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You Should Be Investing in Dividend Growth Stocks. These Are the 2 Best to Buy In October
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While dividend stock investing is one of the best strategies an investor can pursue to create phenomenal wealth, chasing yield can undermine the entire effort. Buying dividend stocks simply because the yields on the stock are high can lead to extreme disappointment and actual wealth destruction.
A recent example of a stock that paid a high yield but gutted investor portfolios is Walgreens Boots Alliance (NASDAQ:WBA). It had been the highest-yielding stock on the Dow Jones Industrial Average with a 7.5% yield just before it slashed the payout in half in January. Although its stock has been in decline for years, WBA shares have lost two-thirds of their value since cutting the dividend.
What investors should be doing is buying dividend growth stocks. These are companies that have consistently raised their payouts for years, often at a healthy clip, while having the financial means to support the dividend.
Below are two dividend growth stocks that have raised their payout at double-digit rates for over a decade. They just announced a new hike and are among the best stocks to buy today.
Pharmaceutical drug wholesaler McKesson (NYSE:MCK) just announced a 15% increase in its quarterly dividend payment to $0.71 per share. It marks the eighth consecutive year McKesson has raised the payout and it has been growing the payout at double-digit rates the whole time. Over the past decade, the drug distributor’s dividend has grown at a compound rate of 11.5% annually.
Yet McKesson can easily support the dividend as it generates substantial amounts of free cash flow, some $4.6 billion worth in 2023. Yet most of the FCF doesn’t go towards paying its dividend. It has an FCF payout ratio of just 6%. Instead, McKesson has been buying back its stock over the past 10 years. Shares outstanding have fallen from 235 million in 2013 to 141 million last year. At the end of its fiscal first quarter in August, the drug distributor had fewer than 131 million shares outstanding.
McKesson’s stock took a big hit after releasing earnings, though. While profits were strong, revenue of $79.3 billion missed analyst expectations by over $3 billion. Part of the problem is the ongoing, but improving, supply chain issues with GLP-1 weight-loss drugs like Ozempic and Wegovy. Demand is outstripping supply. Also, sales of rheumatoid arthritis drug Humira were hurt after patent expiration last year, significantly denting volume growth this year.
However, McKesson still raised its full-year earnings guidance, and coupled with the higher dividend payout, MCK stock is one to buy.
Semiconductor equipment manufacturer Lam Research (NASDAQ:LRCX) is the second dividend growth stock to buy today. It also hiked its quarterly dividend 15% to $2.30 per share, offering a 1.3% yield at current prices.
Yet LRCX stock is down sharply from its recent highs, a victim of the tech sector selloff that began in July. Shares have fallen 35% from the peak, pushing them down 6% for the year. That makes them much more attractive for investors looking to acquire a quality dividend growth stock.
At a price-to-earnings ratio of 25 and trading at 6 times sales, Lam is not in bargain basement territory, but it is in historical to slightly elevated ranges. Yet the continued capital equipment spending on its extreme ultraviolet lithography machines to manufacture artificial intelligence chips ought to see it bounce back soon enough.
In the meantime, Lam Research continues to produce substantial free cash flow to support its dividend. It has an FCF payout ratio of under 20, which leaves plenty of room for further payments and growth. The semi equipment maker has raised its payout at a robust 15% CAGR over the past five years. While over the past decade it is a dramatic 33% CAGR, that’s due to Lam more than doubling the payout in 2018 as it committed to paying out at least half of its FCF as dividends.
Today, LRCX returns 75% to 100% of its FCF to shareholders through a combination of share repurchases and dividend payments, making it one of the best stocks that dividend growth investors can buy.
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