Dividend-paying stocks have been dominant performers in the U.S. market since 1900. Their power lies in compounding, which can substantially increase returns over time.
Companies that consistently raise their dividends frequently outperform the S&P 500 over long periods. These dividend growers often feature strong fundamentals, proven business models, and management teams focused on shareholder returns.
Two critical metrics help identify promising dividend growth stocks: the payout ratio and the dividend growth rate. A sustainable payout ratio, ideally below 75%, suggests the company can maintain its dividend even if earnings decline. A high dividend growth rate typically indicates a quality company able to weather economic downturns and market volatility.
Image source: Getty Images.
Let's examine two pharmaceutical giants that fit this profile: Novo Nordisk(NYSE: NVO) and Eli Lilly(NYSE: LLY).
Novo Nordisk: Dominating diabetes and obesity treatment
Novo Nordisk has built an eight-decade legacy in diabetes care. The company commands 34% of the $50 billion-plus diabetes treatment market and approximately half of the more than $15 billion insulin market. Over the past 36 months, Novo Nordisk's stock has surged 137%, significantly outperforming the S&P 500's 31.8% gain during the same period.
The company's dividend growth story is compelling. Novo Nordisk has a five-year annualized dividend growth rate of 29% and a conservative payout ratio of 47%. This combination indicates substantial room for future dividend increases. The current dividend yield of 1.23% is above average for an elite dividend growth stock, enhancing its appeal to income-focused investors.
NVO Dividend Growth (Annual) data by YCharts.
Novo Nordisk's growth trajectory is primarily fueled by its GLP-1 therapies, notably Ozempic for diabetes and Wegovy for obesity. These innovative treatments are expected to contribute significantly to the company's projected 2025 top-line growth of 19.5%.
From a valuation standpoint, Novo Nordisk shares trade at 24.7 times projected 2026 earnings. This valuation represents a modest premium, compared to both its big pharma peers and the benchmark S&P 500, indicating the market's optimism about the company's growth potential.
However, this premium valuation also presents a key risk factor for investors to consider. During a broad market downturn, stocks carrying valuation premiums often face heightened selling pressure and may experience steeper declines from their current levels.
Eli Lilly: Fueling growth through innovation
Eli Lilly stands out for its innovative culture and substantial financial commitment to developing next-generation drugs. The stock has climbed 292% over the past 36 months, outperforming both Novo Nordisk and the broader market (represented by the S&P 500). Lilly's dividend growth story is also compelling, with a five-year dividend growth rate of 15.3% and a payout ratio of 59.8%.
LLY Dividend Growth (Annual) data by YCharts.
A robust pipeline and recently launched blockbuster drugs underpin Lilly's growth potential. The company's cardiometabolic portfolio, featuring Mounjaro for diabetes and Zepbound for obesity, establishes Lilly as a strong contender in the expanding GLP-1 market. Wall Street analysts project Lilly's 2025 top-line growth at 26%, underscoring the company's strong growth trajectory.
Eli Lilly shares currently trade at 28.9 times projected 2026 earnings, reflecting market enthusiasm for the company's innovative pipeline and growth prospects. While the current dividend yield of 0.57% might seem low, Lilly's strong dividend growth rate and reasonable payout ratio suggest room for significant increases in the coming years.
Two dividend growth stocks built for long-term success
Novo Nordisk and Eli Lilly present compelling investment opportunities for dividend growth investors. These pharmaceutical giants are well-positioned to capitalize on the growing demand for diabetes and obesity treatments. Their strong financial positions, innovative pipelines, and commitment to returning value to shareholders make them attractive long-term holdings for investors seeking both income and growth potential.
Don’t miss this second chance at a potentially lucrative opportunity
Ever feel like you missed the boat in buying the most successful stocks? Then you’ll want to hear this.
On rare occasions, our expert team of analysts issues a “Double Down” stock recommendation for companies that they think are about to pop. If you’re worried you’ve already missed your chance to invest, now is the best time to buy before it’s too late. And the numbers speak for themselves:
- Amazon: if you invested $1,000 when we doubled down in 2010, you’d have $20,579!*
- Apple: if you invested $1,000 when we doubled down in 2008, you’d have $42,710!*
- Netflix: if you invested $1,000 when we doubled down in 2004, you’d have $389,239!*
Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.
*Stock Advisor returns as of October 7, 2024
George Budwell has no position in any of the stocks mentioned. The Motley Fool recommends Novo Nordisk. The Motley Fool has a disclosure policy.
