3 Dividend Growth Stocks for High Total Returns

Investors with a focus on dividend growth typically seek out high-quality stocks to own. While “high-quality” might mean different things to different investors, dividend growth investors often prefer names that have strong business models that can be successful even in a recessionary environment.

Showing strong results under adverse conditions is a sign that the company’s products or services are in high demand, which often allows these companies to continue to pay and raise their dividends to shareholders.

This article will examine three of our favorite high-quality dividend stocks. Each stock has increased its dividend for at least 17 consecutive years and has a very reasonable payout ratio that should allow for future raises. As an added bonus, we forecast that each stock will provide double-digit annual total returns over the next five years.

Albemarle (ALB)

Source: IgorGolovniov/Shutterstock.com

Our first high-quality dividend name to consider is Albemarle (NYSE:ALB), the largest producer of lithium and the second-largest producer of bromine in the world. The company has annual sales in excess of $7 billion and is valued at just over $24 billion today.

Albemarle’s leadership position in the areas that it operates give it a size and scale that competitors are unable to replicate. For example, the company has operations in roughly 100 countries around the globe. Additionally, much of the lithium is used in electric vehicle (EV) batteries, which are becoming more popular. This gives the company pricing power.

This, combined with recent expansions and joint ventures, have added materially to Albemarle’s business. For example, the company’s Energy Storage business had revenue of $1.94 billion in the most recent quarter. That represents a 319% increase from the prior year. Higher prices drove the bulk of this gain (301%), but volume grew 18% due to an operational expansion in Chile and a new processing plant in China.

The company has guided toward a midpoint of adjusted earnings per share (EPS) of $23.25 for 2023, which would be a new company record. From this high starting base, we forecast that Albemarle can grow adjusted EPS by 5% annually through 2028.

While business results have varied over the last decade, Albemarle has still raised its dividend for 28 consecutive years. That qualifies the company as a Dividend Aristocrat. Shares yield just 0.8%, but the dividend is likely to be very safe, as the expected payout ratio for this year is just 7%. This compares favorably to the average payout ratio of 31% since 2013.

Shares of Albemarle are trading at 8.9x the midpoint of guidance for 2023. We believe that shares have a fair value price-to-earnings ratio of 18. That is below the 10-year average of 23.4. Therefore, multiple expansion could add 15.2% to annual returns if shares of Albemarle were to reach our target by 2028.

In total, Albemarle is projected to return 21.4% annually over the next five years, driven by a 5% earnings growth rate, a starting yield of 0.8%, and a mid-double-digit contribution from multiple expansion.

Sonoco Products (SON)

a bag on a table with the word

Source: Shutterstock

Next is Sonoco Products (NYSE:SON), which provides packaging, industrial products, and supply chain services. The company’s revenue totaled more than $7 billion last year, and the stock has a market capitalization of $6 billion.

The company’s products are used in a wide variety of end markets, including food and beverage, appliances, electronics, and construction. This gives Sonoco Products a diverse group of customers, providing some protection if weakness occurs in its end markets.

Sonoco Products has used acquisitions to bolster its industry leadership position. The company completed its $1.35 billion purchase of Ball Metalpack, which manufactures sustainable metal packaging for food and household products, in early 2022. The transaction immediately paid off, as Ball Metalpack helped grow revenue by 30% last year.

We believe that Sonoco Products can grow EPS by at least 5% over the next half-decade. This is well below the average growth rate of 12% since 2013 and 11.7% since 2018, but EPS is starting from a near all-time high.

Despite the cyclical industry that it operates in, Sonoco Products has an impressive dividend growth streak of 41 years. The current yield of 3.3% should be considered quite safe, The expected payout ratio for 2023 is 35%, which is below the 10-year average payout ratio of 49%.

Sonoco Products has guided toward adjusted EPS of $5.85 for this year, giving the stock a price-to-earnings ratio of 10.6. If shares were to trade near their long-term average multiple of 16x earnings, then valuation would act as an 8.6% tailwind to annual results.

Therefore, Sonoco Products has a projected total annual return of 16.2% through 2028, stemming from 5% earnings growth, a starting yield of 3.3%, and a high single-digit addition from multiple expansion.

Williams-Sonoma (WSM)

Williams-Sonoma (WSM) store in a shopping mall

Source: designs by Jack / Shutterstock.com

Our final name for consideration is Williams-Sonoma (NYSE:WSM). The company is a specialty retailer that operates numerous home furnishing and houseware brands. These brands include Williams-Sonoma, Pottery Barn, West Elm, Rejuvenation, and Mark and Graham, among others. The company generates upwards of $9 billion annually and is valued at $7.4 billion.

Williams-Sonoma operates in a very competitive industry, but its business model is one reason it is among our favorite retailers. The company does have traditional brick-and-mortar locations. However, it actually sees more of its revenue through its e-commerce channels. The company also uses direct-mail catalogs.

This omni-channel strategy has worked to Williams-Sonoma’s advantage, especially during the Covid-19 pandemic. While many retailers had to switch business strategies to meet the challenges of the time, Williams-Sonoma already had an established e-commerce business. The company leveraged this while its physical locations were forced to close. During the worst of the pandemic, the company actually flourished, with EPS almost doubling in 2020.

Earnings are expected to be $13.70 for fiscal year 2023, which is down from the prior year. Still, this is a near-record high. As a result of this high base, we forecast earnings growth of 3% per year for the next five years.

Williams-Sonoma has provided shareholders with a dividend increase for 17 consecutive years. Shares have a market beating yield of 3.1%. Investors can likely expect future increases as the projected payout ratio for this year is 26%. For context, Williams-Sonoma has an average payout ratio of 36% over the last decade.

Using guidance for the year, Williams-Sonoma trades with a price-to-earnings ratio of 8.3. The long-term average is 13.6. That means that multiple expansion could add 10.4% to yearly results if the stock were to revert to our target price-to-earnings ratio by 2028.

In total, Williams-Sonoma is expected to deliver annual returns of 15.7% over the next five years, due to earnings growth of 3%, the starting yield of 3.1%, and a low double-digit contribution from multiple expansion.

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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