Three best dividend stocks based on dividend growth and company health

Many dividend investors make the mistake of just looking for a high dividend yield.

This can result in a “dividend trap” which is when a company with limited growth or spotty financial health offers a high dividend. The stock price generally drops, along with the dividend over time, even though the yield may seem high.

According to Trading.biz analyst Cory Mitchell, “Savvy dividend investors buy companies that increase their dividend year after year, and that are also growing their earnings steadily.

“Increasing yearly earnings means bigger dividend income each year, and a stock price that tends to rise over time as well.”

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Here are three dividend stocks that have increased their dividend payment every year for at least 10 years, have strong yearly earnings growth, positive earnings every year for at least six years, and are expected to continue growing earnings over the next five years.

Here is a chart showing how all three stocks have performed over the last year (including dividends).

W.W. Grainger, Inc. (GWW)

Grainger sells a wide range of industrial tools and supplies. It has a 1.8% dividend, which may not seem like a lot, but the dividend amount has increased by 14.9% per year over the last decade. Another way to think of that is that your cash flow from the stock increased 14.9% per year, on average.

Here are some other key metrics.

• Analysts expect 28% yearly EPS growth over the next five years. The S&P 500 average is often around 8 to 9%.
• The company has grown EPS by 21% per year over the last five years.
• The stock has averaged returns of 14.5% per year over the last decade, versus the S&P 500 averaging 12% per year.

Hubbell Inc. (HUBB)

Hubbell sells electrical and power system components. It has a 1.5% dividend yield and has grown the dividend by 9.3% per year over the last decade.

Other key metrics include:

• Industry analysts are predicting 19.5% per year EPS growth over the next five years.
• The company has grown EPS by 15% per year over the last five years.
• The stock has averaged 14.1% yearly returns over the last decade.

UnitedHealth Group Incorporated (UNH)

UnitedHealth is a private health insurer both inside the U.S. and internationally. The company has grown its dividend payment by an average of 21% per year over the last decade. The current yield is 1.4%

Here are some other key metrics.

• Industry analysts predict 12.7% per year EPS growth over the next five years.
• The company has grown EPS by 13.6% per year over the last five years.
• The stock has averaged 23.4% yearly returns over the last decade.

Investing in dividend stocks

The idea behind buying stocks like these, as opposed to a stock that simply has a high dividend yield, is that these companies have proven their profitability and the dividends and share price have benefitted.

Many high-yield dividend stocks may have erratic payments, or if the company isn’t growing the dividend amount may drop in the future (the yield may still appear high because the share price is dropping).

These stocks offer increasing cash flow as well as a rising share price. Or at least they have historically.

The future is unknown, and these stocks will have rising periods and declining periods along with the major indices. If they continue to produce the earnings growth they have been, higher dividends and higher share prices are likely.