3 Great Income Stocks That Could Double Their Dividends

Dividend stocks can be one of your biggest wealth-building investments, provided you choose the right stocks. By that, I mean you should avoid the most common mistake income investors make: Chasing high yields over dividend quality.

High yields do not necessarily make a dividend stock great, as a dividend yield is simply a function of a stock’s price, which can fluctuate. On the other hand, stocks that consistently grow their dividends often turn out to be the best dividend stocks in the long run in terms of total shareholder returns. In fact, you’d be stunned to know that some really low-yielding stocks have doubled their dividends in just about five years, and that’s added more to the returns of patient shareholders than you might guess. If you don’t believe me, check out the track records of these three incredible dividend growth stocks and why they could double their dividends over the next few years. 

A solid business that supports a higher dividend

Home Depot (NYSE:HD) started growing its dividend only after 2010. Yet Home Depot has increased its dividend at such a lightning pace since then, forget about doubling… its quarterly dividend payout has jumped almost sevenfold since 2010! That includes an exceptional year 2019 when the company paid 32% higher dividends over 2018, but there’s no denying Home Depot has emerged as one of the strongest dividend growth stocks in recent years.

Home Depot has built a strong brand image over the years and enjoys solid economies of scale as the world’s largest home improvement retailer, but I consider agility to be one of its biggest competitive advantages. To give you an example, the company recently chartered its own shipping vessels to avoid shipping delays at a time when the COVID-19 pandemic has driven demand for its products higher.

Home Depot made a big growth leap in 2020 when it acquired HD Supply to expand its footprint in the maintenance, repair, and operations (MRO) products market. It appears to be a timely move given how the pandemic has spurred interest in do-it-yourself repairs, and the company’s omnichannel approach that offers customers the option to purchase MRO products in-store or online should prove successful.

Going forward, while many believe Home Depot is all about DIY sales, professional contractors are emerging as even more valuable customers for the company and could help boost its earnings. As earnings grow, so should dividends; and even if Home Depot grows its dividend annually by a reasonable 10%, its current quarterly dividend of $1.65 per share could double within eight years. A supersized dividend year like 2019 could mean dividends doubling much quicker for this 1.9%-yielding stock.

An under-the-radar dividend stock with tremendous potential

Sherwin-Williams (NYSE:SHW) often flies under the radar of income investors, and the only possible reasons I can think of are its miserly yield of 0.8% and the unexciting nature of the company’s business of paints and coatings. Yet Sherwin-Williams perfectly reflects the age-old adage, “boring is beautiful.”

In fact, returns from Sherwin-Williams’ shares in recent years could put some of the high-yielding stocks to shame, and dividends have had a role to play in that: The company was paying a quarterly dividend of $0.22 a share in 2015. This year, it’s doling out $0.55 per share in quarterly dividends, effectively doubling its dividend in just five years.

SHW data by YCharts

So what’s behind Sherwin-Williams’ incredible dividend growth, and what are the chances it’ll sustain momentum? Here are some incredible facts and statistics that’ll answer most of your questions:

• Sherwin-Williams is the world’s largest paints and coatings company.
• It generated almost 36% higher revenue than its closest rival, PPG Industries, in 2020.
• It has more than 4,700 stores across 120 countries.
• Its sales grew at a compound annual rate of 10.2% in the past five years.
• Its adjusted earnings per share grew at a compound annual rate of 17.1% in five years.
• It made 11 acquisitions in the past decade, including Valspar in 2017.
• It has increased its dividend every year for 42 consecutive years.

Sherwin-Williams’ annual dividend this year translates into a solid 22.9% hike over 2020. With management committed to paying out 30% of GAAP EPS as dividends every year, there’s a solid chance Sherwin-Williams could again double its dividend within five to six years.

This dividend could quadruple, and the stock could hit $1 trillion soon

I think Visa (NYSE:V) is a hugely underrated dividend stock. Visa isn’t really a favorite among income investors, as it barely yields 0.6% and its target dividend payout ratio of 20%-25% may leave much to be desired.

Yet management’s strategy to prioritize growth spending has hugely helped boost earnings over the years, and that’s eventually led to larger dividends and massive shareholder returns in recent years. 

V data by YCharts

In terms of dividends, Visa has doubled its quarterly payout in just about five years — it paid a quarterly dividend of $0.56 per share in 2016 and is paying $1.28 per share every quarter this year. I think Visa could easily double its dividend again in as many years thanks to significant growth catalysts, particularly digitization and the e-commerce boom that should bolster demand for cashless modes of payment like credit and debit cards and mobile wallets.

With 3.6 billion co-branded cards in circulation, Visa is already a leading global payments processor. Also, high margins ensure the company can earn boatloads of cash year after year, which management then uses for organic growth and acquisitions before paying out target dividends and repurchasing shares. As you can see in the chart above, the strategy has worked really well in shareholders’ favor so far, and there’s little reason to believe it won’t in the future. In fact, Visa is on such strong footing right now that it’s among the few companies that could be worth $1 trillion by 2035 or sooner, and its dividend could have even quadrupled by then.