really wonderful companies that didn’t make this list due to slowing growth and/or near-term hurdles that lead me to believe their management team will be more conservative with their 2024 increase (relative to their past).

But, I could be wrong…and frankly, I’d love to be wrong in this case because there’s nothing more that I like in the markets than receiving a 10%+ raise.

So, with that in mind, let’s take a look at the list of my highest conviction double digit dividend growth plays for 2024…

What To Look For When Identifying High Dividend Growth Stocks

Looking over this list you’ll notice commonalities that all of these stocks share.

One, for the most part, their yields are low.

That makes sense because there’s an inverse relationship with growth prospects and dividend yields in the market.

To have high dividend growth prospects a company must have high fundamental growth prospects and the market is always willing to place a premium on outsized growth potential.

However, as you’ll notice, this isn’t necessarily a bad thing for their total return profiles.

Not only do nearly all of these companies have 5-year dividend growth rates above 10%, their 5-year total return CAGRs are amazing as well.

And that’s no coincidence. The same fundamental growth that drives one drives the other. This is why I use safe and sustainable dividend growth metrics to be my guide in the market.

Yes, these stocks all trade with high premiums (relative to their peers and for the most part, to the broader market as well). However, looking at their trailing 5-year total return CAGRs, you’ll notice that all but two (FedEx and Nike) have generated double digit total returns.

It’s not as if these companies were all cheap 5 years ago. On the contrary, looking at long-term valuation charts, you’ll notice that they nearly all traded at a premium to the market then as well.

Yes, there has been multiple expansion, essentially across the board, throughout the recent bull market run. But, the fact is, the fundamental growth that they’re produced has offset any short-term valuation premiums, driving share price higher.

This isn’t surprising to me. It aligns with the idea that has driven a lot of my decision making in the market over the last year or so: that high quality compounders drive returns.

As I’ve said before, I’d much rather rely on fundamental growth to drive capital appreciation than multiple expansion via mean reversion (in a typical value-oriented trade).

The market can stay irrational for long periods of time when it comes to low valuations. And sometimes, the market isn’t irrational at all when it comes to deep value plays. Sometimes beaten down companies are beaten down for a good reason(s). I can avoid broken companies by avoiding deep value trades. One thing I know about stocks with fundamental growth like this is that they’re very unlikely to break anytime soon.

Lastly, I want to point out that nearly all of these stocks have decade+ long dividend increase streams.

This isn’t the only metric that I track when looking for dividend growth winners, but I think it’s a good place to start.

What’s in the past is in the past and it doesn’t matter if future growth trajectories are poor. But, that’s rarely the case when it comes to blue chips like these because excellence never happens by accident and proven winners have corporate cultures in place that beget success.

Yes, there are few names on this list with very short annual increase streaks. And yes, every wonderful dividend growth story has to start somewhere. But, once again, I don’t think it’s a coincidence that we’re looking at so many strong increase streaks here.

Each of these companies have carved out a strong competitive moat over the years with notable brands and strong demand for their products and services.

That leads to financial success, which can be reinvested into human and intellectual capital, creating a virtuous cycle of success.

And you don’t have to take my word for it.

Here’s another chart showing the consensus forward-looking growth prospects for each stock on this list.

Once again, the data set isn’t perfect, but as you can see, every company has positive bottom-line growth estimates during 2024 and 2025 (with the vast majority of these consensus annual growth figures coming in above the 10% threshold).

And not only are the future dividend growth prospects so rosy for the companies on this list because of their strong fundamental outlooks, but also, their relatively low payout ratios.

Even if they posted flat bottom-line results for a year or two, just about every company on this list could comfortably increase their dividend without putting a lot of strain on their cash flows.

Only two out of the twenty-five companies that I’m highlighting here have forward payout ratios above 50%. And one of them is a REIT, so that’s to be expected.

Frankly, it’s amazing that these stocks can have such low payout ratios after such long periods of strong dividend growth.

This just goes to show the strength of their businesses which have exhibited the ability to adapt, evolve, and ultimately, grow over time.

I think it also shows a conservative, long-term mindset by management, which provides me peace of mind. I want to own companies that are being run with success 10, 20, 50 years, etc, into the future in mind.

Sure, there’s an argument to be made that each of these companies could increase their dividends significantly, providing shareholders with much higher yields in the present.

But at what cost?

Conclusion

The answer here is a fairly simple one: the capex, R&D, and M&A that is required to properly maintain (and expand) moats over time.

Give me a well-run company with the prospects for sustainable 10%+ dividend growth over the coming years (and decades) over a high yield with quality/growth concerns in the present, every time.

These companies aren’t short-sighted and nor should their investors be.

Managing a company for success years down the road, not just the next quarterly report, is what separates blue chips from wanna-be’s in the market.

That’s what generates long-term outperformance. That’s what generates life-changing returns and generational wealth. And therefore, predictable, reliable fundamental/dividend growth will continue to be my focus in 2024 as opposed to chasing high yields or bottom-fishing for deep value stocks.

Now, I just have to be disciplined and patient enough to watch these rapid compounders closely so that I can capitalize on any dips that drive their share prices down below my personal buy targets.

Happy hunting, everyone!

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