Imagine you open a savings account and deposit $10,000. The interest rate is 2.5%, which isn't tremendous -- but you'll take it in this low-interest-rate environment.
Now imagine that every year, the interest rate rises by 0.25 percentage points: 2.75% in year two, 3% in year three, and so on. Pretty good, right? After 10 years, your account would pay you 4.75%. After 20, the interest rate is 7.25%. Lots of folks would sign up for that.
This exercise is worth thinking about whenever you contemplate the value of dividend-growth stocks to a long-term portfolio. Because the latter deal -- regular increases of the payout over time -- is pretty much what you can expect from a high-quality company that increases its dividend year in and year out. Of course, in a savings account your $25,000 deposit would be insured. When you buy a stock, it's not -- but in exchange for the downside risk, you can enjoy capital gains. Over the long term, high-quality companies tend to at least hold their value and usually increase it.
So while there's plenty of reason to look for stocks with the potential for share-price appreciation of two, three or 10-fold, don't forget about the dividend growers. Look for companies with leading or safe shares in established or growth markets, strong balance sheets, solid and growing cash flow and a long history of increasing the dividend.
I've recommended several stocks in recent months that meet these criteria, including AT&T (NYSE: T) and Duke Energy (NYSE: DUK). Both are still solid choices today, but I'd like to focus on two other stocks that are especially enticing now:
Boeing (NYSE: BA), the world's largest aerospace company, is benefiting from two powerful trends, one long-term and one short-term. Over the long run, global demand for commercial aircraft is set to grow as airlines expand in China, India, Brazil and other large emerging economies. And in the short term, Boeing should reap rewards from the recent loosening of the federal government's defense-spending restrictions. Whoever wins the presidential election this fall and controls Congress, it's unlikely that defense appropriations won't grow faster over the next two years than they did over the past three years.
Of course, in the short run the commercial aircraft business could be constrained by global economic weakness impacting some of the very countries that will provide rising demand in the next couple of decades. That's part of the reason the stock continues to trade at a reasonable valuation. But as long as the world doesn't slide into an extended recession, Boeing's order backlog should be healthy enough to drive solid growth.
The company is financially strong and has raised its dividend for 46 straight years. Dividend increases have been especially hefty in recent years: 19.6% in 2016, 24.7% in 2015, and a whopping 50.5% in 2014. While I don't expect that pace to continue, it's clear the company is looking to reward investors via payout hikes using strong cash flows.
At recent prices, Boeing trades at 15.6 times analysts' consensus estimate for 2016 earnings per share and 13% below its 52-week high. That's an attractive price for a global leader with significant long-term growth prospects, despite short-term uncertainty in its commercial aircraft business.
Verizon Communications (NYSE: VZ), one of my favorite income stocks, is the #1 wireless company in the United States and a major provider of Internet and cable. Verizon is well-managed and invests in strategic acquisitions and technologies to ensure that it will participate in growing markets in the fast-changing telecom sector. As demand for data, video and mobile continues to grow rapidly, Verizon will benefit.
The company has a strong balance sheet and generates a torrent of cash flow from its loyal subscriber base. It uses that cash flow to pay a handsome dividend, currently yielding 4.5%, and increase it regularly -- as it has every year since 2005.
After rallying nicely between mid-January and early April, Verizon shares have retreated a few bucks, creating a good buying opportunity. The stock now trades at 12.8 times analysts' consensus estimate for 2016 earnings per share, which is a good entry point for this top-quality telecom leader and dividend grower.
Risks To Consider: Blue chip dividend growers with above-average yields are appropriate for relatively risk-averse investors, but any individual stock could suffer from bad news at the company level.
Action To Take: Buy Boeing below $134 and Verizon Communications below $53.
Editor's Note: Most people think you have to sacrifice growth for income. But a Texas baby boomer is holding 23 monthly dividend payers... and has seen her portfolio grow 50%. Get all the details here, including names and ticker symbols.