Dividend investors would be wise to focus not just on a stock's current yield, but also on the long-term growth potential of its dividends. That's because strong businesses that consistently raise their dividend payouts reward shareholders with a steadily rising income stream that essentially equates to a raise every year. And, well, who doesn't like a raise?

But there are other reasons to value dividend growth so highly, and they're well supported by research. For instance, a study by C. Thomas Howard  published in Advisor Perspectives found that, for every percentage point a stock's yield rises, its annual return increases by 0.22 percentage points if it's a large cap, 0.25 if it's a mid cap, and 0.46 if it's a small cap.

Even better, Howard found that dividend-growing stocks outperformed dividend cutters by 10 percentage points per year from 1973 to 2010, and beat both flat- and no-dividend stocks. And the icing on the cake is that Howard showed that this outperformance came with a third less volatility. Higher returns, less volatility-induced stress, and a steadily growing income stream -- what's not to love?


With that in mind, here are five stocks that have grown their dividends by more than 20% annually over the last three years:

Company

3-Year Annualized Dividend Growth Rate

Cliffs Natural Resources

92.2%

Walgreen

26%

Guess

23.5%

Wisconsin Energy

21.1%

Textainer Group

21%

Source: S&P Capital IQ

Had you invested in these companies three years ago, you would have enjoyed total dividend increases ranging from 77% to 610%. And, importantly, all of these companies grew their payout much faster than the rate of U.S. inflation during that time , thereby protecting (and growing) your purchasing power.

But more important to investors today is to identify the companies that will grow their dividends substantially in the years ahead. In fact, it's possible that companies such as the ones mentioned above, that have substantially grown their dividends in the past, will have to cut their future payouts if their business prospects begin to dim. On the other hand, companies like Apple  , which have recently initiated dividend programs, have low payout ratios and tremendous earnings growth prospects, are well positioned to grow their dividends for many years.

If you're interested in hearing more about the opportunities that are likely to allow Apple to substantially increase its cash payouts to investors in the years ahead, as well as the threats that could place those dividend distributions in peril, I encourage you to read this detailed report on Apple, written by The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker. To get instant access to his latest thinking on Apple, simply click here now.

 
 

The article 5 Stocks Growing Their Dividends by 20% per Year originally appeared on Fool.com.

Joe Tenebruso manages a Real-Money Portfolio for The Motley Fool and is an analyst on The Fool's Stock Advisor and Supernova premium service teams. You can connect with him on Twitter @Tier1Investor.  Joe Tenebruso has no position in any stocks mentioned. The Motley Fool recommends Apple, Guess?, and Textainer Group. The Motley Fool owns shares of Apple and Guess?. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.


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