The Top 10 Must-Have Dividend-Growth Stocks

UPDATE: The charts in this story have been updated to reflect today's market prices.

High-yield stocks are great for retired income investors, but strong dividend growth can be even better over the years. Dividend-growth stocks deliver higher income each and every year. They make our money work harder for us without effort and are crucial for compounding wealth.

Using our Dividend Safety and Growth Scores, we found 10 dividend-growth stocks that yield more than 2% and pay very safe dividends. Some of these blue-chip dividend-paying stocks have raised their dividends at a double-digit clip for at least five years and are likely to continue boost their payouts for years to come.

Let's meet the top 10 dividend-growth stocks that are appropriate for investors building their dividend-stock portfolios.

1. Rockwell Automation (ROK)

Rockwell Automation equals robots. The company was founded in 1903 in Milwaukee and is focused on one business, industrial automation, in which it's a leader.

There are two components to Rockwell Automation: Architecture & Software (44% of sales) and Control Products & Solutions (56%). Together they represent $9 billion in annual revenues. Customers include all sorts of manufacturers.

Rockwell operates on a global scale. Though 55% of revenue is sourced in the U.S., customers are located in Canada, China, the U.K., Mexico, Italy, Germany and Brazil.

Industrial automation is a complex market that requires considerable capital and skilled software programmers and engineers. It is a huge business, and there are sizable barriers to entry. 

Rockwell Automation faces six major competitors globally: Siemens, ABB, Schneider Electric, Emerson Electric, Mitsubishi and Honeywell.

Because industrial automation is Rockwell Automation's sole business, this company represents a higher degree of business risk than some of its competitors, which operate in other businesses. This concentration also means, however, that this business receives the full attention of management. 

The current $2.90-per-share dividend offers investors an attractive 2.5% yield. Quarterly dividends have been paid for more than 20 years, and the company has increased its dividend each year for six years. The company has a 12.3% annual compound growth rate over the past 10 years and a 15.9% rate over the past five.

The last dividend increase was in November 2015, so another dividend bump could be coming up soon. Rockwell's most important financial ratios support the dividend.

Operating margins have been in the 14%-19% range over the past five years, and the current payout ratio of 49% provides a nice margin of safety for the dividend.

With $2.15 billion in cash in its bank account, Rockwell Automation has enough to pay the current $2.90-per-share dividend for years before it runs out of money. This is a key to the company's strong dividend safety and growth profile.

2. Boeing (BA)

Commercial aircraft is the cornerstone of Boeing, representing 68% of the company's revenue. But Military Aircraft (14% of sales), Network and Space Systems (8%) and Global Services and Support (10%) carry their share of the revenue load. The U.S. Department of Defense accounts for about 60% of the noncommercial aircraft business.

Boeing's leadership position in the global aircraft manufacturing industry has never been better. The company manufactures from a $50 billion-plus order backlog that has grown 47% over the past five years.

Military spending has leveled off from peak 2008 levels, and so have Boeing's order backlogs from the Pentagon. Other areas, however, such as global positioning services and related projects, are keeping Boeing engineers busy.

Boeing's operating margin of about 7.7% is about average for a heavy manufacturing business. Return on invested capital is strong at 32%, as is return on equity, at 69%

Boeing has a massive backlog to deliver. This makes the future easier for management to predict.

Boeing's annual dividend payout of $4.36 per share offers an above-average yield of 3.4%, the highest yield in the group. Dividends have been growing 16.7% per year on average over the past five years and 27.4% per year over the past three.

Boeing stock is a prominent member of the Dow Jones Industrial Average and S&P 500, and it's the type of stock we like to own in our Top 20 Dividend Stocks portfolio.

3. Corning  (GLW)

Corning is almost as old as glass itself, tracing its origins back to 1851. Today the company is a key player in the internet and smartphones.

Corning's Display Technologies (39% of sales) is the largest worldwide producer of glass substrates for the LCD displays that are used in products such as flat-screen TVs and smartphones.

