When it comes to investing, many may overlook stocks with dividend yields below 1.8%. However, Tractor Supply (NASDAQ: TSCO), Cintas (NASDAQ: CTAS), Zoetis (NYSE: ZTS), and Old Dominion Freight Line (NASDAQ: ODFL) are here to prove that the real treasure lies in dividend growth rather than current yields.
Imagine you had invested in any of these stocks a decade ago and held onto them until today. You’d be enjoying a dividend yield of over 5%, significantly higher than your original investment. This remarkable growth is the result of the power of time and compounding high dividend growth rates.
The good news for investors is that these four S&P 500 index members may just be embarking on their journey to unlock long-term income potential for patient buy-and-hold investors.
- Tractor Supply
- Dividend Yield: 1.8%
- Annualized Dividend Growth (5 years): 28%
- Payout Ratio: 39%
- Earnings Per Share Growth (Since 2013): 19%
Tractor Supply, a rural lifestyle retailer, boasts the highest dividend yield among this group. Despite its current yield, the company has been consistently increasing its dividend at an impressive rate. With a healthy payout ratio, Tractor Supply has room for further increases, especially considering its consistent earnings growth. The company’s sales stability, driven by its Neighbor’s Rewards Club, has helped it weather economic fluctuations. Moreover, its impressive return on invested capital (ROIC) places it in the top decile of the S&P 500, making it an attractive choice for dividend-focused investors.
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- Dividend Yield: N/A
- Annualized Dividend Growth (Since 2018): 24%
- Payout Ratio: 35%
Cintas, a provider of uniforms, garments, and business services, has an astounding 39-year history of dividend increases. The company’s dividend has been growing at a remarkable rate since 2018, and it maintains a low payout ratio. Cintas is a market leader with a vast customer base and has experienced substantial growth over the years. Its ability to generate significant returns on invested capital showcases its capacity to integrate acquisitions successfully and generate consistent profits.
- Dividend Yield: 0.8%
- Annualized Dividend Growth (Since 2013): More than 5x
- Payout Ratio: 29%
Zoetis specializes in animal health, providing vaccines, medicines, and diagnostics. The company has rapidly increased its dividends since initiating them in 2013. Zoetis is well-balanced, with a diverse product range serving both pets and livestock. Its substantial revenue from international markets and a wide array of high-earning drugs highlight its robust research and development capabilities. With a rising ROIC and a modest payout ratio, Zoetis is poised for above-average dividend growth.
- Old Dominion Freight Line
- Dividend Yield: 0.3%
- Annualized Dividend Growth (5 years): 35%
- Payout Ratio: 12%
- Net Profit Margin: 21%
Despite its low initial yield, Old Dominion Freight Line has been delivering astonishing annualized dividend growth over the last five years. It is the second-largest LTL shipper in the U.S., known for its efficiency and profitability. While it recently faced challenges due to industry-wide softness, its market share remained stable. The bankruptcy of a major competitor could open up growth opportunities for Old Dominion. Though it trades at a relatively high valuation, it’s a dividend growth stock worth considering, especially through dollar-cost averaging.
In conclusion, these four stocks may not scream “passive income” with their current yields, but their robust histories of dividend growth, strong financial positions, and market leadership make them promising candidates for long-term income potential. For investors willing to be patient and adopt a buy-and-hold strategy, these stocks offer a path to building substantial wealth over time.