3 Dividend Champions with room for dividend growth

Key Points

• As EV prices decrease and automakers ramp production, demand for Albemarle products should trend higher over time.
• For West Pharmaceutical, a 22% annualized total return over the last 10 years, including a growing dividend, has been a winning combination for income investors.
• Chubb Limited has a 30-year dividend hike streak and currently pays a $3.44 per share annual cash payout.

The World Series champion Texas Rangers recently paid nice dividends for sports bettors. For stock investors, there's a different, more predictable group of dividend payers worth betting on — the Dividend Champions.

Dividend Champions are publicly traded companies that have increased their dividends for at least 25 consecutive years. Their ability stems from operating strong businesses that grow earnings over long periods. Their stocks make ideal investments for dividend growth investors who prefer a portfolio generating increasing cash flow.

These cash distribution all-stars are often confused with Dividend Aristocrats, which also have 25-year dividend hike streaks — but are specifically members of the S&P 500 index. Some investors prefer to focus on Dividend Champions because they represent a more comprehensive set of dividend growers. There are currently 150 Dividend Champions, nearly three times the number of Dividend Aristocrats.

Both are great places to find winning income stocks — but there's an opportunity to be more selective. Dividend Champions come in different shapes and sizes based on market capitalization, industry and even dividend growth prospects. Some pay a large percentage of profits as dividends, while others pay a small portion. 

The payout ratio, or proportion of annualized dividends to future earnings, is a valuable way to assess dividend sustainability and growth potential. Companies with high payout ratios can be more vulnerable to dividend freezes or cuts when earnings growth slows. Companies with low payout ratios are often better able to withstand a profit downturn and keep the dividend hikes going.

Low-payout Dividend Champions are an incredibly compelling choice for buy-and-hold dividend investors. Approximately one out of every 10 Dividend Champions have payout ratios below 20%. These creams of the crop appear to have long roads ahead when delivering championship-caliber dividend growth.

What is Albemarle’s payout ratio? 

Albemarle Corporation NYSE: ALB has a forward payout ratio of only 10%. Ten percent of next year's earnings will go to shareholders as dividends. The maker of lithium, bromine and other specialty chemicals trades at a three-year low following disappointing third-quarter profits. However, the long-term growth story remains solid, given the company's role in providing battery-grade lithium for electric vehicles (EVs). 

As EV prices continue to decrease and automakers ramp production, demand for Albemarle products should trend higher, especially if gasoline prices stay elevated. 

Lithium pricing will be a key determinant of profitability, but with Wall Street forecasting earnings per share (EPS) around $15 next year, paying a 40 cents per share quarterly dividend shouldn't be a problem. As cost inflation subsides and new car loan rates moderate, extending a 29-year dividend hike streak shouldn't be an issue. 

What is West Pharmaceutical's dividend hike streak?

At 31 years, West Pharmaceutical Services Inc. NYSE: WST has one of the most impressive dividend increase streaks among U.S. companies. The Dividend Champion makes delivery systems for injectable drugs and other healthcare products in constant need, which historically led to steady earnings growth and an ability to raise the dividend — albeit modestly.

West Pharmaceuticals investors don’t get a big yield. The current 20-cent per share quarterly dividend equates to a forward yield of just 0.2%. They get equity in a business that has performed well throughout the economic cycle because its owned brands and contract-manufactured products are always in demand worldwide. 

Investors also get a stock with tons of room for dividend growth because West has an ultra-low 9% payout ratio. Management has long opted to reinvest profits in product innovation and geographic expansion but has stayed committed to raising dividends. A 22% annualized total return over the last 10 years, including a growing dividend, has been a winning combination for income investors.

Is Chubb's dividend growth sustainable?

Switzerland-based insurer Chubb Limited NYSE: CB has a 30-year dividend hike streak and currently pays a $3.44 per share annual cash payout. The dividend is more than sustainable, given the company's 16% payout ratio, one of the lowest among large-cap financials. Prospects for future dividend increases are based on Chubb’s leading position in the property casualty insurance market, which has a presence in over 50 countries. 

Chubb recently reported solid third-quarter financials (including 58% core operating income growth) that benefited from higher interest rates on investments and improved margins, bolstering an already stout balance sheet that now contains $2.6 billion in cash. Over the last five years, the board has boosted the dividend by an average of 3%, bringing the yield up to 1.6%. A globally recognized insurance brand and exposure to an "essential" product could eventually bring another title to this Dividend Champion — a 50-year Dividend King.