3 Brilliant Dividend Growth Stocks to Buy Now and Hold for the Long Term

A lot of dividend investors focus on buying the stocks with the highest yield. That, however, can lead you down a troubling road if the dividends you collect don’t grow quickly enough to offset the ravages of inflation. That’s why focusing on dividend growth can be just as important as focusing on yield.

There’s two ways to go here. First, buy some high-yield stocks and some dividend growth stocks, like Mastercard (MA 0.23%) and Cintas (CTAS +0.10%). Second, buy a dividend growth stock that also has an attractive yield, like NextEra Energy (NEE +2.35%).

Here’s a look at all three of these stocks.

Dividend growth as a complement to income stocks

You can pretty easily find a high-yielding stock like, say, Realty Income (O +0.88%). It is a slow and boring real estate investment trust (REIT) that is built from the ground up to pay reliable dividends. Today, the dividend yield is 5.5%. The only problem is that the dividend has only grown at an annualized rate of 3.6% over the past decade.

The historical growth rate of inflation is around 3% a year. So, the buying power of Realty Income’s dividend has grown over time, but not by much. This is why you might want to pair Realty Income with stocks like Mastercard and Cintas. The average annualized dividend growth for these two companies over the past decade was 20% and 22%, respectively. The rapid dividend growth from these two companies will leave you with materially more buying power.

Mastercard, a financial company, is one of the largest payment processors in the market, collecting a small fee every time someone uses a card with the Mastercard logo on it. It has a dominant position and it would be hard to displace the company given the technology, infrastructure, brand trust, and distribution that Mastercard has achieved. Future growth may not be as high as past growth, but cash continues to be displaced by card payments, so there is still more room to run. Mastercard’s dividend streak is 14 years long.

Cintas, meanwhile, is a bit more boring. It is an industrial company that provides things like uniforms to other businesses. While the business is a bit cyclical by nature, downturns can offer growth opportunities. A significant portion of Cintas’ growth comes via acquisitions in what is a fragmented industry. Acquisitions tend to be cheaper during periods of business weakness. Cintas has increased its dividend annually for more than four decades.

The one problem with Mastercard and Cintas is that their yields are low, at 0.5% and 1%, respectively. The growth they offer as businesses, and on the dividend front, generally leads to premium valuations. Which is why pairing them with higher-yielding but slower dividend growth stocks could be the best option.

Trying to get the best of both worlds

You don’t have to settle for low yields to get strong dividend growth. But you will likely have to settle for a lower yield and slightly slower dividend growth if you try to find a stock that scratches both itches. A great example here is NextEra Energy, which has a 2.8% dividend yield and an 11% dividend growth rate over the past decade. For reference, that S&P 500 index’s dividend yield is a skinny little 1.2% or so.

What’s interesting about NextEra Energy is that it is a utility. The foundation of the business is its regulated utility operations in Florida. That’s a slow and boring business. The dividend growth is being driven by the company’s investments in renewable energy, where it is one of the largest solar and wind companies on the planet. Given that the shift toward cleaner power sources is a decades-long affair, there’s likely to be more growth ahead for NextEra Energy. If you want to mix income and income growth in your investments, it would put you in the sweet spot between the two.

Setting yourself up for a lifetime of dividends

Just buying high-yield stocks without considering dividend growth is setting yourself up for disappointment. The better dividend investing strategy is to try to mix yield and dividend growth in some fashion. Indeed, if you want to generate a lifetime of dividends, you’ll want to make sure you consider dividend growth alongside yield.

You can take a barbell approach with high-yield investments paired with high-dividend growth investments like Mastercard and Cintas. Or you can try to find a middle ground with stocks like NextEra Energy that offer reasonable yield and reasonable dividend growth in one investment. Just don’t forget that dividend growth is how you maintain the buying power of the dividends your portfolio generates.