Most active investors desire to earn above-average returns. Otherwise, they’d simply passively invest in an S&P 500 index fund and call it a day, since that would provide them with market-average returns with little effort.
Earning above-average returns isn’t always easy, though. However, one strategy has delivered them with a fair degree of consistency over the years: investing in dividend stocks, specifically dividend growers and initiators. As the data clearly showcases, they’ve historically delivered above-average returns:
Dividend Policy
Average Annual Total Returns
Dividend growers and initiators
10.2%
Dividend payers
9.2%
No change in dividend policy
6.6%
Dividend cutters and eliminators
(0.6%)
Dividend nonpayers
4%
Equal-weighted S&P 500 index
7.7%
Data source: Ned Davis Research and Hartford Funds. NOTE: Returns data from 1973-2022.
There are lots of dividend growth stocks to choose from these days. Two top options to consider investing in right now are Prologis (NYSE: PLD) and Brookfield Infrastructure (NYSE: BIP)(NYSE: BIPC). They have a long history of growing their payouts and delivering market-beating returns, which seems likely to continue in the future. Because of that, they could help provide your portfolio with the secret sauce needed to generate above-average total returns.
Lots of built-in growth
Prologis is the leading industrial real estate investment trust (REIT). The company’s global warehouse portfolio generates growing rental income to support its rising dividend. The REIT has increased its payouts at a 12% compound annual rate over the last five years, twice as fast as the S&P 500’s average. It also offers an above-average yield (currently 2.7% compared to 1.5% for the S&P 500). Prologis’ rapidly rising payout has helped drive it to market-beating total returns over the last five years (an annualized rate of 18.7% compared to 14.3% from the S&P 500).
The warehouse operator is in an excellent position to continue growing its dividends at an above-average pace. Management estimates rent growth should drive 7.5% to 8.5% annual net operating income growth through 2026. Add in growth from development projects, and the REIT should grow its core funds from operations (FFO) at an annualized rate of 9% to 11% during that timeframe. Meanwhile, Prologis has further upside potential from acquisitions, which have historically added about 1.5% to its core FFO per share each year. Those growth drivers could enable the REIT to increase its dividend by around a double-digit percentage rate over the next few years. The combination of earnings growth and rising income should help Prologis produce double-digit percentage total annual returns.
The fuel to continue producing strong total returns
Brookfield Infrastructure is a leading infrastructure operator. Its global portfolio of utilities, pipelines, ports, and data centers generates steadily rising income backed by long-term contracts and government-regulated rate structures. That supports the company’s 4.4%-yielding payout. Brookfield has grown its dividend at an 8% compound annual rate over the last decade. That has helped fuel a 12.5% annualized total return during that period, outpacing the S&P 500’s 12.1% annualized total return.
The company is in a strong position to continue outperforming. It has a trio of organic drivers (inflation-linked rate increases, volume growth, and development projects) that should support annual FFO-per-share growth of 6% to 9%. Meanwhile, the company has an active capital recycling program (selling mature businesses and reinvesting the proceeds into higher-returning new investments). That strategy has historically helped drive its annual FFO-per-share growth into double-digit percentages. Those drivers should give it the fuel to achieve its long-term targets of increasing its dividend by 5% to 9% annually and delivering total annual returns in the 12% to 15% range.
Growing dividends can give stocks the power to outperform
Investing in dividend growth stocks can give investors a leg up in their efforts to earn above-average returns. That has certainly been the case for those who have invested in Prologis and Brookfield Infrastructure over the years. Those companies should be able to continue increasing their above-average payouts at healthy clips, which could enable them to maintain their market-beating ways. That makes them great dividend stocks to buy for those seeking to boost their overall returns.
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Matthew DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, and Prologis. The Motley Fool has positions in and recommends Prologis. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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