3 Dividend Growth Stocks to Watch in July 2020 (They Yield up to 12%)

Looking for Returns in This Shaky Market? These Dividend Growth Stocks Could Help

For most of the past decade, a few percent of dividend yield did not seem like much. That’s because markets were steadily climbing. But when markets start looking shaky—like what’s happening right now—dividends could provide investors with great peace of mind.

Think about it. In a market sell-off, even the most solid blue-chip companies will likely see their share prices tumbling. But if a company decides to pay a dividend, its shareholders will get paid no matter where the company’s stock price is going.

In other words, a solid dividend policy can give investors a way to earn a return with certainty in an uncertain market environment.

Better yet, because dividends have to be paid in cash, the ability to pay dividends through thick and thin is considered a genuine sign of strength for a company. So, instead of selling everything, investors are more likely to hold on to shares of reliable dividend-paying companies in a market crash. As a result, these stocks might be able to survive the downturn in better shape than the rest.

The best part is, there are companies that pay not just a steady dividend, but an increasing one. So, over time, shareholders can get “pay raises” in their passive income stream.

Below is a list of three dividend growth stocks that deserve income investors’ attention right now. The reason is that, while we live in an unprecedented market environment, these companies might be able to deliver dividend increases to shareholders in the near future. And one of them is actually an ultra-high yielder.

3 Top Dividend Growth Stocks for July 2020

(Source: Google Finance, last accessed June 16, 2020.)

Costco Wholesale Corporation

It doesn’t take a rocket scientist to see why Costco Wholesale Corporation (NASDAQ:COST) is worth checking out this time around. While a lot of businesses have struggled due to the coronavirus outbreak, customers have been lining up outside Costco’s warehouse stores to stock up on supplies. (Source: “Preparing for the Coronavirus: Shoppers Are Finding Empty Shelves, Long Lines at Stores Nationwide,” USA Today, March 13, 2020.)

Of course, the real reason why we are talking about Costco Wholesale Corporation here on Income Investors is its dividend growth. The company set up its regular dividend policy in 2004, with an initial quarterly dividend rate of $0.10 per share.

Since then, Costco has raised its payout every single year. The latest dividend hike came this April, when the company boosted its quarterly payout to $0.70 per share. So, since 2004, Costco’s quarterly dividend rate has increased by 600%. (Source: “Splits & Dividends,” Costco Wholesale Corporation, last accessed June 16, 2020.)

The company has a growing business to support those sizable payout increases. According to its latest earnings report, Costco generated $36.5 billion of net sales in the third quarter of its fiscal-year 2020, which ended May 10. The amount represented a 7.3% increase year-over-year. (Source: “Costco Wholesale Corporation Reports Third Quarter and Year-to-date Operating Results for Fiscal 2020,” Costco Wholesale Corporation, May 28, 2020.)

At the bottom line, the dividend growth stock earned a net income of $838.0 million, or $1.89 per diluted share. This figure was negatively impacted by the incremental wage and sanitation costs related to COVID-19, but it still easily covered the $0.70-per-share dividend the company declared during the fiscal quarter.

At the time of this writing, Costco stock has an annual dividend yield of 0.94%, so it’s not a high-yielder by any means. But, if the company can keep growing its dividends at a decent clip, investors who purchase COST stock today can expect to earn much higher yield on it in the years ahead.

Johnson & Johnson

One of the reasons behind the recent market volatility is that investors are wondering just how bad the recession could get. That’s why, for income investors, it’s important to own companies that can pay dividends through thick and thin.

And when it comes to providing recession-proof dividends, few companies have done a better job than Johnson & Johnson (NYSE:JNJ).

You see, as a healthcare giant, JNJ has established market positions in all three of its operating segments: “Consumer,” “Pharmaceutical,” and “Medical Devices.”

Healthcare is known for being a recession-proof industry. Even in the company’s Consumer segment, its business is quite durable. In particular, with brands like “Johnson’s Baby,” “Band-Aid,” and “Tylenol,” many of JNJ’s Consumer products have become household names and can generate consistent sales through economic cycles.

As a matter of fact, Johnson & Johnson has grown its adjusted operational earnings for 36 consecutive years. (Source: “Full Year 2019 Results,” Johnson & Johnson, last accessed June 16, 2020.)

Therefore, it shouldn’t come as a surprise that the company has been rewarding its investors with a steadily increasing stream of dividends. Looking back, we see that JNJ stock has increased its dividend every year for 58 consecutive years. (Source: “Dividend History,” Johnson & Johnson, last accessed June 16, 2020.)

The best part is, despite decades of continuous dividend growth, Johnson & Johnson has no problem covering its payout.

Last year, Johnson & Johnson generated adjusted earnings of $8.68 per share while declaring four quarterly dividends totaling $3.75 per share. As a result, it had a conservative payout ratio of 43.2%. (Source: “Johnson & Johnson Reports 2019 Fourth-Quarter and Full Year Results,” Johnson & Johnson, January 22, 2020.)

In the first quarter of 2020, the company delivered adjusted operational sales growth of 5.6% despite the COVID-19 pandemic. Moreover, its adjusted earnings per share rose 9.5% to $2.30. (Source: “Johnson & Johnson Reports 2020 First-Quarter Results,” Johnson & Johnson, April 14, 2020.)

At its current share price, Johnson & Johnson stock offers a decent annual yield of 2.9%.

NEWTEK Business Services Corp

Compared to the previous two companies, NEWTEK Business Services Corp (NASDAQ:NEWT) is a much lesser-known name. However, despite being a much smaller stock with a market capitalization of around $380.0 million, NEWT is offering a very, very big payout.

NEWTEK is a business development company (BDC). But, unlike most BDCs that are mainly lenders, NEWTEK provides a wide range of business and financial solutions to small- and medium-sized businesses. The company offers complete lending solutions, accounts receivable lines of credit, electronic payment processing, mobile payment processing, payroll and benefits processing, and Web design, among other services.

Over the years, NEWTEK has served over 100,000 business accounts.

On June 12, the company’s board of directors declared a second-quarter cash dividend of $0.56 per share, which represented a 21.7% increase year-over-year. (Source: “Newtek Business Services Corp. Declares Dividend of $0.56 per Share for the Second Quarter of 2020,” NEWTEK Business Services Corp, June 12, 2020.)

In a hard time like this, such a sizable dividend increase is great news for income investors.

With NEWT stock trading at around $18.00, this quarterly payment comes out to an annual yield of 12.4%.

Seeing such a high yield, investors might be wondering whether the payout is too good to be true.

Well, in the company’s latest dividend announcement, management is forecasting adjusted net investment income of between $1.30 and $1.50 per share for the second quarter of 2020. Combine this with its first-quarter adjusted net investment income of $0.21 per share and the company would be earning $1.51 to $1.71 per share in the first half of the year, if things go as expected.

And since NEWTEK has declared total dividends of $1.00 per share in the first half of 2020, reaching the guidance range would allow the company to comfortably cover its payout.

But of course, with the COVID-19 pandemic, it’s uncertain how much the company will pay going forward. According to management, they expect to “maintain a dividend policy with the objective of making quarterly distributions in an amount that approximates 90 – 100% of the Company’s annual taxable income.” (Source: Ibid.)

In other words, nothing is carved in stone. But in today’s low-yield environment, income investors might want to add NEWTEK stock to their watch list.