3 Dividend Growth Stocks for Long-Term Returns

Stocks to buy

Dividend growth investors consider multiple things when buying a stock, such as dividend yields and price-to-earnings (P/E) ratios. These investors should also incorporate a company’s future growth potential into their analysis. Investors looking for better returns could consider stocks that might have lower yields today, but stronger long-term growth prospects.

The Dividend Challengers are a group of companies with five to nine years of dividend growth. These three Dividend Challengers pay dividends and have future growth potential, meaning they could generate high total returns over the long term.

Yum! Brands (YUM)

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Yum! Brands (NYSE:YUM) is a fast-food giant that owns the KFC, Pizza Hut, Taco Bell and The Habit Restaurants chains. It is present in more than 155 countries and has more than 54,000 restaurants, 60% of which are located abroad. KFC generates about half of the total revenue and operating profit of the company. Yum! has increased its dividend for six consecutive years.

In early August, Yum! Brands reported financial results for the second quarter of 2023. The company grew its currency-neutral sales 13% over the prior year’s quarter thanks to 9% same-store sales growth and 6% growth of store count. KFC, Taco Bell and Pizza Hut grew their sales 19%, 7% and 7%, respectively. Digital sales rose to a new all-time high of $7 billion and exceeded 45% of total sales. Thanks to the strong business performance, earnings-per-share grew 33%, from $1.06 to $1.41, and exceeded the analysts’ consensus by 17 cents.

The company’s recent growth is due to a major organizational change to aggressively increase its franchised store count. It spun off its Chinese segment and refranchised its stores at a fast pace, from 77% in 2016 to 98% currently. Yum! Brands used proceeds from the sale of its stores to franchisees to buy back shares. In addition, thanks to the refranchising, the company has become more efficient, with much lower operating expenses and a wider operating margin.

Yum! Brands has returned to strong growth mode thanks to the growth of its store count and its same-store sales. It has greatly rewarded shareholders with its refranchising and aggressive share repurchases. The company expects to grow its store count by 4%-5% per year in the upcoming years. During the last five years, Yum! has grown its earnings per share (EPS) at approximately 9% per year.

The strength of its brands and their appeal to consumers constitute a significant competitive advantage. Thanks to its established brands, the company enjoys reliable free cash flows. As a result, the company is not likely to have issues servicing its debt. It is also worth noting that Yum! Brands has proved markedly resilient during recessions, mostly thanks to its low-priced menu offerings. This allows the company to pay dividends, even during downturns.

Mondelez International (MDLZ)

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Mondelez International (NASDAQ:MDLZ) was established in 2012 when Kraft Foods renamed itself Mondelez and retained its snack food business, while its grocery business was spun off to a new company called Kraft Foods Group. Mondelez has more than $28 billion in annual revenue. The company has a heavy presence in developing regions — over 60% of total revenue is derived from emerging markets in Asia, the Middle East, Africa and Latin America.

Mondelez reported its Q2 2023 results on July 27. For the quarter, net revenue increased 17% year-over-year, with organic net revenue growth of 15.8%, which was driven by strong volume/mix performance. Adjusted earnings per share rose 16.9% (and 21.5% on a constant currency basis) to 76 cents for the quarter.

Organic net revenue growth of 37.7% was the strongest in Latin America, followed by 13.2% growth in Asia, the Middle East, and Africa; 13.1% in Europe; and 12.4% in North America. Emerging markets showed a bit greater growth of 19.7% versus developed markets of 16.2%. Adjusted EPS climbed 13% (and 19.9% on a constant currency basis) to $1.65. Mondelez also increased its quarterly dividend by 10.4% to $0.425. It has increased its dividend for nine consecutive years.

Since the Kraft Foods spinoff in 2012, Mondelez has seen steady growth. From 2013 to 2022, it grew EPS by 7.7% per year. Organic growth as well as acquisitions have fueled its earnings-per-share growth, along with share buybacks. Revenue is the primary driver of earnings growth with margins remaining steady in normal market conditions.

Mondelez’ dividend payout ratio is about 50%. The payout is safe, even in a recession. It expects to generate free cash flow of more than $3.3 billion for the current year. Given Mondelez’s operating history and the stable sales performance of its core brands, it should be resilient to recessions. Its competitive advantages include its broad assortment of consumer favorites as well as its diverse distribution base and global supply chain.

Constellation Brands (STZ)

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Constellation Brands (NYSE:STZ) produces and distributes alcoholic beverages including beer, wine and spirits. With over 100 brands in its portfolio, it is the third-largest beer company in the U.S. importing and selling beer brands such as Corona, Modelo Especial, Modelo Negra and Pacifico, along with craft beer brands including Funky Buddha Brewery.

In addition, Constellation has many wine brands including Robert Mondavi and Kim Crawford, as well as spirits brands including Svedka Vodka, Casa Noble Tequila and High West Whiskey.

The company has increased its dividend for eight consecutive years, including an 11% increase in April 2023.

On June 30, Constellation Brands reported first-quarter fiscal 2024 results for the period ending May 31. (Constellation Brands’ fiscal year ends on the last day of February.) For the first quarter, the company recorded $2.5 billion in net sales, a 6% increase compared to the same prior year period, surpassing analysts’ expectations by $40 million. Beer sales improved by 11% year-over-year, while wine and spirits sales declined by -10%.

Earnings per share equaled $2.19 for the first quarter, which was a 9% increase compared to fiscal Q1 2023, and 8 cents ahead of analyst estimates. Constellation Brands provided its fiscal 2024 outlook. The company expects adjusted earnings-per-share to be $11.70 to $12.00 for the full fiscal year.

Constellation Brands has grown EPS by more than 14% per year in the last decade. In a highly competitive U.S. beer, wine and sprits market, Constellation Brands has differentiated itself with a focus on what the company describes as “premiumization” trends. This means the company is pursuing growth in the high-end of the beer, wine, and spirits categories.

Constellation expects to invest $4 billion to $4.5 billion on expanding capacity in Mexico. This will support an additional 25 million to 30 million hectoliters of total capacity. It also includes construction of a new brewery in Southeast Mexico and continued expansion and construction at existing sites in Nava and Obregon. These investments will support future growth for the company’s high-end Mexican beer portfolio.

Constellation Brands has several competitive advantages. Its long list of strong brands gives the company pricing power. Its strong distributor network provides an effective route-to-market for the company’s strategy in premium categories. Another benefit of Constellation Brands’ business is that it can withstand downturns very well, as alcoholic beverages are generally resistant to recessions.

On the date of publication, Bob Ciura did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

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.

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