Best Dividend Growth Stocks

5 Best Core Dividend Growth Stocks

Investors following a dividend growth strategy often don’t know where to start. They also don’t know how to start. In my opinion it is fairly simple to start as a do-it-yourself dividend growth investor. Furthermore, the advantages outweigh the risks of dividend growth investing in my opinion. It really comes down to three basic principles: save, knowledge, and invest.

But if you have some money saved, some basic knowledge about investing in stocks, and the ability to invest then what next? Which stocks do you pick? What are the best dividend growth stocks? Well, there are some top core or foundational dividend growth stocks that one could consider. In this article we discuss the best 5 core dividend growth stocks.


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5 Best Core Dividend Growth Stocks Selection Criteria

How does one select a dividend growth stock from the universe of approximately 3,000 dividend paying stocks? It really comes down to having both quantitative and qualitative criteria. Let’s take a look at some quantitative and qualitative criteria that I personally want to consider for 5 best core or foundational dividend growth stocks.

Years of Dividend Growth

First, we want stocks that are established dividend growers. It is difficult to get to 10 years of dividend growth for many companies. They are often in cyclical industries or face too much competition. When times are tough during recessions earnings and cash flow may not be sufficient to pay a growing dividend. So, the dividend is frozen or even worse tech dividend is cut or suspended for a longer period of time. Hence, I want a stock that has paid a growing dividend for 10-years or more. This means that the stock should at least be a Dividend Contender. Some will argue that a Dividend King or Dividend Aristocrat is a better choice. They do have a point. But 10-years is a fairly long time and it gives a somewhat larger universe of stocks to choose from.

Financial Strength

Next, I want a company with a solid financial footing. This is important as a company that is overleveraged will likely run into problems from the perspective of dividend safety. Interest payments may become too high. Or the company may have to refinance maturing debt at higher interest rates. There are several ways to look at dividend safety including debt-to-equity ratios, leverage ratios, and interest coverage. 

Credit Rating

However, one simple method is to take a look at company or corporate credit ratings. Corporate credit ratings are an evaluation of a company’s ability to pay issued debt. These are issued by one of the independent credit agencies. The three main agencies are Moody’s, Standard & Poor’s, and Fitch. The highest credit ratings are ‘Aaa’ or ‘AAA’ depending on the agency. But this is hard to achieve. Presently, there are only two U.S. companies with a triple-A rating: Microsoft (MSFT) and Johnson & Johnson (JNJ). So, we look at stocks that have an ‘A3’ or ‘A-‘ or better to provide a larger group of stocks to choose from.

Why is this important? Companies with better credit ratings have a much lower probability of bankruptcy according to a recent research paper. It is largely a measure of company quality.

Bankruptcy versus Corporate Credit Rating
Source: Pirogava, et al. (2019)

Debt Metrics

Note that some companies do not have corporate credit, or they do not have debt. So, another metric to take a look at is Value Line’s Financial Strength Grade. This takes into account debt and cash on the balance sheet, profits, cash flow, size, stock price, earned returns, profits and direction. In this system an A++ is the top score. For the foundational dividend growth stocks, I like stocks with an ‘A+’ or better rating.

One could also look at Value Line’s Safety Ranking. This combines financial strength and stability of the stock price. In this ranking a ‘1’ (out of 5) is the best score.

Alternatively, one could like at the leverage ratio of net debt-to-EBITDA. If this is greater than 2.5X then the company likely has too much debt from the context of dividend safety and dividend growth. It means that a significant part of cash flow is being used to pay interest and pay down debt. Another metric that I sometimes use is debt-to-equity.

Competitive Business

This is a rating of the business moat. This is somewhat qualitative. However, I like looking at Morningstar’s three moat (none, narrow, wide) rating system for its simplicity. I like companies with wide moats as opposed to narrow moats or no moats. For instance, Microsoft clearly has a wide moat. Microsoft is the dominant software company from the perspective of personal and business computing software. The company has competitors, but Microsoft clearly has scale that many of its competitors do not. It would take quite a bit of capital and investment to dislodge Microsoft as the market leader.

