I stumbled upon some data a few years back that has altered my investment philosophy. According to data by Ned Davis Research and Hartford Funds, dividend growers and initiators have delivered superior total returns over the last half century (10.2% annualized). They have crushed the returns of the average stock in the S&P 500 (7.7% annual return for an equal-weighted S&P 500 index).
This data has led me to increasingly focus on investing in companies that can grow their dividends. I recently bought three dividend growth stocks: Chevron(NYSE: CVX), EQT(NYSE: EQT), and Vici Properties(NYSE: VICI). Here's why I bought shares.
Lots of fuel to grow the dividend even at the low end
Chevron is dividend growth royalty. The oil giant delivered its 36th straight year of dividend increases in 2023. It has grown its payout at a peer-leading 6% annual rate over the last five years, a pace it has maintained for the past 15 years.
The oil company should have plenty of fuel to continue increasing its dividend in the future. Chevron's current investment plan has the company on pace to grow its free cash flow at a more than 10% annual rate through 2027, assuming oil averages around $60 a barrel (well below the current rate in the $70s). That would provide the company with the cash to increase its dividend, invest in its capital program, and repurchase shares at the low end of its $10 billion-$20 billion range while maintaining a strong balance sheet.
There's ample upside to that plan from higher oil prices and acquisitions. Chevron could generate enough free cash flow to repurchase shares at the top-end of its range if oil averages around $70 a barrel through 2027. Meanwhile, its pending deal to acquire rival Hess would more than double its free cash flow by 2027 while extending its growth outlook into the 2030s. Chevron should thus have plenty of fuel to continue increasing its dividend.
About to become a free cash flow machine
EQT has a less-than-stellar dividend track record. The leading U.S. natural gas producer suspended its payout during the pandemic to retain additional cash to repay debt. When the company resumed paying dividends about two years later, it set its payment level at less than half its pre-pandemic rate.
However, EQT has increased its dividend twice since then, giving investors a 20% raise in the second half of 2022 and bumping it up by another 5% last year.
The natural gas giant's payout could head a lot higher in the future. The company spent the past several years increasing its scale, reducing costs, and securing access to premium natural gas markets. It therefore expects to generate significantly more free cash flow over the next several years, especially in the 2026-2028 timeframe, when it will start benefiting from new pipeline contracts and LNG export capacity. That growing free cash flow will give EQT the money to repay debt, repurchase stock, and boost its dividend.
A rapidly expanding REIT
Vici Properties increased its dividend by 6.4% last September. That represented its sixth consecutive annual payout boost since its formation.
The real estate investment trust (REIT) has supported its growing dividend by steadily expanding its leading experiential real estate portfolio. It has been very busy over the past few months, securing several new investments:
- Bowlero sale-leaseback transaction: Vici is buying 38 bowling entertainment centers from Bowlero for $432.9 million.
- Kalahari: The REIT is providing up to $212 million in construction financing to Kalahari for its indoor waterpark development in Virginia.
- Chelsea Piers: The company acquired the premier sports and entertainment complex in New York, converting its initial loan investment into real estate ownership.
- Cabot: Vici expanded its relationship with Cabot by agreeing to provide development loans for luxury golf resorts in Saint Lucia and Scotland.
- Margaritaville Resort: The REIT will provide up to $105 million to fund the development of a Margaritaville Resort in Kansas City.
These deals will increase the REIT's cash flows in the near term. They'll also supply it with future growth potential. For example, it has the right to buy future Bowlero centers and can acquire the property developments it's funding, as it did with Chelsea Piers. The REIT's growing cash flows should enable it to continue increasing its dividend.
Dividend growth machines
Chevron, EQT, and Vici Properties appear poised to continue increasing their dividends at healthy rates in the future. Their combination of income and growth put them in excellent positions to produce attractive total returns. That's why I recently scooped up a few more shares of these dividend growth stocks and will probably buy even more in the future.
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Matthew DiLallo has positions in Chevron, EQT, and Vici Properties. The Motley Fool has positions in and recommends Chevron, EQT, and Vici Properties. The Motley Fool has a disclosure policy.
