3 Dividend Growth Stocks for 2019 Yielding Up to 10.4%

How to Collect Rising Dividends for 2019 and Beyond

In a market filled with uncertainty, solid dividend-paying companies can provide much-needed safety for income investors. The reason is simple: the market might be going through a sell-off, but for a company to pay a dividend to shareholders, it does not need the approval of other market participants.

Right now, there are plenty of companies that can pay steady dividends. But if you really want to live off the return from your income portfolio, you should take into account the impact from inflation.

You see, while inflation in the U.S. is nowhere near as high as in Venezuela, prices in general have been going up. Using data from the Consumer Price Index, the U.S. Inflation Calculator web site shows that a basket of goods that cost $100.00 in 2008 would cost $117.25 today. That translates to a cumulative inflation rate of almost 17.3%. (Source: “Inflation Calculator,” U.S. Inflation Calculator, last accessed October 25, 2018.)

In other words, if your income portfolio gives you the same dollar value of dividends as it did 10 years ago, your purchasing power has essentially deteriorated.

Fortunately, there are companies that have been growing their payouts to shareholders. If they raise their dividends at a faster pace than the rate of inflation, investors would actually have higher purchasing power as time goes by.

So let’s take a look at three dividend growth stocks worth considering for 2019.

List of 3 Dividend Growth Stocks

1. Microsoft Corporation

If you’ve been following this column, you’d know that I like to start my lists with companies in slow-changing and often defensive industries. That’s because, for risk-averse income investors, it’s important to have a portfolio that can provide reliable dividends through thick and thin.

Today, however, I want to begin by telling you about a high-flying tech stock: Microsoft Corporation (NASDAQ:MSFT). Since the focus here is on dividend growth, let’s take a look at how the company is doing on that front.

Microsoft established a quarterly dividend policy in 2004, starting with $0.08 per share. Today, the amount stands at $0.46 per share, translating to an increase of 475%! (Source: “Dividends and Stock History,” Microsoft Corporation, last accessed October 25, 2018.)

Moreover, the company has been raising its dividends on an annual basis. In other words, even during the Great Recession, which some consider to be the biggest downturn since the Great Depression, MSFT stock investors still got bigger dividend checks in the mail every year.

And don’t think for one second that this tech stock is done with its payout increases. Despite being a four-decades-old company, Microsoft is still growing rapidly.

According to the latest earnings report, Microsoft’s revenue grew 19% year-over-year to $29.1 billion in the September quarter. In particular, the company’s commercial cloud revenue surged 47% year-over-year to $8.5 billion. Earnings came in at $1.14 per share, up 36% from a year ago. (Source: “Microsoft Cloud Strength Powers Record First Quarter Results,” Microsoft Corporation, October 24, 2018.)

The payout is also safe. In Microsoft’s fiscal-year 2018, which ended June 30, the company earned an adjusted net income of $3.88 per share. Given its total dividends of $1.68 per share declared for the year, Microsoft achieved a payout ratio of 43.3%, leaving a wide margin of safety. (Source: “Microsoft Cloud Drives Record Fourth Quarter Results,” Microsoft Corporation, July 19, 2018.)

The company’s current yield of 1.7% may not seem like much, but with a fast-growing business and a conservative payout ratio, MSFT is one of the best dividend growth stocks for 2019.

2. Getty Realty Corp.

Getty Realty Corp. (NYSE:GTY) is in the real estate business. Headquartered in Jericho, New York, the company specializes in the owning, leasing, and financing of convenience stores and gas stations.

Like many other real estate companies, Getty Realty is structured as a real estate investment trust (REIT). That means the company must distribute at least 90% of its profits to shareholders through dividends. In exchange, the REIT pays little to no income tax at the corporate level. Thanks to this pass-through structure, REITs have become a staple for income-seeking investors.

Getty Realty isn’t the largest or the most diversified REIT in the market. But I still like the company because of its ability to dish out increasing dividends.

You see, one of the most important things to keep in mind regarding REIT investing right now is the evolving retail space. Due to the rise of the e-commerce industry, many physical retailers have experienced substantial sales declines. If this trend continues, it could hurt retailers’ ability to pay rent to their landlords. That’s why investors should always be cautious when looking at a REIT that specializes in retail properties.

Getty Realty, on the other hand, does not have to worry too much about this problem. While store closures are common in the retail industry these days, the number of convenience stores in service has remained steady in the past 10 years. (Source: “Investor Presentation,” Getty Realty Corp., last accessed October 25, 2018.)

And since most cars are still running on either gasoline or diesel fuel, the gas station business is a recurring one, too.

In fact, not only is Getty Realty surviving the downturn in the retail industry, but the company has actually been growing its business.

In the third quarter of 2018, the company generated adjusted funds from operations (FFO) of $17.9 million, or $0.44 per share. This was a solid improvement from the $15.7 million, or $0.40 per share earned in the year-ago period. Furthermore, the FFO amount easily covered the company’s total dividends of $0.32 per share declared during the quarter. (Source: “Getty Realty Corp. Announces Third Quarter 2018 Results,” Getty Realty Corp., October 24, 2018.)

On the same day of its earnings release, Getty Realty announced a 9.4% increase to its quarterly dividend rate to $0.35 per share. That boosted its yield to 5.1% at the current stock price.

In the past four years, GTY stock’s quarterly dividend rate increased at a compound annual growth rate of 12.3%.

And the best could be yet to come. Getty Realty rents out its properties through long-term leases that often come with annual rent escalators. It is also acquiring new properties and is pursuing a five-year plan to redevelop five percent to 10% of its existing portfolio. Due to the REIT’s mandatory distribution requirement, higher profits down the road will likely translate to increasing dividends.

3. Sprague Resources LP

For those who think GTY stock’s safe and growing payout of 5.1% still isn’t enough, I present to you Sprague Resources LP (NYSE:SRLP).

Sprague Resources is a master limited partnership (MLP) headquartered in Portsmouth, New Hampshire. While most MLPs are in the midstream oil and gas business, Sprague focuses on downstream operations. The partnership engages in the purchase, storage, sale, and distribution of refined products and natural gas. It also provides storage and handling services for a wide range of materials.

Sprague Resources went public in October 2013. Given the subsequent downturn in commodity prices, what do you think happened to its distributions?

No, the partnership did not cut its payout. In fact, since SRLP stock’s initial public offering (IPO), it has delivered 17 consecutive distribution increases. (Source: “Sprague Resources LP Dividend Date & History,” Nasdaq, last accessed October 25, 2018.)

With a quarterly distribution rate of $0.6675 per unit, this dividend growth stock offers a yield of 10.4%.

And if you are wondering whether those distribution hikes were a bit aggressive, don’t worry. For full-year 2018, Sprague Resources management expects to generate distributable cash flow that is 10% to 30% in excess of its actual distributions. That would leave a margin of safety. (Source: “Sprague Resources LP Reports Second Quarter 2018 Results,” Sprague Resources LP, August 8, 2018.)