For income-focused investors, “yield chasing” is one of the most common and most painful mistakes. Instead, focusing on stocks with healthy growing dividends can be a much better approach. In this report, we rank our top 10 dividend growth stocks (those with at least 10 consecutive calendar years of dividend increases), including a healthy mix of higher (above 5%) and lower (below 5%) dividend yield opportunities. We start the countdown with #10 and finish with our #1 top idea.

Before getting into the rankings…

Yield Chasing Is a Mistake

Before getting into our top 10 list, it’s worth reviewing the terrible mistake of “yield chasing.” Yield chasing is when an investor purchases a stock simply because it offers a high yield without any consideration for the safety of that yield or the health of the business. Often times, the reason a dividend yield is high is because the company is in distress and a dividend cut may be imminent. Also, mathematically, dividend yields are often high because the shares price is falling (and could have further to fall ahead).

Another aspect of yield chasing is the misnomer of believing a dividend is safe simply because a company has consistently increased it in the past. Companies know investors like a consistent track record of dividend increases, but unfortunately sometimes companies get so focused on increasing the dividend each year that they neglect the underlying fundamentals of the business and whether they can support the dividend payments over the long-term. If you are going to invest in high-dividend stocks, it’s critically important to understand the underlying fundamental of the businesses and whether or not they can actually support the dividend over time.

“Yield on Cost” is Important

Yield on cost is an important concept for dividend investors when balancing their need for current and long-term income. Yield on cost is simply the current annual dividend, divided by the price you paid for the shares (whether you bought them last week or 25 years ago). The reason yield on cost is such an important concept is because what looks like an attractive yield today, may not be so attractive over the long-term—and vice versa.

For example, 10 years ago Microsoft (MSFT) and AT&T both traded at around $27 per share, but AT&T offered a 6% dividend yield whereas Microsoft’s was only about 2%. If you’d have purchased AT&T simply because it offered a higher yield back then, you may be surprised to know that Microsoft has a much higher yield on cost (and pays out a bigger dividend) today (even though its current dividend yield has always been lower).

The reason is because Microsoft’s price and dividend have both grown much faster than AT&T’s. Some investors may have really needed that bigger AT&T dividend back then, but if they had purchased Microsoft instead they’d have made way more money (way more!) and had a higher dividend payment today. And this is just one example of the importance and power of dividend growth.

Again, yield on cost (as it relates to dividend growth) is a very important concept for dividend investors. After all, what good is a high dividend payment if it is more than offset by a weak or declining share price?

Top 10 Dividend-Growth Stocks:

We understand investors have differing needs for current levels of dividend income. And for this reason, we have included an attractive mix of dividend growth stocks, including opportunities with higher dividend yields (above 5%) and lower dividend yields (below 5%). However, all of the stocks within our top 10 have increased their dividend for at least 10 consecutive calendar years, and all of them are attractive from a fundamental and total return potential standpoint.

Without further ado, here are our top 10 healthy, strong, dividend-growth stocks for you to consider…

10. Enbridge (ENB), Yield: 8.5%

Enbridge is a stable cash flow giant with an attractive dividend yield. More specifically, Enbridge is a midstream company that operates the world’s largest oil and natural gas pipeline network transporting about 25% of overall crude oil produced in North America. Approximately 98% of the revenue is derived from long term cost-of-service or take-or-pay contracts with automatic escalators leading to predictable cash flows across business cycles which in turn allows for consistent dividends. And as you can see in the following graphic, the business has grown and evolved over time.

And as we recently wrote in our members-only report, a few of the reasons we like Enbridge include: (1) Even though the oil and gas industry has been through challenging times, the outlook has become brighter. (2) Enbridge is actively investing to expand its current business footprint (as well as taking small steps towards greener alternatives). (3) The company has resilient cash flow generation across business cycles (this is important). (4) Enbridge is in a strong financial position with improving leverage (the full report goes into the details). And (5) the shares are trading at an attractive dividend yield.

Overall, if you are looking for big healthy yield with the potential to keep growing, Enbridge is absolutely worth considering for a spot in your portfolio. Here is a link to our latest members-only report on Enbridge.

9. Omega Healthcare (OHI), Yield: 7.7%

Omega Healthcare is an attractive healthcare REIT (focused on providing financing and capital to Skilled Nursing Facility and Assisted Living Facility operators), and it has grown its dividend for 17 consecutive years.

Many investors previously believed the company’s heavy reliance on government programs (i.e. Medicare and Medicaid) was a risk factor (due to government efforts to reduce the growth rate on entitlement spending). However, these government programs proved to be a blessing during covid as rent collections remained very strong while other healthcare REITs struggled mightily (because they didn’t have the same government support).

