7 Desirable Dividend Growth Stocks for Income Investors

• Apple (AAPL): Strong growth with emerging segments likely to help in sustaining the growth momentum. Robust cash flows will ensure dividend upside.
• Chevron (CVX): Among the top picks from the energy sector with a healthy balance sheet, low break-even assets, healthy cash flows and an attractive dividend yield.
• Pfizer (PFE): Strong growth and cash flow upside from the covid-19 vaccine business. Deep pipeline of drugs to ensure that growth sustains in the long-term.
• AT&T (T): A contrarian pick that seems significantly undervalued. Communications business has growth potential and there is renewed dividend growth visibility after the media division spin-off.
• AstraZeneca (AZN): Low-beta stock with an attractive dividend yield. A strong portfolio of products and a deep pipeline of innovative drugs. Double digit top-line growth visibility.
• Costco (COST): Sustained growth in membership fees provides cash flow upside. Omni-channel retail strength backs growth story and dividend upside visibility.
• Altria (MO) – Another low-beta undervalued contrarian pick. Robust cash flows ensure dividend growth even during the period of business transformation.

Quality dividend stocks are a critical part of any well-diversified portfolio, but as the markets take on more volatility, even growth investors may want to take a minute to re-balance their portfolios.

Inflation has been rising with energy prices likely to remain firm. Further, geopolitical tensions have increased the risk of a recession. A recent survey indicated that U.S. might be poised for a recession in 2023.

At the same time, the Federal Reserve is considering multiple rate hikes this year. This mayt translate into a relative tightening of liquidity and increases the possibility of a market correction. I am not anticipating a big crash. However, a 10% to 15% correction cannot be ruled out.

I would therefore re-balance my portfolio and consider exposure to some high-quality dividend growth stocks. My focus is on relatively undervalued and low-beta stocks that would help preserve capital if there is a meaningful market correction.

Dividend Stocks to Buy: Apple (AAPL)

From a price action perspective, AAPL stock has been in an uptrend with returns of 27% in the last six months. However, at a forward price-to-earnings ratio of 28.3, the stock looks attractive for further upside.

AAPL stock has a current dividend pay-out of $0.88. This implies a dividend yield of 0.5%. However, I believe that there are two important factors that support sustained dividend growth.

First, Apple has a cash glut. As of December 2021, the company has more than $200 billion in cash and equivalents. Second, for the first quarter of 2022, the company generated $47 billion in operating cash flows.

The cash resources are likely to be used in dividends and share repurchases. Of course, Apple will be deploying cash in innovation-driven organic and inorganic growth.

Finally, the iPhone segment remains the company’s cash flow machine. However, emerging segments like wearable and services will support top-line and earnings growth. This is likely to ensure that cash flows remain robust.

Overall, AAPL stock is attractive for the core portfolio. I expect investors to continue benefitting from dividend and capital gains.

Chevron (CVX)

In the last six months, Chevron stock has surged by 54%. However, at a forward P/E of 12.3, the stock still looks attractive.

CVX stock has a healthy dividend yield of 3.46%. With oil trading above $100 per barrel, there is clear visibility for dividend growth.

From a fundamental perspective, there are three major reasons to like Chevron. These include a strong balance sheet, a strong asset base and low break-even assets.

Currently, Chevron has a net-debt ratio of less than 20%. With high oil prices, the company is positioned to deliver robust cash flows. This will be deployed towards aggressive share repurchasing and higher dividends. For the current year, the company has a share buyback guidance in the range of $5 to $10 billion.

It’s also worth noting that Chevron has a resource base of 88bboe. With a healthy record of reserve replacement, the company has multi-year cash flow visibility.

Chevron is also deploying additional cash flows into the renewable energy sector. The company has a target of renewable fuels of 100mbd by 2030. For the same year, the company expects hydrogen fuel capacity at 150Ktpa.

Overall, Chevron is a quality pick from the oil and gas sector. Even if oil trades around $80 per barrel, the company is positioned to generate robust cash flows and there is visibility for sustained dividend growth.

Dividend Stocks to Buy: Pfizer (PFE)

Pfizer stock has trended higher by nearly 30% in the last six months. However, the stock remains significantly undervalued at a forward P/E of less than 10.

A dividend yield of 3.14% makes PFE stock among the quality dividend growth stocks to consider.

For 2021, Pfizer reported strong top-line growth and cash flow upside from the vaccine against covid-19. Even for the current year, Pfizer has guided for revenue of $100 billion (mid-range). This would imply a year-on-year growth of 23%.

It’s also worth noting that the recent surge in covid-19 cases and a new variant have strengthened the case for another booster dose. Therefore, Pfizer is likely to deliver revenue that’s on the higher end of the guidance.