In Optical Communications (30%), Corning is the largest producer of fiber optical cable, one of the vital links in high-speed data communications. Environment Technologies (11%) produces catalytic converters and other filters for the auto industry. Specialty Materials (11%) includes such things as Corning Gorilla Glass, which is now in common use in smartphone displays. Finally, Life Sciences (9%) provides products to companies in the health care field. All together, these units add up to annual revenue of $9 billion.

Corning competes on a global scale on the basis of design, product performance and availability. Price is a factor, but technological performance and availability are overriding factors. It is easy to see that the most important markets are in display glass and fiber optics.

Asahi Glass and Nippon Electric Glass are Corning's principal competitors. This market includes smartphones, computer and TV displays. Until recently this has been a major growth engine for the company. With the slowdown, the worldwide appetite for high-speed internet service is today's best growth market.

The current 54 cents-per-share annual dividend payment offers investors a 2.4% yield. The company's payout ratio of 38% is in line with trends over the past five years and provides potential for nice dividend growth in years ahead.

Corning has increased its dividend every year since 2010 and recorded annualized dividend growth of 19.1% over the last five years.

The company's $4.6 billion of cash is enough to cover dividends for years, providing additional fuel for income growth. 

The company generates considerable cash flow and has very limited balance sheet leverage. Abundant cash flow is important to finance daily operations and to fund dividends.

All things considered, Corning is well positioned to continue rewarding shareholders with solid dividend growth in the years ahead.

4. Best Buy (BBY)

On a rainy day during football season, there is no better place (other than a sports bar) to spend a Sunday afternoon then at Best Buy. You get to see, touch and sample the latest consumer electronic gadgets.

The world of retailing is a rough-and-tumble place with a high mortality rate, but Best Buy has survived and is now one of the biggest players.

The familiar blue-and-yellow logo can be found on 1,600 stores nationwide and through the bestbuy.com website (11% of the business).

The company is highly competitive with other internet retailers by offering home delivery and in-store pickup as well as its own branded credit card. Best Buy is also home of the Geek Squad, which will install or repair any Best Buy products.

Consumer electronics retailing is highly competitive. Having low prices for nationally known brands and convenient locations is very important. An online presence is absolutely essential to compete with the likes of Amazon and eBay.

A critical determinant of success is managing working capital. What this means is selling products and collecting cash in less time than it takes to pay suppliers.

Operating margins in consumer electronics are narrow, in the 3%-5% range, which means they're barely sufficient to finance operations. Bust Buy succeeded, however, while other, less-tightly managed companies with smaller scales have failed.

In the latest annual report, management set a goal of returning capital to shareholders. The company raised its regular quarterly dividend by more than 20% in 2015 and 2016 while also paying out special distributions each year.

Although the payout ratio has trended higher in recent years as opportunities for reinvestment have slowed, the current level of 37% provides room for continued double-digit dividend growth.

Shares of Best Buy currently offer a dividend yield of 2.9%.

5. Essex Property Trust (ESS)

Essex Property Trust, founded in 1971, is at the epicenter of the real estate boom in the western U.S.

Essex Property Trust is a real estate investment trust, or REIT. In order to avoid paying federal income tax, Essex Property Trust -- like all REITs -- must pay out at least 90% of its taxable income in the form of shareholder dividends.

This REIT owns and operates apartment communities and some commercial properties.

The company owns or has investment interests in 59,241 rental units in 243 communities located along the West Coast as well as four commercial buildings. Its investments feature both newly constructed properties and rehabilitated older apartment complexes.

The West Coast has witnessed the greatest influx in population. The technology industry has created jobs attracting many younger people.

In general, young people are finding it difficult to purchase homes and are choosing to rent instead.

This REIT's typical property investment is in larger projects, including high-rise apartment structures. This strategy reduces the competition to institutional investors, hedge funds and other real estate REITs.

