Passive income is one of the most sought-after financial goals among investors. While many income-seeking investors gravitate toward high-yielding stocks, the foundation of a sustainable passive-income strategy lies in dividend growth stocks. These companies offer something more valuable than a large current payout -- the potential for steadily increasing income streams that can help maintain purchasing power over decades.
Quality dividend growth stocks share several crucial characteristics that set them apart from other types of passive-income vehicles. Their business models generate consistent free cash flow that supports both reinvestment and growing shareholder distributions, backed by conservative payout ratios and strong balance sheets.
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Most importantly, they operate in industries with high barriers to entry, protecting their market positions and profitability. Three stocks and one exchange-traded fund (ETF) stand out for these qualities, offering different approaches to building growing passive-income streams. Read on to find out more about these top dividend growth vehicles.
Warehouse giant keeps delivering value
Costco's (NASDAQ: COST) 0.5% dividend yield might seem modest at first glance, yet the warehouse-club operator has grown its payout by an average of 12.3% annually over the past five years. This remarkable growth stems from the company's proven business model, while its conservative 26.3% payout ratio provides substantial room for future increases.
The company's membership-based approach generates predictable cash flow, while its massive scale provides strong pricing power. Costco's ongoing international expansion also offers a significant growth runway, given that its proven formula translates well across borders. The stock has rewarded investors with a whopping 741.9% total return over the past 10 years, nearly tripling the S&P 500's performance over this period:
Costco's combination of steady membership growth, pricing power, and a low payout ratio makes it an ideal foundation for passive income portfolios focused on long-term dividend growth, rather than current yield. The company's proven ability to generate shareholder returns while maintaining pricing leadership suggests continued dividend growth for decades to come.
Off-price retail leader defies e-commerce threat
TJX Companies (NYSE: TJX) offers investors both stability and growth through its off-price retail model. The company pays a 1.27% yield and has grown its dividend at a 10.7% annual rate over the past five years. Its conservative 33.2% payout ratio signals strong potential for continued dividend growth.
TJX's treasure-hunt atmosphere creates a unique shopping experience that online retailers can't replicate. The company's deep vendor relationships and buying expertise enable it to source products at exceptional values, advantages its competitors have struggled to match.
TJX's resilient business model and consistent dividend growth make it a compelling choice for passive-income investors. The company's proven performance across economic cycles, supported by its conservative payout ratio, suggests a reliable stream of growing dividend payments ahead.
Global beverage leader delivers reliable dividends
Coca-Cola(NYSE: KO) dominates the global beverage industry with its portfolio of more than 200 brands sold in over 200 countries. The company offers income investors a 3.06% yield and has increased its dividend for over 60 consecutive years.
As consumer preferences evolve, Coca-Cola continues expanding beyond its carbonated drink roots into coffee and sports beverages. While digital initiatives strengthen its operations, the beverage titan's 79.4% payout ratio suggests more modest dividend growth ahead, compared to the other stocks discussed here.
Coca-Cola's reliable cash flow and multidecade-long history of rising dividends make it a natural fit for passive-income portfolios. The company has demonstrated its ability to reward shareholders across every market environment, making it a dependable source of growing dividend income.
An ETF that provides broad dividend growth exposure
The Vanguard Dividend Appreciation ETF(NYSEMKT: VIG) offers a low-cost way to invest in multiple dividend growth leaders. This passively managed fund tracks companies with at least 10 consecutive years of dividend increases.
With a minimal 0.06% expense ratio and a diversified portfolio of 338 stocks, the Vanguard Dividend Appreciation ETF provides broad exposure to quality dividend growth companies. Top holdings include dividend growth stars like Microsoft, Apple, and JPMorgan Chase. Thanks to its focus on high-quality dividend growers, the fund has delivered a 209% total return over the past 10 years.
The Vanguard Dividend Appreciation ETF's focus on quality dividend growth companies, combined with its low costs and diversification benefits, makes it an excellent core holding for passive-income portfolios. The fund's strict inclusion requirements help ensure sustainable dividend growth potential across market cycles.
The path to growing passive income
Dividend growth stocks remain powerful tools for building lasting passive income streams. These four investments stand out for their combination of sustainable payout ratios, consistent dividend increases, and durable competitive advantages.
While each offers different yields and growth rates, they share fundamental strengths that suggest continued dividend growth potential. Whether through Costco's pricing power, TJX's recession-resistant model, Coca-Cola's global brands, or the Vanguard Dividend Appreciation ETF's diversified approach, these selections provide multiple paths to growing passive income streams over time.
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JPMorgan Chase is an advertising partner of Motley Fool Money. George Budwell has positions in Apple, Costco Wholesale, JPMorgan Chase, and Microsoft. The Motley Fool has positions in and recommends Apple, Costco Wholesale, JPMorgan Chase, Microsoft, and Vanguard Dividend Appreciation ETF. The Motley Fool recommends TJX Companies and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
