3 Blue-Chip Stocks for High Dividend Growth
These names have the ability to raise their dividends at a high level each year, and also have solid yields right now.
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Dividend stocks are often classified by the size of their yields. After all, most investors looking for income will naturally focus on the highest-yielding stocks.
But income investors should not immediately dismiss stocks with lower dividend yields. In many cases, lower-yielding stocks have the ability to raise their dividends at a higher growth rate, leading to more income over time than stocks with higher starting yields.
We believe the following three blue-chip stocks have the ability to raise their dividends at a high level each year, while they also have solid yields right now.
Blue-Chip Dividend Stock #1
Broadcom AVGO designs, develops, and sells semiconductors under the following business units: Wired infrastructure, wireless communication, enterprise storage and industrial. Its offerings include data center chips, factory automation, energy systems and power generation, broadband access, and home connectivity.
Broadcom is a fabless semiconductor company, which means that the products it designs are manufactured by other companies/foundries. The company domiciled to the U.S. a couple of years ago and is now headquartered in San Jose, CA.
The company reported its fiscal fourth-quarter earnings results on December 7. It generated revenues of $9.3 billion during the quarter, which represents an increase of 4% compared to the prior year's quarter. The solid revenue growth performance was possible thanks to beating estimates in the semiconductor solutions unit, while its infrastructure software business generated solid growth as well.
Broadcom reported earnings per share of $11.06 for the fourth quarter, which was ahead of the analyst consensus estimate. The company expects that revenues will come in at around $50 billion during the current fiscal year, which would represent a nice revenue increase compared to the previous year.
The company's biggest market is wireless communication, where the company owns a strong connectivity portfolio that includes advanced LTE, Bluetooth 5.x, Wi-Fi, GNSS (GPS, Galileo, etc.), and so on. Broadcom is also well positioned in the enterprise storage market, where it provides switching and other connectivity solutions and storage products such as SSD controllers. These markets will continue to grow for many years.
Broadcom's dividend payout risen considerably over the last couple of years, due to the large dividend increases that Broadcom has offered to its owners. Between 2010 and 2021, Broadcom increased its dividend by an incredible factor of more than 100. The company's dividend still looks relatively safe, however, as it is well-covered by both profits as well as by the cash flows that the company generates. The forward dividend payout ratio is under 50%.
AVGO has increased its dividend for 13 consecutive years and currently yields 1.7%.
Blue-Chip Dividend Stock #2
Costco Wholesale COST is a diversified warehouse retailer that operates about 870 warehouses that collectively generate about $254 billion in annual sales. Costco's leadership in this industry has rewarded shareholders handsomely over the years as it sports a $300 billion market capitalization.
Costco posted fiscal first-quarter earnings on December 14, and results were slightly better than expected. Revenue was equal to estimates at $57.8 billion, up 6.2% year over year. EPS came to $3.58, which was 16 cents ahead of estimates.
Comparable sales were up 3.8%, which was lower than the 4.3% expected. U.S. comparable sales were 2% higher, missing estimates by 0.8%. E-commerce sales beat expectations. When excluding forex translation and gas prices, comparable sales also missed estimates, coming in at +2.6% in the U.S. against estimates of 3.5%. Net income was $1.589 billion, up from $1.364 billion last year.
We see Costco's forecasted growth as straightforward; sales growth will continue to make up most of its predicted growth. We are forecasting 9% EPS growth annually in the coming years as strong sales numbers help drive incremental gains in operating margins. The vast majority of Costco's operating margin dollars come from its membership fees, which continue to grow at strong rates, but are a very small fraction of total revenue. This is 100% margin revenue and fuels higher comparable sales, as well as more members and more people in the stores buying.
Costco is a shareholder-friendly company that returns significant cash to shareholders. Costco announced a special cash dividend of $15 per share, which was paid in January. Costco's payout ratio is quite low at 26% for this year, and we believe it will remain near or under 30% going forward. The company has the ability to boost the dividend.
COST has increased its dividend for 20 years and currently yields 1%.
Blue-Chip Dividend Stock #3
Humana HUM is one of the largest private health insurers in the U.S. with a focus on administering Medicare Advantage plans. The firm has built a niche specializing in government-sponsored programs, with nearly all its medical membership stemming from individual and group Medicare Advantage, Medicaid, and the military's Tricare program.
At the end of 2023, the company had approximately 16.8 million members in medical benefit plans, as well as approximately 4.9 million members in specialty products. In 2023, 80% of premiums and services revenue were from contracts with the federal government.
On January 25, Humana released its fourth-quarter and full-year 2023 results for the period ending December 31, 2023. For the quarter, the company reported revenues of $25.7 billion and adjusted loss per share of $0.11 driven by higher benefits expenses, especially the increase in Medicare Advantage medical cost, operating costs. and lower medical memberships.
For the full year 2023, Humana reported total revenues of $106.4 billion and adjusted EPS of $26.09, compared to $92.8 billion in revenue and adjusted EPS of $25.88 in 2022.
The company issued lower 2024 earnings guidance. Adjusted EPS is estimated to be around $16.00, suggesting a significant decline from the 2023 figure of $26.09. The company assumes that the higher Medicare Advantage medical costs experienced in the fourth quarter will persist throughout 2024. With seniors resuming elective procedures that were put on hold for COVID-related restrictions, costs have significantly risen for insurers. However, the pent-up demand for services should ease after 2024.
Management provided a revenue outlook for this year within the range of $113 billion, implying a 6.7% increase from the $106.4 billion in 2023. Furthermore, Humana anticipates individual Medicare Advantage membership to witness a minimum membership growth of 100,000 in 2024. The benefit ratio of the Insurance unit is expected to stay around 90% for 2024.
Humana has grown earnings by 14.8% per year over the past decade and -2.2% over the past five years. We expect earnings to increase by 12% per year for the next five years, based on the expected dip in 2024.
The company has been able to increase its yearly dividend payout for 12 consecutive years. Over the last five years, the average annual dividend growth rate was 19.2%, meaning that the dividend payout of Humana has doubled over this period.
HUM stock currently yields 1%.
At the time of publication, Ciura had no positions in any securities mentioned.