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The 9 Best Dividend Growth Stocks in the Dow Jones

Brian Bollinger, Contributing Writer, Kiplinger.com

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The Dow Jones Industrial Average is one of the oldest and hallowed stock market indices in the world. Created in 1896, the Dow consists of 30 large-cap American companies, many of which pay dividends.

While many companies in the Dow are considered blue chips, they certainly aren't created equal, nor are all the industrial average's dividend stocks necessarily safe bets for dependable income. In June 2018, for example, General Electric (GE) was booted from the index after having been a member for more than a century.

GE's share price had slumped more than 50% in the year leading up to the firm's removal from the Dow, and management also had cut the dividend for just the second time since the Great Depression.

To help identify the best dividend growth stocks in the Dow and avoid the GEs of the world, research firm Simply Safe Dividends utilizes a Dividend Safety Score system that has caught more than 98% of dividend cuts in advance.

We'll use that system to take a closer look at nine Dow dividend growth stocks that appear positioned to reward shareholders with safe and solid payout expansion in the years ahead.

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3M

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Market value: $108.6 billion

Dividend yield: 3.0%

Consecutive years of higher dividends: 60

A member of the exclusive dividend kings list analyzed by Simply Safe Dividends, 3M (MMM, $183.76) not only boasts six decades of dividend increases, but the industrial conglomerate also has made payouts for more than a century without interruption.

Tape, sealants, drug delivery systems, insulation and protection equipment are just some of the more than 60,000 products 3M sells in 200 countries around the world.

3M's success, dating back to 1902, is largely attributable to management's focus on innovation and products that play a critical role in customers' operations. In fact, about one-third of 3M's $32 billion of annual sales are derived from products the firm invented over the past five years.

In November 2018, the company put out a five-year plan that shows management largely anticipates more of the same success. 3M expects to generate 3% to 5% organic sales growth through 2023, grow its earnings per share between 8% and 11%, and generate a strong 20% return on invested capital.

With a reasonable payout ratio near 50% and an excellent investment-grade-rated balance sheet, 3M should be able to continue rewarding shareholders with healthy dividend growth, potentially near 10% per year if management delivers on their latest five-year plan.

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Apple

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Market value: $687.1 billion

Dividend yield: 2.1%

Consecutive years of higher dividends: 6

Down more than 35% from its all-time closing high in September 2018, Apple (AAPL, $142.19) trades at a forward price-to-earnings multiple of merely 10. Such a low multiple is unusual for a company that reported 20% revenue growth and a 41% jump in earnings in its latest quarter ... but the company has justified a little of its slump lately with its first quarterly revenue-guidance cut in the iPhone era.

Investors are rightly concerned by Apple's dependence on the iPhone, which accounted for 63% of sales in fiscal 2018 and admittedly faces some market saturation risk that could cause future growth to slow. However, the company's iconic brand and globe-spanning portfolio of hardware products and services should keep Apple's cash flow and dividend strong for the foreseeable future.

Apple's services business, which consists of software such as the App Store, iCloud, and Apple Pay that are integrated into its hardware products, continues emerging as a future growth driver. Services revenue grew 27% last quarter, accounting for 16% of total sales, and presumably carries much higher margins given the capital-light nature of the business.

With more than $230 billion in cash and marketable securities, Apple also has flexibility to make strategic acquisitions while returning significant amounts of capital to shareholders. On that front, Apple has raised its dividend each year since it began making payments in 2012.

A low payout ratio below 25%, excellent cash-flow generation and a strong balance sheet should allow AAPL to continue growing its dividend at a double-digit clip for the foreseeable future.

For all of these reasons, Apple is the largest holding in Warren Buffett's dividend portfolio, which Simply Safe Dividends analyzed, and appears to be one of the best dividend growers in the Dow.

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Boeing

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Market value: $180.7 billion

Dividend yield: 2.6%

Consecutive years of higher dividends: 7

Boeing's (BA, $310.90) last three annual dividend raises clocked in at 20%, 20% and 30%, respectively. Such strength has been fueled by an ongoing boom in demand for commercial airplanes, which has resulted in Boeing's backlog topping 5,800 planes worth more than $400 billion.

