Dividend growth has historically been a key contributor to a stock’s outperformance.
Tech titan Microsoft (MSFT -0.78%) recently increased its dividend by another 11%. That new rate will cost it about $25 billion annually. It will likely keep the company near the top of the pack among global-dividend payers.
Microsoft wasn’t the only company that recently gave its investors a raise. Telecom giant Verizon (VZ 0.89%) increased its payment by less than 2%, while leading real estate investment trust (REIT) Realty Income (O 1.53%) provided an even more modest pay bump.
While Microsoft’s pay raise made headlines due to its size, what’s even more important is the consistency with which these companies have raised their payouts (more than a decade apiece). That’s because dividend growers have historically delivered the highest-total returns.
The data on dividends
Hartford Funds and Ned Davis Research have analyzed the returns of stocks by their dividend policy going back 50 years. They found that the average-dividend payer has delivered a 9.2% average-annualized total return with lower volatility (0.94 beta) compared to the average member of the S&P 500 (the equal-weighted S&P 500 index has delivered a 7.7% average-annualized total return with a beta of 1.0). That’s due to the much lower returns of dividend non-payers (4.3% with a beta of 1.18).
However, not all dividend stocks are equal. Dividend growers and initiators are driving the returns:
|
Dividend Policy |
Returns |
Beta |
|---|---|---|
|
Dividend growers and initiators |
10.2% |
0.89 |
|
No change in dividend policy |
6.7% |
1.02 |
|
Dividend cutters and eliminators |
-0.6% |
1.22 |
Data source: Hartford Funds and Ned Davis Research.
That data makes it abundantly clear that dividend growth is a key driver of a stock’s outperformance. Even better, investors get those higher returns with less risk (as measured by the lower beta).
Great dividend-growth stocks
Microsoft has done a terrific job of growing its dividend. It has increased its payout at a double-digit annual clip over the past decade. Meanwhile, its growth streak is up to 20 years. Unsurprisingly, Microsoft has delivered robust total returns during that period (more than 16% annualized compared to 11% for the S&P 500).
The tech titan should have no trouble continuing to increase its payout. It generates an enormous amount of cash each year (analysts expect it will produce $81 billion in free cash flow next year). That will easily cover its projected-dividend outlay ($25 billion), leaving it ample excess to fund growth and repurchase shares (it recently unveiled a new $60 billion repurchase program). Meanwhile, Microsoft has a cash-rich balance sheet with minimal net debt. The company is also growing at a healthy rate, powered by its investments in cloud computing and artificial intelligence (AI).
Verizon also has an excellent record of increasing its dividend. It recently raised its payment for the 18th consecutive year, maintaining the longest current streak in the U.S. telecom sector. While Verizon only provided its investors with a modest raise, it offers a high-dividend yield (over 6%).
The telecom giant can easily afford its payout. It produced $16.1 billion in cash flow from operations during the first half of this year. That covered its capital expenses ($8.1 billion) with $8.5 billion to spare. The company’s excess free cash flow was more than enough to fund its dividend outlay ($5.6 billion). With its free cash flow rising as it invests in growing its 5G and fiber networks, Verizon should be able to continue growing its high-yielding dividend. While Verizon’s returns have lagged the market in recent years, it could deliver higher returns in the future as its investments reinvigorate its growth (and keep the dividend headed higher).
Finally, Realty Income recently bumped up its monthly dividend from $0.263 per share to $0.2635 per share, a 0.2% raise. That was its fifth increase this year (and 127th since coming public in 1994), extending its quarterly streak to 108 in a row.
The REIT’s raises might be modest but are consistent and mighty over the long term. It has delivered a 13.5% annual-total return since coming public 30 years ago, driven by its high yield (recently around 5%) and steadily rising payout (4.3% compound annual dividend growth since 1994). Realty Income expects to grow its adjusted funds from operations at a 4% to 5% annual rate in the future, which should support continued dividend increases. Add that to its high yield, and there’s a clear path to double-digit annualized-total returns.
More dividend growth ahead
Dividend-growth stocks have historically produced the highest-total returns. That’s why investors should take note of the recent raises that Microsoft, Verizon, and Realty Income have provided to their investors. With more growth ahead, they’re in solid positions to produce above-average total returns in the future.
Matt DiLallo has positions in Realty Income and Verizon Communications. The Motley Fool has positions in and recommends Microsoft and Realty Income. The Motley Fool recommends Verizon Communications and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
