Best S&P 500 stocks for dividend growth

Dividend stocks are one of the most popular ways to invest. They can deliver cash into your pocket, giving you a real return regardless of how the stock market is performing. And among the strongest dividend payers are the stocks in the Standard & Poor’s 500 index (S&P 500), a collection of about 500 of America’s largest and most profitable businesses.

Here are some of the S&P 500’s fastest-growing dividends over the last five and ten years.

Best S&P 500 stocks for 5-year dividend growth

The stocks with the best five-year growth rates have usually just started paying out a dividend or they’ve started to emphasize dividends as part of their capital allocation program. So it’s not unusual to see companies with extraordinarily high dividend growth rates over the recent past.

The trade-off for that high growth is usually a lower dividend yield relative to slower growers. However, many energy companies are now making significant payouts. (Data as of Sept. 20, 2024.)

Source: Charles Schwab

Now compare that list with the companies that have been able to keep up the fast growth for a decade.

Best S&P 500 stocks for 10-year dividend growth

Compared with the top growth rates over the last five years, it’s almost impossible for a company to maintain that torrid pace for a full decade. But many companies do still put up very fast growth rates over the prior 10 years.

In many cases, such as the banks, companies started growing their dividend from low levels in the wake of the financial crisis, so the numbers are mostly a result of that. (Data as of Sept. 20, 2024.)

Source: Charles Schwab

What to consider when investing in dividend stocks

While high dividend growth is attractive, you also need to analyze whether the dividend is sustainable before you run off and buy the stock. Here are a few things to check on:

• Current dividend yield: A current dividend yield that is too high might indicate that there’s trouble with the business or that investors suspect the dividend will be cut soon. On the other hand, for a dividend that’s very low — think 0.5 percent or less — it may not be worth waiting on growth in future years if you’re relying exclusively on the income.
• Payout ratio: The payout ratio is the dividend divided by the company’s profit. If this number regularly exceeds 100 percent or is close to it, then you should expect the dividend to be cut. In general, the lower the payout ratio, the safer the dividend. A lower payout ratio also gives the company room to increase its dividend, too.
• Business stability: Does the dividend-paying company have a sustainable business? The more stable the business, the more likely it will be able to pay and grow its dividend for years. Energy companies, for example, often experience boom-and-bust cycles as the price of oil and other energy sources ebbs and flows. So they may not be the safest dividend stocks.
• Timing: Some companies have high dividend growth because the measurement period started at a favorable time. For example, banks were just recovering from the financial crisis a decade ago and their dividends were limited. As the economy normalized, they were allowed to pay higher dividends, and many ramped their payouts and may not be able to offer such fast growth again. So be careful of the time period that’s measured.

Companies that have paid dividends for years may offer the safest dividend stocks. Among the strongest are the Dividend Aristocrats, a prestigious group of companies that have paid and raised their dividends for 25 years and more. They’re also a strong place to begin your search.

If you’re looking to build a portfolio that’s a dividend dynamo, then it’s useful to reinvest your dividends. You can automatically use your dividends to buy more shares of the stock, enjoying the power of compounding dividends over time. And the best brokers for reinvested dividends are those that allow you to buy fractional shares, letting you put your entire dividend to work.

Bottom line

Looking at a list of the fastest-growing dividend stocks is a good place to start when you’re looking for attractive dividends, but it’s only a start. You’ll want to investigate and understand why the company is rapidly increasing its payout. But companies with a long-term track record of paying out a growing stream of dividends are loath to cut them, so look for firms with competitive advantages that will allow them to grow their payouts for years to come.

Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. In addition, investors are advised that past investment product performance is no guarantee of future price appreciation.