As the world's largest aerospace manufacturer, Boeing's profitability should rise as it ramps up production to meet demand. Morningstar senior equity analyst Chris Higgins, CFA, projects Boeing's commercial airplanes margins to exceed 13% by 2019 and hit 14% in 2021, well above recent levels around 9% to 10%.

Given the extreme capital intensity and technological expertise required to design and manufacture airplanes, not to mention the numerous regulatory hurdles, Boeing should remain a force in this market for years to come.

Meanwhile, as the plane maker's earnings continue to grow at a double-digit clip, BA investors can likely expect at least 10% annual dividend growth in the years ahead. This dividend stock is in excellent financial shape, earning an A credit rating from Standard & Poor's, and its payout ratio sits at a comfortable level near 50%.

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Home Depot

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Market value: $193.4 billion

Dividend yield: 2.4%

Consecutive years of higher dividends: 9

Founded in 1978, Home Depot (HD, $168.61) is the largest home improvement retailer in the world with more than $100 billion in sales and more than 2,200 stores. Importantly for income investors, the retail giant has paid uninterrupted dividends for more than three decades while growing its payout by 24% annually over the past five years.

In a retail world that is increasingly under pressure from the unabated rise of e-commerce, Home Depot continues to hold its own. The company's same-store sales last quarter were up nearly 5%, and earnings per share grew 36%.

Home Depot serves a mix of do-it-yourself consumers and professional contractors who depend on the store having the products to meet their needs in a timely manner. Thanks to its status as the largest player in the space, Home Depot can afford to hold one of the broadest arrays of products at competitive prices.

While the pace of new store openings has slowed (management expects just three new store openings in fiscal 2018), management continues investing in Home Depot's existing store base and technology systems to remain competitive.

In fact, Argus analyst Christopher Graja, CFA, believes Home Depot will continue increasing its earnings and profitability in the years ahead thanks to impressive execution of its business plan, solid customer service, and a favorable housing market backdrop. Those gains would be on top of the more than 400 basis points of operating margin improvement HD recorded over the last five years.

Home Depot's payout ratio is expected to be close to 40% in 2019, about in line with its long-term norm. With analysts expecting earnings growth in the high single digits, HD's dividend growth should remain strong for the foreseeable future.

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Intel

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Market value: $211.2 billion

Dividend yield: 2.7%

Consecutive years of higher dividends: 4

Intel (INTC, $44.49) is the behind-the-scenes technology giant responsible for powering many of the world's computers and data centers. Since incorporating in 1968, Intel has invested heavily to maintain one of the most complex manufacturing processes in the world, consistently producing microprocessor chips that delivered superior performance and cost advantages compared to rivals.

Intel routinely invests more than 20% of its sales in R&D to maintain its edge, and management has focused increasingly on expanding the company's reach beyond PCs. Intel believes its total addressable market exceeds $300 billion today, spread across various connected devices and networks, data centers, the cloud and the internet of things.

While the continued rise of mobile devices is weighing on growth prospects for personal computers, Intel's core legacy business, Morningstar senior equity analyst Abhinav Davuluri expects the company to continue defending its turf here while generating "substantial traction" in growth areas such as artificial intelligence and automotive.

While Intel has a mere four-year streak of dividend growth, the company has improved its payout in every year but one since 2004.

Overall, Intel's earnings are expected to grow at a mid-single-digit pace in 2019. Combined with the firm's excellent balance sheet and sub-30% payout ratio, its lowest level in more than a decade, INTC's dividend appears well-positioned to continue growing at a healthy pace.

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McDonald's

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Market value: $137.0 billion

Dividend yield: 2.7%

Consecutive years of higher dividends: 43

Approximately 37,000 McDonald's (MCD, $174.90) restaurants are scattered across more than 100 countries, with over 90% of them run by independent owners. By franchising out the vast majority of its locations, McDonald's business enjoys low capital intensity and a high operating margin near 40%. That's because the franchisee is on the hook for covering most of the costs of a restaurant's equipment, seating, signs and more.

Meanwhile, McDonald's continues to own the land and collects high-margin rent and royalties based largely upon a percentage of a restaurant's sales.