Sector Diversification

I would like five stocks that are in different sectors. This is a matter of diversification, which mitigates risk. Owning too many stocks in the same sector leads to risk if the sector as a whole experiences difficulty. For example, low oil prices will affect all oil majors. In fact, oil prices were at decade lows recently. In turn, oil stocks as a group were severely punished.

5 Best Core Dividend Growth Stocks

The one thing to understand is that the aforesaid criteria focus on company quality rather than dividend yield or valuation. A high dividend yield is often something we desire. But dividend yield is a function of stock price and fluctuates based on stock price. Remember that dividend yield = dividend payout / stock price. Hence, the dividend yield is inversely related to stock price. If the stock price goes up the dividend yield comes down and vice versa.

Buying a stock at low valuation is desirable but valuation is not a measure of company quality. Valuation often depends on stock price and earnings. Valuation is a reflection of what we would pay for a stock. A quality company can be overvalued, fairly valued, or undervalued. Ideally, we would like to buy the quality company when it is undervalued.

The table below lists what I consider to be the top 5 core dividend growth stocks as of this writing. I used data from the listed sources, Portfolio Insight*. This could change with time as a company’s fortunes rise and wane. For instance, Company A may do an acquisition that significantly increased debt. In turn this could negatively affect corporate credit ratings or at least trigger a review.

CompanyTickerYears of Dividend GrowthCorporate Credit RatingVL FinancialNet debt-to-EBITDAMorningstar MoatIndustry
Johnson & JohnsonJNJ61AAAA++0.49XWidePharma-ceuticals
Procter & GamblePG67AA-A++1.14XWideHousehold Products
Lockheed MartinLMT21A-A++1.31XWideAerospace & Defense
Source: By Dividend Power based on data from listed sources, Portfolio Insight*, and* (as of October 23, 2023)

Let’s now briefly discuss each company on this table.

Microsoft (MSFT)

It’s tough to argue against buying and holding Microsoft. It is one of two triple-A rated companies that investors could buy and thus it is the number one best dividend growth stock. Microsoft has a fortress balance sheet with a net cash position. This financial strength is great from the perspective of dividend safety and dividend growth. The company is a Dividend Contender and should in all likelihood become a Dividend Aristocrat. The main risk for Microsoft is that the company does not keep up with rapidly changing hardware or software. However, Microsoft has built an ecosystem around Office, Windows, Xbox, and its cloud offerings that should keep the top and bottom line growing for some time.

Microsoft is arguably the leading personal and enterprise software company. Microsoft is ranked as the No. 2 global brand in 2022 by Interbrands. The company also sells some hardware and is a player in developer tools. Major brands or products include Office, Windows, Outlook, Skype, SharePoint, Exchange, Bing, Surface, GitHub, SQL, LinkedIn, and Xbox. Most people use one or more of its products either at home or at work. In fact, I am writing this article on MS Word right now. Microsoft recently completed its acquisition of ActivisionBlizzard, expanding its gaming offerings.

MSFT Dividend and Valuation

Microsoft’s strength has allowed the company to raise the dividend at a double-digit rate for the trailing 5-years and the past decade. The dividend growth rate is 9.82% CAGR for the past 5-years and 11.83% for the past 10-years. The yield is low at about 0.83% as of this writing. The payout ratio is a conservative ~28% so there is room for many more increases. Microsoft’s dividend safety is excellent and backed by it’s triple-AAA rating.

Portfolio Insight - Dividend Growth MSFT
Source: Portfolio Insight*

With that said, the market has largely recognized Microsoft’s strengths. It trades at a forward earnings multiple of over 29.5X, but this is down slightly from its peak of about 31.2X. The P/E ratio is also at the lower end of its 5-year range making it the least expensive since the worst months of the COVID-19 pandemic.

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Johnson & Johnson (JNJ)

Johnson & Johnson is the second triple-AAA rated company that investors could buy. Again, it is tough to argue against buying-and-holding Johnson & Johnson. The balance sheet is solid with a very low leverage ratio. The company’s success in paying and growing the dividend has been tested with time through many recessions. Johnson & Johnson’s dividend safety is outstanding. In fact, the company is on my list of 3 Safest Dividend King Stocks. The dividend has been raised 61 years in a row. The company is one of 42 Dividend Kings placing it in a select group.