And the company’s strength persists, as CEO Taylor Pickett explained during last week’s quarterly earnings call:

We continue to post strong quarterly results with second quarter adjusted FFO of $0.85 per share and funds available for distribution of $0.81 per share. We have maintained our quarterly dividend of $0.67 per share, and the dividend payout ratio remains conservative at 79% of adjusted FFO and 83% of funds available for distribution.

These are attractive incremental quarterly results for investors that like dividend security. Furthermore, continuing demographic tailwinds (i.e. an aging population) continue to bode well for the firm.

Omega currently trades at an attractive ~10.6x forward FFO, and it ranked in our 3rd best decile (in our table of 100 dividend-growth stocks, above). Also attractive, it has a well-covered dividend, government support and long-term demographic tailwinds. If you like high-yield dividend-growth stocks, Omega is attractive and worth considering for investment.

8. Digital Realty (DLR), Yield: 3.0%

Next on our list is data center REIT, Digital Realty. DLR has increased its dividend more than 10 years in a row as it continues to benefit from the massive ongoing digital transformation—whereby data is being moved to the cloud (i.e. data is basically being moved to data centers instead of onsite servers for both individuals and large enterprises). This long-term trend was happening well before the pandemic, and we expect it to continue long after.

“Yield on Cost" is an important concept for investors to consider when investing in dividend growth stocks. Specifically, Digital Realty’s dividend yield may seem small (at around 3%) compared to other names in this report; however investors would be wise to consider total returns (dividends plus price appreciation).

For example, you can see in the charts below, Digital Realty’s stock price can dramatically outperform popular dividend stocks offering higher yields (such as AT&T (T)), considering Digital Realty’s business continues to be on a high growth trajectory (you can see its expected growth rate in our earlier 100 stock table). And when you factor in the dividend (in addition to price returns) dividend growth stocks like Digital Realty can be even more attractive.

For example, here is a look at Digital Realty’s historical returns versus popular dividend stock AT&T.

With regards to yield on cost, Digital Realty has increased its dividend so many times (and we expect it to continue increasing) that if you simply bought shares and hung on, the yield on your original cost would be dramatically higher than the yield offered by most other stocks. If you are a dividend-growth investor, Digital Realty is absolutely worth considering (we currently own shares).

7. Exxon Mobil (XOM): 6.1%

The thought of investing in Exxon Mobil gives some investors nightmares. Specifically, its net income was recently negative, it was basically borrowing money to cover its dividend, and activist investors have put significant pressure on the company regarding climate change risks. However, despite these risks, we view the big dividend as highly attractive.

The following table shows XOM’s annual calendar year dividend has increased in each of the last 10 years, and if the company offers a dividend increase before the end of this year then the track record will remain intact.

You’ll also notice in the table above that earnings per share was negative in 2020, which is a red flag to some investors. However, with pandemic restrictions easing and the economy reopening, Exxon Mobil is benefiting from increased energy demands and higher oil prices. The company is already experiencing strong gains this year and making significant progress in paying down its debt. We greatly appreciate the firm’s conservative approach to paying down debt before increasing the dividend, yet we are also hopeful for another dividend increase before the end of this year (the company has plenty of cash flow to do it).

Overall, Exxon Mobil is a well-managed business in an increasingly strong financial position, with an increasingly healthy (and growing) dividend payment. Furthermore, at just 12.4x forward earnings, the shares are attractive for purchase. We currently own shares of Exxon Mobil.

6. W.P. Carey (WPC), Yield: 5.3%

W. P. Carey is an attractive net lease REIT that benefits immensely from a highly diversified portfolio of properties that are mission critical to their tenants. More specifically, WPC specializes in investing in a diversified range of “operationally-critical, single-tenant” commercial real estate, including industrial, warehouse, office, retail, and self-storage. And a lot of investors really like this one for its big safe growing dividend, as you can see in the following chart.

We recently completed a detailed members-only report on WP Carey, and in it we highlighted a variety of attractive qualities, including: (1) The fact that the business continues to offer resilient performance across economic cycles (a big one for dividend growth investors). (2) WPC is well positioned for continuing robust growth ahead (the members report gets into the details). (3) The company is in a strong liquidity position, offering capital market flexibility, including a favorable cost of capital. And (4) the valuation is attractive.

To learn more about our views on WP Carey, including the health of the business, valuation, risks and dividend safety, members can check out our new full report here.

5b. Altria Group (MO), Yield: 7.2%

Altria Group (MO) is one of the world’s largest manufacturers and sellers of cigarettes, tobacco and related products. And if you can get past the health risks of the products, it offers a very strong dividend (with over 50 years of dividend increases). Further, the shares have significantly less volatility risk than the rest of the market (as per its 0.6, 3-year beta). Furthermore, we like the company’s aggressive share repurchase program.

We currently own shares of Altria, and you can read our previous full report here.

