Costco, Nike, and Starbucks: Buying Dividend Growth Stocks at an Early Stage
Jan 21st 2014 10:59PM
Updated Jan 21st 2014 11:00PM
Dividend growth investors usually focus their attention on companies that have been able to sustain consistent dividend growth over several decades, and this is certainly an intelligent way to invest. However, some high-quality companies, such as Costco , Nike , and Starbucks have the fundamental quality to continue raising payments in the long term, even if their dividend-growth track records aren't among the longest ones in the market.
Do they deserve a place in your dividend growth portfolio?
Costco for smart shoppers
Costco has been a unique success story in the retail industry over the past few years. The company makes most of its profits from membership fees, as opposed to margins on product sales, which allows Costco to charge amazingly low prices for its merchandise and keep its customers happy and coming back for more.
In addition, this smart business model based on subscription fees provides stability and predictability to the company's cash flows, an enormously valuable trait when evaluating a company's ability to consistently raise dividends over time.
Costco has materially outperformed competitors such as Wal-Mart and Target over the past few years. This is an important consideration when making investment decisions in an industry like discount retail, in which one company's gains are usually another one's losses.
Wal-Mart and Target have achieved impressive track records of dividend growth over the years, with 39 and 46 consecutive dividend increases, respectively. There is no reason to believe Costco can't build its own decades-long trajectory of growing dividends as time passes and the company continues outgrowing its peers.
In fact, Costco has increased its distributions every year since paying its first dividend in 2004, including a special dividend of $7 per share in 2012. That makes 10 consecutive dividend increases for the company. The stock pays a dividend yield of 1.1%, and the payout ratio of only 26% of earnings leaves plenty of room for further dividend growth.
Nike is running ahead of the pack
Nike is the undisputed heavyweight champion in the global sports apparel and shoes industry. The Nike swoosh is one of the most recognizable brand logos in the world, and the company has invested heavily in marketing and advertising through the years, to consolidate its position as the leading brand in the business.
In fact, in its income statement, Nike refers to marketing as "demand creation expense." The name is quite appropriate in this case, as the company´s brand power allows it to charge higher prices for its products and to successfully enter new markets such as soccer, where Nike has gained considerable market share over the past few years.
Nike has an active stock buyback policy, the company repurchased 5.5 million shares for approximately $402 million during its last fiscal quarter alone. In addition, the company has raised dividends over the past 12 consecutive years. Nike has a safe payout ratio around 27% of earnings and pays a dividend yield of 1.3%.
Starbucks for steaming dividend growth
Starbucks isn't a name that typically comes to mind when investors think about dividend growth companies. After all, the company has paid a dividend only since 2010. However, investing is about looking through the windshield, not in the rearview mirror, and the company offers a lot of potential for dividend growth in the coming years.
Starbucks has more than 19,700 stores in the most valuable locations around the planet, and it still has plenty of room for expansion, especially in Asia, where market penetration is much lower than in the U.S. and demand for the company's products is particularly strong. Product innovation and new sales channels should provide extra growth venues for the company in the coming years.
Dividend growth has been quite impressive over the past few years. What started as a $0.10 quarterly payment per share in 2010 has now grown into $0.26 per share. The company raised dividends by a whopping 24% during 2013, so Starbucks seems to be ready to continue building a solid trajectory of growing dividend payments in the long term.
The dividend yield is 1.4%, and Starbucks carries a comfortable payout ratio below 40% of earnings.
Costco, Nike, and Starbucks have relatively short dividend growth histories, at least in comparison with a dividend juggernaut like Coca-Cola, which has raised its payments for more than 50 consecutive years. However, these companies have the fundamental soundness to generate consistently growing cash flows over time, and they have already started building their dividend-growth track records.
Maybe they deserve some consideration from investors looking for an early entry point in companies offering extraordinary dividend growth potential.
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The article Costco, Nike, and Starbucks: Buying Dividend Growth Stocks at an Early Stage originally appeared on Fool.com.Fool contributor Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coca-Cola, Costco Wholesale, Nike, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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