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Over the past 80 years, stocks have returned almost 10% annually. Dividends have accounted for approximately 40% of average annual returns. At the same time inflation has averaged 3% annually. These numbers are all averages however – investors cannot expect to generate 10% per year in total returns every single year. Stock returns fluctuate over time. While stock prices gyrate wildly up and down dividends provide a more stable component of total returns.

The relative stability of dividend payments makes them an ideal source of retirement income for individuals looking to live off their investments. Not only are dividend payments stable however, but they also tend to rise faster than the rate of inflation over time. Over the past 80 years, dividends have increased by 5.4% on average, which was almost 2.4% higher than the rate of inflation. Earnings per share, which is the ultimate driver behind dividend growth, increased by 5.50% over the same time period. Without earnings growth, companies could not afford to raise distributions consistently.

Investors should realize of course that these numbers fluctuate from year to year. As a result it is important not to get too optimistic in estimating future dividend growth prospects. For example, most of the times I have added any stocks to my dividend portfolio, they had all shown a strong dividend growth pattern over the preceding decade. Things do happen however, and dividends do get frozen, cut or eliminated. Since I own a diversified portfolio of dividend stocks I am not exposed too much on these risks from a single individual company. As a result, my overall portfolio projections for dividend growth are typically equal to 5% or 6% on average.

While I also require at least a 2.50% initial yield before purchasing a stock, my target portfolio yield is closer to 4%. This could be achieved by purchasing a small position in a higher yielding stock such as Royal Dutch Shell (RDS.B) or Kinder Morgan (KMP), which increases my current yield. In a portfolio of 40 stocks one could have 25 stocks yielding three percent, seven stocks yielding four percent, five stocks yielding six percent and four stocks yielding eight percent in order to achieve a portfolio yield of 4%. The negative side of this exercise of course that it reduces my portfolio dividend growth. As Dave Van Knapp’s article 10 by 10: A New Way to Look at Yield and Dividend Growth illustrates, the balancing act of current income versus future growth is important in dividend investing.

The stocks with strong dividend growth which are attractive buys at the moment include:

For a brief description of each company, check the overview below:
Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Abbott Laboratories has increased dividends for 38 years in a row. (analysis)
Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. This dividend aristocrat has raised dividends for 35 consecutive years and yields 3.30%. (analysis)
Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. The company has increased payments to common shareholders every year for 28 years. (analysis)
The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend aristocrat has raised dividends for 45 consecutive years and yields 2.90%. (analysis)
The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company has increased payments to common shareholders every year for 32 years. (analysis)
Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. JNJ has been consistently increasing its dividend for 48 consecutive years. (analysis)
Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health and hygiene products worldwide. The company has boosted distributions for 38 years in a row. (analysis)
The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. (analysis)
The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the financial services, education, and business information markets worldwide. The company operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. The company has raised distributions for 37 consecutive years. (analysis)
PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised distributions for 38 years in a row. (analysis)
The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has raised distributions for 54 consecutive years. (analysis)
McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has been consistently increasing its dividends for 33 consecutive years. (analysis)
Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores has consistently increased dividends every year for 35 years. (analysis)
Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. Exxon Mobil has been consistently increasing its dividends for 28 years in a row. (analysis)

Disclosure: Long all stocks listed above

Source: 14 Dividend Stocks With Dividend Growth Potential