With strong cash flows, Pfizer is well-positioned to accelerate the deep pipeline of clinical trials. For the current year, Pfizer expects to invest $11.0 billion in research and development. That’s one reason to believe that healthy growth will sustain in the coming years.

At the same time, Pfizer has made acquisitions in the recent past to boost its drug pipeline. Strong cash flows would also help Pfizer is boosting dividends on a y-o-y basis. Pfizer has a strong track record of dividend growth at a CAGR of 6.32% in the last five-years. I would not be surprised if the dividend growth exceeds the last few years average.

AT&T (T)

With the impending spin-off of the media division, AT&T has already cut its annual dividend nearly in half to $1.11 per share. Dividend growth for T stock has also not been impressive in the last few years.

However, I would consider T stock at current levels for two reasons.

First and foremost, AT&T trades at a forward P/E of 7.8. With the dividend cut being discounted, the valuations look attractive. Once the demerger is completed, it’s likely that T stock will trend higher.

Furthermore, for 2021, AT&T reported communications segment revenue of $30.2 billion. For the same period, the segment EBITDA was $10.6 billion. With growth in the mobility and wireline business, cash flow is likely to be robust. In particular, AT&T stands to benefit from the adoption of 5G. I therefore expect dividends to increase for the communications pure-play.

It’s also worth mentioning here that AT&T plans to deleverage and reduce net debt to 2.5x by the end of 2023. With a stronger balance sheet, the company will be positioned to deploy more cash towards dividends and possible share buybacks. Overall, T stock is a good contrarian bet at current levels.

Dividend Stocks to Buy: AstraZeneca (AZN)

AstraZeneca stock is up nearly 18% in the last six months. The 2.95% dividend yield stock still looks attractive.

One reason for the rally is robust top-line growth. For 2021, AstraZeneca reported revenue of $37.4 billion. On a y-o-y basis, revenue increased by 38%. Even after discounting the revenue growth from the covid-19 vaccine, revenue growth was healthy at 23%.

For the current year, revenue growth will continue to be supported by the covid-19 vaccine. Additionally, the company’s antibody cocktail to prevent covid-19 has received approval in the United States, Europe and U.K. This will also support growth.

AstraZeneca has also guided for double-digit revenue growth through 2025. This seems entirely likely with the company having an innovative late-stage pipeline.

Overall, AstraZeneca is positioned for sustained EBITDA and cash flow growth. This is likely to translate into stock upside and dividend growth. At a forward P/E of 16.0, the stock is worth holding in the portfolio.

Costco (COST)

Costco (NASDAQ:COST) is another of my favorite names among dividend growth stocks. Since it initiated dividends in May 2004, they have grown at a CAGR of 13%.

I expect dividend growth to sustain with higher cash flows.

One reason to like Costco is the recurring income from membership fees. In the last twelve months, Costco has earned $4.0 billion in membership fees. With a healthy renewal rate, the cash flow from memberships is likely to remain steady.

At the same time, as the company expands its presence in the U.S. and globally, the membership fee is likely to swell. As an example, Costco has just two stores in China. With a big addressable market in the country, the number of member households is likely to remain in an uptrend.

It’s worth noting that for Q2 2022, Costco reported net sales growth of 16.1% to $50.94 billion. With the company ramping up omnichannel sales capabilities, it’s likely that comparable-store sales growth will remain strong.

I must however mention here that COST stock trades at a forward P/E of 44.0. I would consider fresh exposure to the stock on dips. However, a significant correction seems unlikely for the low-beta stock.

Altria (MO)

Altria stock has a dividend yield of 6.83% and trades at a forward P/E of 10.9.

It’s worth noting that Altria has not been on a high-growth trajectory. To some extent, this factor explains the depressed valuation.

However, even with moderate growth, the business has been a cash flow machine. As a matter of fact, the company has increased dividends in the last five years at a CAGR of 8.25% against a sector median of 5.72%.

For 2021, Altria reported revenue from smokable products of $95.6 billion. Therefore, the free cash flow for the company is entirely attributable to the smokable product segment. These cash flows are being deployed for expansion in the non-smokable product category.

In the oral tobacco business, Altria already has a growing market share. It’s also worth noting that Altria has a 45% stake in Cronos (NASDAQ:CRON). With the Congress clearing a key legislation that would legalize marijuana at Federal level, the stake in Cronos is likely to create value in the next few years.

Overall, MO stock is another low-beta name with healthy free cash flows. Even with the business transformation, dividend growth has been healthy. At current valuations, there is also scope for capital gains.

On the date of publication, Faisal Humayun 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.