COMMON STOCKS, UNCOMMON GROWTH: 3 FIRMS OFFERING RAPID DIVIDEND GROWTH

By Grant Bailey, Equity Analyst 

Ever heard of the rule of 72? Essentially, the rule of 72 is a common mental formula used to determine how many years it will take for an investment to double, based on the projected annual growth rate. Based on the arithmetic of the rule of 72, it would only take 7 years for an investment to double at a growth rate of 10%. This means that a stock that pays out $1 in dividends today, would pay out $2 in 7 years, and $4 in 14 years, if the dividend grows 10% annually. By owning these kind of stocks, your annual income could quadruple in 14 years. As a bonus, keep in mind that dividend income is taxed at a lower rate than income you would earn at a job. 

So, with that in mind, we’re going to be diving into some stocks that have an annual dividend growth rate at or above 10%, with expected growth continuity. But not all companies enjoy this kind of dividend growth. We understand that it can be difficult to find high-quality stocks with such robust dividend growth, so we did it for you! 

Zoetis (ZTS)

Zoetis is a healthcare giant, with a market capitalization of nearly $56 Billion. Zoetis uniquely specializes in animal healthcare, with ~1/3 of total revenue from production animals and practically all remaining revenue from companion animal products. Zoetis’ revenue in the U.S. leans extremely heavily towards companion animals, while its international revenue leans slightly more towards production animals. Zoetis has offered a sizeable dividend growth rate surpassing 20% over the 5-year average. Revenue from companion animals is only expected to grow. This is because, with the unprecedented amount of uncertainty regarding the US economy, Americans are preferring to get a pet rather than have children, because of how expensive children can be. With Zoetis  share price down 20% over the past year and even more over the past 5 years, now seems to be the best time to dive in. Contrary to most stocks, Zoetis can easily withstand economic tailwinds, not only because of its business model, but also because the entire company operates with such incredible efficiency that even cutting its margins in half couldn’t keep it away from profitability. According to Stock Rover, ZTS has a gross margin of over 70%, an operating margin of 38%, a net margin of 28%, and an 80% return on equity, good for an exceptional profitability score of 95. So, with fantastic value, exciting growth prospects, and unprecedented efficiency, Zoetis would be difficult to argue against.

Hartford Insurance Group (HIG)

I know insurance is boring, but you know what’s not boring? Making money. HIG gives you a great chance to do just that. Stock Rover is especially high on Hartford Insurance, giving HIG a Value Score of 98, a Growth Score of 90, and a Profitability Score of 85. The 98 Value Score is a result of an intriguing 9.8 forward P/E ratio (compared to the industry average of 12.7) and 0.8 forward PEG ratio, coupled with an absurdly low 6.9 P/FCF ratio. These metrics are considerably lower than HIG’s insurance industry peers, making it a comparatively good valuation; not to mention, the general market’s average p/e ratio is nearly 27. But how did Hartford also achieve such a high growth score? It massively outperformed the insurance industry in this aspect, with its exceptional EPS average annual growth. Now, how in the world did that happen? The reason Hartford has been able to achieve this growth is that it’s a more cyclical company than other competitors in the insurance industry because it concentrates most of its sales model on insurance for business and commercial, meaning its products are more elastic and sensitive to economic fluctuation. That said, Hartford overall sells several different types of insurance, which provides a considerable amount of defensibility against market volatility, not to mention an average annual dividend growth of 10%+ over the past 5 years. This is a great pick for anyone with a “cautiously optimistic” viewpoint of the US economy. 

Progressive Corp (PGR)

Yes, it’s another insurance company. But not all insurance companies operate the same! While Hartford has a slight emphasis on cyclicality, Progressive, on the other hand, has a slight emphasis on defensibility. Believe it or not, Stock Rover actually has a higher opinion on Progressive than on Hartford, giving PGR a Value Score of 97, a Growth Score of 97, and a Profitability Score of 90. Does this company even have any holes at all? PGR’s valuation metrics are almost identical to Hartford’s, and regarding growth prospects, Progressive’s average sales growth over the past 5 years, annualized, comes out to about 15%, while EPS growth and EBITDA growth are considered to be mediocre. PGR’s high profitability resulted from return on assets being 9.8% compared to the industry average of 4.3% and return on invested capital being 26% compared to the industry average of just 15.6%. Perhaps most impressive is PGR’s dividend: 21%+ average annualized growth over the past 5 years. Because Progressive specializes primarily in Property and Casualty insurance, PGR’s products are far less elastic than Hartford’s, which makes it much less vulnerable to economic headwinds compared to Hartford. (Many people who owns homes or cars are legally required to insure those possessions….which makes Progressive’s annual revenue fairly dependable). 

All in all, stocks with dividend growth rates of 10%+ are hard to come by, but the few that can grow at that rate are sometimes goldmines in disguise. Most jobs would yield a 2-3% raise per year alone… that’s nothing compared to 10%. If people could easily find 10% raises, they’d be living in some sort of utopia. Yet this 10% dividend growth rate serves a similar purpose to a raise; it’s essentially a raise for investors. As an investor, a 10% raise sounds pretty awesome, right? These picks make that dream a partial reality, at least to some extent. The 10% growth indicates that what you’re bringing in gets doubled every 7 years. Now, think about your current stock investments. Do some quick mental math here and ask yourself what your current dividend would look like by the time you reach retirement age, assuming 10% growth. The differences are astronomical.