Sarah Travers
Over the past 50 years, the S&P 500 has consistently delivered a solid annualized return of around 10%. This return aligns closely with the long-term average earnings growth of companies within the index. Investors aiming to surpass the broader market’s returns should focus on stocks that are not only fairly priced but also exhibit above-average growth potential. While investing in growth stocks is one way to outperform the market, these companies typically do not pay dividends. For those investors who seek both passive income and strong stock price appreciation, there are still a few select dividend-paying stocks that meet these criteria. Here are two such stocks that show promise for the future.
Starbucks: A Coffee Giant Poised for Growth
Starbucks is one of the top dividend stocks with the potential to outperform the S&P 500 over the next five years. Recently, Starbucks announced a significant leadership change, with Brian Niccol, the former chairman and CEO of Chipotle Mexican Grill, stepping in as the new CEO. Niccol’s leadership at Chipotle helped transform it into a top-performing global restaurant stock, and there is optimism that he could bring similar success to Starbucks.
Despite challenges in consumer spending, Starbucks remains a strong brand. Although global comparable sales have declined recently, the company is still expanding its footprint by opening new stores and growing its loyalty program. Last quarter, Starbucks’ loyalty membership increased by 7% year over year, reaching a total of 33.8 million members. The brand’s strong recognition, ranked as the highest among restaurant brands globally, positions it well for continued growth, particularly in smaller cities where there is still substantial market potential.
Starbucks has maintained healthy profit margins, with a net profit margin of 11% over the past year, even amid a challenging sales environment. This consistent profitability supports a growing dividend payout, with the company currently distributing over 60% of its annual earnings as dividends. The quarterly dividend is set at $0.57 per share, which, combined with the recent drop in share price, has elevated the forward dividend yield to 2.46%—the highest it has been in years.
Although Starbucks’ stock has underperformed the S&P 500 over the past five years, the future looks promising. With Niccol’s proven track record, there is potential for Starbucks to achieve its previous annual earnings growth target of 15%. If Starbucks continues to trade around a price-to-earnings ratio of 25, and Niccol successfully enhances its margins, the stock could see its value double by 2029, all while providing shareholders with an above-average dividend yield.
Casey’s General Stores: Convenience Chain with Consistent Returns
Casey’s General Stores, a prominent chain of convenience stores, is another dividend stock that could outperform the S&P 500 over the next five years. Despite being in a seemingly unexciting industry, Casey’s has consistently delivered impressive returns for shareholders, doubling the S&P 500’s performance over the last decade. Since 2014, with dividends reinvested, Casey’s has provided a total return of 478%, compared to the S&P 500’s 239%.
Casey’s operates over 2,600 stores and has been steadily expanding its presence across the United States for more than 50 years. The company started paying regular dividends in 1991 and recently raised its quarterly dividend by 15% to $0.50 per share, resulting in a forward yield of 0.54%. This increase suggests that an investor’s yield could double within five years, reaching over 1% from the current share price.
Casey’s strong business model provides inherent competitive advantages. Its stores attract customers who often make impulsive purchases, driving high margins for the chain. Known for its freshly prepared food, particularly pizza, Casey’s ranks as the fifth-largest pizza chain in the U.S. The company has achieved an impressive 15% annualized growth in earnings per share over the past decade and continues to grow, with earnings rising 13% over the last year.
Looking ahead, Casey’s aims to open at least 350 new stores between fiscal 2023 and 2026. It also plans to accelerate the growth of its food business and improve operating efficiency, both of which are expected to drive further earnings growth. Wall Street analysts project the company’s earnings to grow at an annualized rate of 13%. With a reasonable forward price-to-earnings ratio of 26, Casey’s General Stores is well-positioned to deliver returns that could outpace the broader market, making it a strong contender for dividend-focused investors.