Thanks to its premier locations, rigorous restaurant standards, well-known brand and continued adaptation of its menu to meet changing consumer tastes, McDonald's model has enabled the company to reward shareholders with 43 consecutive years of dividend increases, including a hefty 15% boost in September 2018.

Going forward, management seeks to deliver 3% to 5% annual sales growth, an operating margin in the mid-40% range and earnings per share growth in the high single digits. McDonald's payout ratio will sit near 60% in 2019, so the company's dividend growth rate will likely track closer to earnings growth in the years ahead, providing predictable income gains for investors living off dividends in retirement.

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Merck

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Market value: $197.7 billion

Dividend yield: 3.0%

Consecutive years of higher dividends: 7

Merck's (MRK, $74.04) historical pace of dividend growth was uninspiring, to say the least. Over the last 20 years, Merck's dividend grew 3% per year. And over the last five years, Merck's dividend compounded by just 2% annually.

However, something appears to be changing as Merck's management boosted the drug maker's dividend by 15% in October 2018.

Morningstar sector director Damien Conover, CFA, observed that Merck is now through the worst of its patent cliff, reducing the amount of generic competition it faces, and the firm's drug development strategy is bearing fruit.

Specifically, Morningstar believes Keytruda, Merck's blockbuster lung cancer drug, could ultimately reach peak sales of $15 billion, serving as a significant growth driver given that company's total revenue is just over $40 billion today.

When combined with Merck's investment-grade balance sheet, reasonable payout ratio near 50% and expectations for mid- to high-single-digit earnings growth in 2019, shareholders could continue enjoying a faster pace of dividend growth compared to the company's historical rate.

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Nike

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Market value: $117.8 billion

Dividend yield: 1.2%

Consecutive years of higher dividends: 17

As Argus analyst John Staszak, CFA, observes Nike's (NKE, $72.75) "strong brand and product pipeline have enabled it to raise prices and increase sales of both its apparel and footwear."

In fiscal 2018, Nike invested more than $3.5 billion in advertising and endorsement contracts with well-known athletes to continue supporting the firm's strong brand equity.

Thanks to this spending, along with Nike's "globally recognized brand, innovative products, economies of scale, and rapid growth in emerging markets," Staszak expects Nike to continue dominating the athletic apparel and footwear market for many years to come.

Nike's dividend growth track record and outlook are similarly impressive. Nike last increased its dividend by 10% in November 2018 and has compounded its payout by 14% annually over the last two decades. With a relatively low payout ratio near 30% and analysts expecting low double-digit earnings growth in 2019, Nike's dividend has strong potential to continue growing at a high single-digit to low double-digit pace.

SEE ALSO: 15 Consumer Stocks That Deliver Dividend Growth Like Clockwork

Visa

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Market value: $300.0 billion

Dividend yield: 0.8%

Consecutive years of higher dividends: 10

Visa (V, $128.13), never among the highest-yielding dividend stocks, nonetheless began paying dividends in 2008 and has since raised its payout each year, qualifying the firm for the Dividend Achievers list reviewed by Simply Safe Dividends.

As a leading global payments company, Visa makes electronic payments possible for consumers, businesses and banks. During fiscal 2018, Visa's 3.3 billion cards were used at nearly 54 million merchant locations to process $11.2 trillion in payments.

Morningstar senior equity analyst Brett Horn, CFA, notes that according to the Nilson Report, Visa accounts for roughly half of all credit card transactions and an even higher proportion of debit card transactions. With such a massive base of cardholders, Visa is a necessary payment method for merchants to accept.

Global digital payments surpassed cash payments for the first time two years ago, and Horn believes Visa's long-term outlook remains bright.

Growing consumer spending should increase the amount of spending flowing through Visa's cards, and the company notes in its annual report that about $17 trillion of payments worldwide still were conducted using cash and checks, which should gradually convert to electronic forms over time.

Visa's dividend has grown 20% per year over the last five years, and double-digit growth seems likely to continue. The company's payout ratio sits below 20%, its balance sheet is pristine with an A+ credit rating from Standard & Poor's, and analysts project 16% earnings growth in 2019.

Brian Bollinger was long AAPL, BA, INTC, MCD, MMM and V as of this writing.

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