3 Dividend Stocks for Growth and Total Returns

Dividend Stocks

Thousands of stocks pay dividends, which can make choosing among them difficult, but there are some aspects of dividend stocks that are particularly attractive.

One factor that can make a big difference is competitive advantage and leadership in a given industry. In general, larger companies with global dominance are considered safer and typically have more sustainable competitive advantages, making them more attractive for dividend growth investors.

In this article, we’ll take a look at three large-cap dividend stocks that we see as having not only strong industry positions but also the ability to return lots of cash to shareholders as they grow. These characteristics generate strong total return potential for shareholders and high dividend growth over time.

So while investors have many choices when it comes to places to put their money, we see these three large-caps as strong candidates for an attractive combination of growth potential, current yield and dividend growth.

Our picks among the top dividend stocks are:

  • Yum! Brands (NYSE:YUM)
  • Stryker Corporation (NYSE:SYK)
  • Northrop Grumman (NYSE:NOC)

High-Growth Dividend Stocks: Yum! Brands, Inc. (YUM)

Source: JHVEPhoto / Shutterstock.com

First up is Yum! Brands, a fast-food company that operates KFC, Pizza Hut, Taco Bell, and The Habit Burger Grill locations globally.

At the end of 2020, the company had 25,000 KFC units worldwide, nearly 18,000 Pizza Huts, 7,400 Taco Bells, and close to 300 The Habit Burger Grills in operation in 150 countries and territories.

Yum operates a franchise model that has helped it expand quickly, and with a capital-light business model, which also helps it achieve very strong profit margins.

Yum’s competitive position is robust in part because of the scale the company enjoys, but also because it competes in a variety of different spaces. Its core brand, KFC, is known worldwide for its chicken and homestyle sides.

Its Pizza Hut division is similarly famous for its pizzas. Taco Bell is growing rapidly because of an innovative take on Mexican food, in addition to recent menu moves such as investing in a wider drink menu and serving breakfast.

Finally, the company’s somewhat recent acquisition of The Habit provides a new growth avenue, as Yum management sees a very long growth runway for the chain given it is operating less than 300 units today. Yum, as a result, has outstanding competitive characteristics that combine stability, profitability, and growth potential.

In fact, we see Yum as having 12% annual EPS growth potential for the next five years, building upon the record earnings the company produced in 2020 amidst the COVID-19 crisis. Yum offers diners a strong value proposition at all of its chains, which we think will continue to resonate.

We see this growth accruing from strong revenue gains, but also margin expansion and share repurchases. These factors should combine to create robust earnings-per-share growth for Yum for many years to come as it continues to expand its footprint worldwide, and potentially add more acquisition targets.

Because of a strong rally in the stock in recent months, the yield is just 1.7%, but given a low payout ratio and low capital intensity of the business model, we also see Yum as a strong dividend growth stock.

Stryker Corporation (SYK)

Source: Shutterstock

Next up is Stryker Corporation, a medical technology company that operates in three divisions: Orthopaedics, MedSurg, and Neurotechnology and Spine.

Through these segments, Stryker offers products like implants for hip and knee joint replacements, surgical equipment and surgical navigation systems, endoscopic systems, disposable products, products for brain and skull surgeries, spinal implants, and the list goes on.

Like Yum, Stryker has exceptional growth potential. We see the company growing at 12% annually in the coming years, the combination of high-single-digit revenue growth and continued margin expansion.

Stryker’s competitive position is due in large part to the company’s Mako surgical robot, which produces upfront revenue for Stryker. It also gives the company many years of subsequent service and disposables revenue associated with the surgeries that are performed with it.

Mako has been accepted as a leader in robotic arm-assisted surgeries for years, a fact that has helped Stryker grow as quickly as it has, in addition to affording the company the ability to move into ancillary products such as the disposables that go along with each surgery.

The Mako robot is akin to the razor and blade model, wherein the company sells the consumer a razor in order to also sell them blades for a long time to come.

Stryker’s yield is 1% today as the stock is near its all-time highs, but we see dividend growth approaching double digits annually for the foreseeable future, the product of a very low payout ratio today, as well as the company’s high earnings growth.

Dividend Stocks: Northrop Grumman (NOC)

Source: Shutterstock

Our final stock is Northrop Grumman Corporation, which operates as an aerospace and defense company globally. The company operates in four segments: Aeronautics Systems, Defense Systems, Mission Systems, and Space Systems.

Part of Northrop’s competitive advantage is that it has been designing weapons for the US military since World War II, having earned a reputation for creating outstanding aircraft during its formative years.

Northrop has since expanded into the wide variety of categories listed above, but its reputation remains intact, delivering quality and world class technology with its products.

Further, defense products tend to have very long lifespans, a fact that Northrop shareholders have benefited from over the years with its long-lived contracts with the US government, for instance.

We expect to see 8% annual earnings-per-share growth in the coming years from Northrop, the product of low- to mid-single-digit revenue growth, modest margin expansion, and a contribution from share repurchases.

The company’s robust earnings level of today, combined with its forecast growth, makes it such that shareholder returns can be strong both via dividends and repurchases.

The yield is 1.6% today, but the stock is near its all-time high. We expect Northrop to continue to rapidly increase its dividend payment to shareholders given its payout ratio is under a quarter of earnings today, and that its growth outlook is strong.

On the date of publication, Bob Ciura did not have (either directly or indirectly) positions in any of the securities mentioned in this article.

Bob Ciura has worked at Sure Dividend since 2016. He oversees all content for Sure Dividend and its partner sites. Prior to joining Sure Dividend, Bob was an independent equity analyst. His articles have been published on major financial websites such as The Motley Fool, Seeking Alpha, Business Insider and more. Bob received a bachelor’s degree in Finance from DePaul University and an MBA with a concentration in investments from the University of Notre Dame.