Identifying dividend growth stocks with high returns on invested capital (ROICs) can be a great way to look for investments as both criteria have proven to be market-beating propositions over time. Today, however, we will take this one step further, looking at four businesses with dividend yields above their five-year averages.
This extra step offers higher passive income prospects while potentially uncovering stocks trading at a discount. Fitting this screener nicely are Visa (NYSE: V), Toro (NYSE: TTC), MarketAxess (NASDAQ: MKTX), and Tractor Supply (NASDAQ: TSCO). Let's explore why all four are great candidates to double up on today.
V Dividend Yield data by YCharts.
1. Visa
Ranked as the seventh-most valuable global brand, according to Kantar Brandz, financial behemoth Visa has 4.2 billion credit cards issued and is accepted by over 100 million merchants worldwide. This top-tier brand ranking is noteworthy to investors as Kantar Brandz has shown that the top 10 most valuable brands have outpaced the returns of the S&P 500 Index since 2006 -- 435% to 245%.
While the company has barely eeked past the market over the last five years, it has delivered an impressive total return of over 400% during the previous 10 years. Despite slightly outpacing the market recently, Visa's valuation multiples have fallen dramatically over the last few years. Consider the following chart:
V Price to Free Cash Flow data by YCharts.
Cut in half from its recent highs in 2021, Visa now trades at a much more reasonable 26 times free cash flow (FCF). Compared to its duopolistic peer, Mastercard, and its mark of 37 times FCF, Visa's 25% annualized FCF growth rate over the last decade and current ROIC of 28% look attractive.
Growing its 0.7% dividend by 17% annually over the last five years, Visa has a tremendous growth runway remaining for future dividend increases, using only 22% of its net income to fund its payouts. With Visa's value-added services (fraud mitigation, advisory services, data analytics) growing sales by 19% in the third quarter, the company's growth optionality is still branching out -- making this dividend-grower a top pick to double down on.
2. Toro
While its brand is synonymous with residential mowers, there is much more to Toro than many may realize. Home to a professional segment that accounts for 80% of the company's sales, Toro serves various markets, such as utility and underground construction, golf course upkeep, snow removal, and trenching and irrigation. Despite delivering record results on the top and bottom lines in its most recent quarter, the company remains down to start the year.
Now trading with a price-to-earnings (P/E) ratio of 21, Toro's valuation is at its lowest since 2016. Registering an average ROIC of 24% over the last 10 years, the serial acquirer has proven to be masterful at investing its hard-earned cash on various tuck-in acquisitions across many adjacent markets.
Paying a 1.3% dividend that uses only 26% of Toro's net income, the company has steadily increased its payments by 11% since 2018. With a temporarily elevated backlog of roughly $2 billion -- or about 40% of a full year's sales -- Toro looks well-positioned to succeed in 2023.
After nearly quadrupling earnings per share (EPS) over the last decade, Toro's historically cheap valuation and track record of successful acquisitions make it a tremendous buy-and-hold purchase today.
3. MarketAxess
Before MarketAxess burst onto the bond-trading scene in 2000, telephones were the primary option for institutional investors looking to place trades with a select few broker-dealers. Nowadays, these investors turn to MarketAxess to place electronic requests for quote (RFQ) trades with over 140 dealers or use the company's all-to-all Open Trading platform with over 1,700 counterparties.
These trading options offer better price discovery and liquidity, creating a network effect that grows stronger with each client that MarketAxess adds. Now home to nearly 2,100 active client firms, the company has grown to account for around 20% of the combined U.S. high grade, U.S. high yield, emerging markets, and Eurobond markets (by trading volume as of 2022).
Despite building up this leadership position in the bond-trading industry, the company's valuation was sky-high, leading to paltry stock returns as growth decelerated. However, MarketAxess is poised to reaccelerate its growth, thanks to recent innovations in automated trading, live markets, and new capabilities with data-backed trading signals for its clients.
Home to a stellar ROIC of 23%, the company pays a well-funded 1% dividend that grew by 13% annually over the last five years. With ambitions to expand further into international markets, municipal bonds, and exchange-traded funds, MarketAxess is set to build upon its leadership position and extend its 465% total return since 2013.
4. Tractor Supply
Despite a challenging consumer environment, rural lifestyle retailer Tractor Supply grew sales and EPS by 7% and 9%, respectively, in its latest quarter. Led by less-discretionary pet and livestock sales that account for 50% of total revenue, the company grew at twice the pace of its market.
Further leading Tractor Supply's growth charge was double-digit growth from its consumable, usable, and edible (CUE) products that drive consistent return visits to the company's stores. Thanks to these two durable groups and a well-executed history of store-count expansion, the company has recorded 31 consecutive years of sales growth.
Now counting over 31 million members in its Neighbor's Rewards Club (which grew by 5 million in just the past year), the company aims to continue adding to its 2,181 stores -- with 3,000 being its long-term goal. Having grown its ROIC from 10% in 2000 to 35% today, Tractor Supply has shown to be extremely capable of adding new stores profitably.
Growing its 1.8% dividend for 11 consecutive years at a 28% annualized rate over the last five, the company's 39% payout ratio leaves ample room for increases -- making this a brilliant pick for dividend growth investors.
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Josh Kohn-Lindquist has positions in MarketAxess, Mastercard, Toro, Tractor Supply, and Visa. The Motley Fool has positions in and recommends MarketAxess, Mastercard, and Visa. The Motley Fool recommends Toro and Tractor Supply and recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