The current $6.40-per-share dividend payout offers investors a 2.9% yield. This is less than the typical yields offered by REITs. But Essex Property Trust has been in favor with investors, and shares have appreciated 7.8% annually over the past 10 years, on a total-return basis. That beats the S&P 500's 7.2% annual total return over that period.

Essex Property Trust has been one of the top performers on our REIT list and has grown dividends for more than 20 consecutive years.

Along the way, Essex Property Trust has consistently rewarded shareholders with annualized dividend growth of 6.3% over the last 20 years and 6.9% per year over the last five years.

Few businesses deliver more reliable income growth than Essex Property Trust.

6. Vail Resorts (MTN)

Vail Resorts runs ski resorts (79% of sales). In recent years, company-owned hotels and lodging (20%) have gained in importance as well as the company's interest in real estate (1%). Altogether it adds up to $1.40 billion in annual revenue.

Vail Resorts runs well-known resorts in North America. The list includes the Vail, Beaver Creek, Breckenridge and Keystone resorts in Colorado; Park City in Utah; Heavenly, Northstar and Kirkwood in Lake Tahoe, and the recently acquired Whistler-Blackcomb in Canada. The company also owns an Australian resort.

Competition for Vail comes from other ski resorts and from other vacation options.

The cost of a ski vacation can add up quickly, and that also factors into demand. During the financial crisis, Vail Resorts' top line fell significantly. Annual revenue for the fiscal year that ended in July 2009 was down 15% from the year before. The stock suffered, too, falling to less than $17 before the end of 2008 from more than $65 in 2007. Vail has above-average sensitivities to the economy and consumer spending.

The company began paying quarterly dividends in November 2011. Over the past three years dividends have compounded at a 49.2% annual rate and now total 45% of free cash flow. This is a healthy payout ratio that provides a nice margin of safety and room for future dividend growth.

The current $3.24-per-share dividend payout offers investors a 2% yield. Historically, the stock has had strong appeal to growth investors, appreciating 15.4% per year over the past decade on a total-return basis. That compares with 7.2% for the S&P 500.

7. Republic Services (RSG)

Economic cycles come and go, but one of the constant features of everyday life is trash. Generally speaking, garbage grows with the population.

Republic Services, with more than $9 billion in annual revenue, ranks No. 2 in the waste management industry.

The company's trucks provide everything from nonhazardous solid waste collection and transfer to recycling and disposal services. Customers serviced include commercial, industrial, municipal and residential entities in the U.S. and Puerto Rico.

Republic Services also is in the recycling business. It processes and sells of old corrugated cardboard, old newspapers, aluminum, glass and other materials.

The business of trash is highly fragmented with more than 20,000 companies, mostly local or regional in size. Republic with its national coverage and $9 billion in revenues ranks second behind Waste Management at about $13 billion.

Anybody with a truck can be in the business, but gaining a meaningful presence requires capital, contracts with municipal governments, and hard-to-replicate landfills. For many years the industry has been consolidating, a trend that benefits the big players such as Republic and Waste Management.

Republic Services has increased its dividend for more than 10 consecutive years and raised its payout by at least 7% each year since 2012.

The current $1.28-per-share annual payout offers investors an above average 2.5% yield.

Good cash flow, modest balance sheet leverage and strong stock performance make Republic Services an attractive dividend-growth stock.

8. Omnicom Group (OMC)

If you are a global Fortune 500 company with a multitude of needs like advertising, branding and corporate communications, you call Omnicom.

As the name implies, Omnicom does about everything. The firm offers a total of 20 marketing and communications services just about everywhere in the world.

The company has been around since 1986, but that doesn't mean it's old school. It is right up there in social media marketing, search engine, mobile marketing and big data.

Omnicom is diversified both in its customer base and the industries it serves. The largest client is less than 3% of Omnicom's $15 billion in total annual revenue. The top 100 clients represent slightly more than 50% of the company's revenue, and no single industry accounts for more than 13%. Revenue is split fairly evenly between the U.S. and foreign sources.