Johnson & Johnson is a major player on consumer health products, pharmaceuticals, and medical devices. Johnson & Johnson is ranked the No. 92 global brand in 2022 by Interbrands. Johnson & Johnson makes oncology, immunology, cardiovascular, and other drugs. Next, the company makes surgical products, vision care products, sterilization products, medical devices, and much more. If you are getting medical treatment you are probably encountering a Johnson & Johnson product. Many of us use the company’s products from infancy. The firm divested Kenvue with consumer products brands like Band-Aid, Neosporin, Tylenol, Zyrtec, Sudafed, Motrin, Benadryl, Pepcid, Listerine, Aveeno, Neutrogena, Stayfree, Carefree, o.b., and Clean & Clear.

JNJ Dividend and Valuation

The forward dividend yield is decent at approximately 3.11%. This is above the average yield of the S&P 500 Index and also more than the 5-year average of 2.67%. The dividend growth rate is in the mid-single-digits. In the trailing 5-year the dividend growth rate is ~6.03% and in the trailing decade the dividend growth rate is 6.37%. Johnson & Johnson last increased the quarterly dividend rate to $1.19 from $1.13 per share in April 2023. The payout ratio is reasonably conservative at ~44% on an adjusted basis so there is room for more increases.

Portfolio Insight - Dividend Growth JNJ
Source: Portfolio Insight*

The stock is trading below the broader market valuation at the moment at a forward price-to-earnings ratio of about 15.2X. The company is facing some risk from lawsuits related to talc baby powder and opioids and the outcomes of both are not full known, but they will have an impact on earnings. This valuation multiple is below the average for the past decade making JNJ a good stock to consider as of this writing.

Related Articles About Johnson & Johnson (JNJ) on Dividend Power

Procter & Gamble (PG)

Procter & Gamble stock is another long-time favorite of many dividend growth investors and is third on the list of best dividend growth stocks. The company may not have a coveted triple-AAA rating, but its financial strength is excellent. The balance sheet is in good shape with low leverage ratio. Procter & Gamble is probably one the safest Dividend Kings. The company is a Dividend King having raised the dividend for 67 consecutive years. For perspective, only nine companies have raised the dividend for 60+ years. This places Procter & Gamble in a very exclusive group of companies.

Procter & Gamble is one of the premier consumer packaged goods company. Procter & Gamble operates globally. The company’s brands are for the most part market leaders with a No. 1 or No. 2 position worldwide. Major brands include Tide, Downy, Cascade, Febreeze, Mr. Clean, Swiffer, Pampers, Luvs, Charmin, Puffs, Always, Head & Shoulders, Pantene, Olay, Old Spice, Secret, Braun, Gillette, Venus, Crest, Oral-B, Vicks, Pepto Bismol, and others. Essentially, you are likely using one of Procter & Gamble’s products every day. Pampers is the No. 52 global brand and Gillette is the No. 71 global brand in 2022 as ranked by Interbrand.

PG Dividend and Valuation

The dividend yield is about 2.54%, which is better than the broader market. The dividend growth rate is low but acceptable. The past 5-year dividend growth rate is 5.68% CAGR. The past decade dividend growth rate is 5.02% CAGR. Procter & Gamble increased the quarterly dividend rate to $0.9407 from $0.9133 per share in April 2022.The payout ratio is ~62%, a little higher than desired but still below our target cutoff value of 65%.

Portfolio Insight - Dividend Growth PG
Source: Portfolio Insight*

The stock is not particularly undervalued at the moment. It is trading at a forward earnings multiple of almost 23.1X above its average range in the past decade. Procter & Gamble is rarely undervalued due to its historically consistent results and years of dividend growth. If an opportunity comes along to buy at lower valuation, we would personally jump on it.

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Lockheed Martin (LMT)

Lockheed Martin is not a traditional dividend growth stock that comes to mind. However, the company has a solid balance sheet and it is conservatively run. Lockheed Martin has a lower credit rating than the three companies that we have talked about so far. But its leverage ratio is on par with other quality companies. The company is a Dividend Contender having raised the dividend for 20 consecutive years. In my opinion Lockheed Martin will likely become a Dividend Aristocrat in time.