5a. Enterprise Products Partners (EPD), Yield: 8.1%

Enterprise Products Partners L.P. (EPD) operates one of the largest integrated networks of midstream infrastructure for natural gas, natural gas liquids (NGL), crude oil, petrochemical and refined products in the US. And if you are looking for big safe income, EPD is worth considering.

We like EPD because it successfully leverages one of the largest and most diversified midstream asset portfolios, and uses a primarily fee-based business model to drive strong cash flow generation even during the most uncertain economic scenarios. Its balance sheet strength is unmatched in the midstream space, which it efficiently leverages to invest in long-term growth. Moreover, it regularly pays out big distributions. We believe EPDs distributions are the safest among midstream companies and expect the company to continue to grow them. We also believe the shares are priced inappropriately low at this time and there is a significant potential for price appreciation. Accordingly, we find EPD to be highly attractive from the perspective of a long-term income-focused investor. We are currently long EPD, and you can read our previous full report here.

4. National Fuel Gas Company (NFG), Yield: 3.4%

NFG flies under the radar because the idea of investing in a utilities stock is so boring to so many investors. However, without a lot of share price volatility, this one continues to pay out an attractive growing stream of dividends to investors. NFG has grown its dividend every year for over 50 years!

If you are an income-focused investor, this dividend grower is worth considering for a spot in your portfolio, and you can read our previous full report on NFG here.

3b. Qualcomm (QCOM), Yield: 1.3%

Qualcomm offers the second lowest dividend yield on our list, but it has increased its dividend for nearly 20 years straight, and it has more attractive dividend increases (and share price increases) in the years ahead based on its healthy growing business. Qualcomm is an example of a lower growing dividend that investors way want to consider for its long-term yield on cost possibilities. You can access our previous Qualcomm report here.

3a. Microsoft (MSFT), Yield: 0.8%

A lot of investors don’t typically think of technology stocks when they think of dividend growth—but they should. Microsoft (and Qualcomm, for that matter) both have high growth rates, attractive valuations and extremely powerful long-term dividend growth trajectories

Again, the yield may appear very small to some investors, but it is growing steadily and “yield on cost” is a concept investors need to keep in mind. If you bought shares of Microsoft and AT&T 10 years ago, AT&T offered a higher dividend yield then and now. But if you look at yield on cost, Microsoft is doing way better (i.e. you’re getting paid more dividend income) because the share price and the dividend have both increased dramatically and they continue to be on a trajectory to keep doing so for a very long time into the future. We really like Microsoft as a long-term dividend growth investment, and you can read our previous Microsoft full report (and oldie, but a goodie) here.

2. Reaves Utility Trust (UTG), Yield: 6.4%

Thinking outside the box, the Reaves Utility Trust is a utility stock closed-end fund (it invests in a basket of utilities stocks) with a big steadily growing dividend. Because UTG is a closed-end fund, it has some additional characteristics to consider, including its prudent use of leverage and its price versus net asset value. We currently own shares of UTG, and we believe it will continue to distribute extremely attractive income to investors. You can read our previous full report on UTG here.

1b. Procter & Gamble (PG), Yield: 2.5%

1a. Johnson & Johnson (JNJ), Yield: 2.4%

Rounding out our list, in the #1 spot, we are adding two old-school blue-chip dividend-growth stocks, Procter & Gamble (PG) and Johnson & Johnson (JNJ). They have both been increasing their dividends for a very long time (65 years and 58 years, respectively), and we expect them to continue increasing those dividend for a very long time into the future considering the nature of their businesses.

Both businesses aren’t going away. P&G offers consumer products (ranging from toilet paper to fabric softener) while J&J offers other important and trusted products (ranging from band-aids, to basic pharmaceutical products and medical devices). What’s more both of these businesses are well run and continue to trade at attractive valuation multiples (and dividend yields) relative to their long-term value. For example, as you can see in our earlier table, both stocks offer attractive price-to-earnings ratios, especially as compared to their attractive growth rates and dividend growth track records.

A lot of investors forget about J&J and P&G because the yields are not huge and the businesses seem boring, but they are not going away and we expect them to keep paying big healthy growing dividend yields for many many years into the future. We currently own shares of both, and have no plans of selling—possibly ever!

The Bottom Line:

If you are an income-focused investor, you need to balance your need for current income with the potential for long-term growth. Because what looks like an attractive dividend today (from a current yield standpoint) may not be an attractive dividend down the road (from a yield on cost standpoint). Every investor has to understand their own personal goals and needs as an investor, and then select opportunities that help you meet those goals and needs. Disciplined, long-term, goal-focused investing will continue to be a winning strategy.

You can view all of our current holdings here.

Top 10 Dividend Growth Stocks: Give Yourself a Raise