Diversification is important for Omnicom. There are few barriers to entry and virtually no long-term contracts in this business. The real assets are the employees in this industry. Size and diversification place Omnicom in a more stable position than most, however.

The company's global reach also makes it an attractive partner for multinational clients, and Omnicom has invested heavily in digital marketing skills.

The current $2.20-per-share dividend payout offers a 2.6% yield that investors will find somewhat above average. The payout is very safe, and the dividend has compounded over the last 20 years by 13.1% and by 20.1% per year over the past five.

History is not always a good predictor of the future, but Omnicom's 46% payout ratio and $2.62 billion of cash in the bank suggests plenty of flexibility for continued dividend growth. 

9. CA  (CA)

CA is not exactly a household name. The company is the quiet leader in software solutions that enable its business customers to plan, develop, manage and secure applications across distributed, cloud, mobile and mainframe platforms.

And who are CA's customers? Most of the Global Fortune 500 and government agencies around the world rely on CA to help manage their transition from mainframe-based data to cloud and mobile venues.

CA's software Subscriptions and Maintenance (SM) unit accounts for about 82% of total revenue. Direct fees from separate software (SF) contracts amount to 10% of sales, while Professional Services (PS) at 8% rounds out the total.

The SM business operates under contracts and license agreements with a life of three to five years. This allows CA to have an above-average level of predictability to their revenue stream.

CA offers a broad range of enterprise solutions under the Agile brand family, including applications such as project management, identity management, infrastructure management and more.

CA's revenue has been on the decline since its fiscal year that ended in March 2013. Declining revenue is usually not a good sign about a company's ability to finance its operations and dividend.

Nevertheless, CA's operating margin since 2012 has ranged between 27%% and 29.5%. This is an indication of CA management's skills in maintaining a high level of cash flow.

CA increased its dividend 400% in 2012 and last raised its dividend by a modest 2% earlier this year. The current $1.02-per-share payout offers investors a 3.2% yield.

When will dividend growth accelerate? Current business does not require cash for reinvestment.

With $2.81 billion in cash on the balance sheet and a debt-to-equity ratio of 38, CA can afford to start growing its payout at a faster clip if it so desires.

10. United Parcel Service (UPS)

Founded in 1907, UPS is the biggest package delivery company worldwide. But, there's more to UPS than package delivery. It provides technology-driven logistics services for corporate customers. The idea is to save customers costs in warehousing and delivery.

UPS groups it business into three segments based on location. U.S. Domestic Package is the big gun at 63% of revenue and profits. International contributes 21% and 28% of sales and profits, respectively.

The balance comes from UPS logistics solutions. This is where UPS really cements its relationship with corporate customers.

Since the dawn of the consumer internet, e-commerce has been growing at double-digit rates, taking market share from traditional retailers. E-commerce is very much a powerful force for the package shipping business.

E-commerce accounts for 10.5% of retail sales, if you exclude automobiles and fuel, according to Internet Retailer, which cited data from the government. On an adjusted basis, full-year web sales were $340.8 billion in 2015, the site also said. UPS is on record forecasting this total will double by 2020.

UPS may be the world's largest package shipper, but it's not the only one. Federal Express and the United States Postal Service are also important shippers. There are also numerous regional and local delivery companies that play a role.

UPS made its public ownership debut in 1999 and has paid a quarterly dividend ever since. It has been growing dividends at a compound average of 8.3% over the past decade and 9.2% per year over the past five years.

The current $3.12-per-share dividend payout offers an above-average 2.9% yield. The quarterly payout was last increased 6.8% in November 2015.

The company's habit is to make increases annually in November, so another dividend raise could be right around the corner.

The current payout ratio of 54% means the company should easily finance operations while providing a reasonably safe and growing income for shareholders.

This article is commentary by an independent contributor. At the time of publication, the author was long ROK, BA, RSG, and OMC.

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