Lockheed Martin’s strength is its scale as the largest U.S. aerospace & defense company. It makes many aircraft and other products for the U.S. Army, Air Force, and Navy and allies. The company has limited competition in this market space. Furthermore, these military platforms tend to be around a long time and are periodically updated or modernized. Major aircraft platforms include the F-35, F-22, F-16, C-130, C-5, P-3, Apache, Blackhawk, and Seahawk, as well as others. Lockheed Martin also seems products for missiles, space, electronics, etc.

LMT Dividend and Valuation

The current dividend yield is ~2.84%, which is decent and above trailing average in the past 5-years of 2.67%. The company is also generous with dividend increases. The dividend has grown at 8.85% CAGR in the past 5-years and 10.63% CAGR in the past 10-years.

Portfolio Insight - Dividend Growth LMT
Source: Portfolio Insight*

The stock is trading at a very reasonable valuation of ~16.8X times forward earnings. It is trading at earnings multiple lower than the average for the S&P 500 Index and within its 5-year and 10-year ranges. This is likely due to the risk of defense budget cuts and changing priorities at the Pentagon. The stock price fell due to COVID-19, which was probably a good time to buy. However, the current state of geopolitical conflicts has pushed the stock price higher.

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Visa (V)

Visa is one of the two dominant payment transaction corporations. It operates in an oligopoly with Mastercard with about 50% market share. Their market dominance has allowed the company to grow the top and bottom lines and the dividend. In addition, the balance sheet has little debt, and leverage is minimal. As a result, the company is a Dividend Contender, having raised the dividend for 15 consecutive years. The company is the newest entrant on the list of best core dividend growth stocks, replacing 3M Company.

Visa operates VisaNet, a network processing about 65,000 transactions per second and $10+ trillion in 2022. It allows companies to authorize, clear, and settle payment transactions. In addition, the company offers co-branded credit and debit cards with about 16,000 partners. More than 3.4 billion cards are circulating and accepted at over 50 million merchants.

V Dividend and Valuation

Visa has increased the dividend at a double-digit rate for the trailing five years and ten years. According to Portfolio Insight*, The dividend has grown at 17.95% CAGR in the past 5-years and 20.33% CAGR in the past decade. Applying the Rule of 72 calculates the dividend should double in between four and five years. The forward dividend yield is only 0.77%, but it is more than the 5-year average of 0.67%.

Portfolio Insight - Dividend Growth V
Source: Portfolio Insight*

The stock is trading at a P/E ratio of approximately 26.9X, which seems high but less than the 5-year range and within the 10-year span. Visa rarely trades at a low valuation, but the current multiple is the lowest since the pandemic bear market. Hence, investors may want to try a dollar cost averaging approach.

Related Articles About Visa (V) on Dividend Power


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Final Thoughts on the 5 Best Core Dividend Growth Stocks

Overall, we like quality companies for a large cap dividend growth stock portfolio. The 5 Best Core Dividend Growth Stocks serve as a place to start researching for those interested in dividend growth investing. There are other potential choices besides the ones listed above. But these are the top core dividend growth stocks based on their quality and length of time for dividend growth. Notably, we have replaced 3M with Visa because of the former’s lawsuit risks. These five stocks have stood the test time so far and some may consider them as the best dividend growth stocks.

Disclosure: Long MSFT, V, LMT, and PG.

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Prakash Kolli is the founder of the Dividend Power site. He is a self-taught investor, analyst, and writer on dividend growth stocks and financial independence. His writings can be found on Seeking Alpha, InvestorPlace, Business Insider, Nasdaq, TalkMarkets, ValueWalk, The Money Show, Forbes, Yahoo Finance, and leading financial sites. In addition, he is part of the Portfolio Insight and Sure Dividend teams. He was recently in the top 1.0% and 100 (73 out of over 13,450) financial bloggers, as tracked by TipRanks (an independent analyst tracking site) for his articles on Seeking Alpha.

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