The famous Italian economist and philosopher Vilfredo Pareto is best known for the observation called the Pareto Principle, which states that 80% of earnings come from just 20% of actions.
Applied to investing, investors will notice over time that many of their stocks will lose money or not make much money. But some of the choices that are profitable tend to be lucrative enough to be life changing.
Here are two dividend growth stocks to consider for your portfolio that could make you richer in the long run.
1. Costco: A Colossal Membership Retailer
With 850 warehouses in the United States and 12 other countries, Wholesale Costco (COST 0.49%) is a leading membership-based retailer. The company uses its massive size and scale in negotiations with suppliers to buy in bulk, which saves money. In the second quarter of its current fiscal year, 71.6% of Costco’s $2.8 billion in net income was generated from membership fees, allowing it to pass the savings on to members with a minimum margin on products. This is what makes the company a very compelling value for customers.
As much as this business model has helped members save money, it has also made big money for shareholders: a $10,000 investment in Costco 10 years ago would now be valued at $57,000. with dividends reinvested. This is far more than the $30,000 the same amount would have generated had it been invested in a S&P500 index fund.
As Costco continues to add warehouses to new markets and gain more members as a result, earnings should continue to grow at a healthy pace: analyst consensus of 9.3% annually diluted earnings per share (EPS) over the next five years could arguably prove prudent given the company’s ability to consistently exceed expectations. Costco’s 0.7% dividend yield is significantly lower than the S&P 500 index’s 1.7% yield. But with the dividend distribution rate likely to be around 26% for the current fiscal year, the company’s dividend growth has only just begun. Additionally, Costco has a history of occasionally paying out special dividends.
Costco’s forward price-to-earnings (P/E) ratio of 31.5 is well above the discount store industry average of 22.7. But given the world-class quality of the company, dividend-growing investors would be well advised to consider buy Costco stock and adding dips.
2. Williams-Sonoma: Tons of wiggle room for this future high-end home retailer
Recording $8.7 billion in total revenue in 2022, Williams Sonoma (WSM 0.06%) is a well-established retailer of products such as cookware and home furnishings. The company’s strategy of designing in-house and prioritizing digital sales (two-thirds of revenue in 2022 came from e-commerce) to its affluent customer base has paid off for shareholders.
A $10,000 investment in Williams-Sonoma stock 10 years ago would now be worth $29,000 with dividends reinvested. And that’s even considering that the stock is currently 33% off its 52-week high.
As big as Williams-Sonoma is as a company, the huge growth potential remains. That’s because the company’s market share in the $830 billion industry is just over 1%. That’s why analysts estimate Williams-Sonoma’s earnings will grow 8.9% each year for the next five years. Putting that into perspective, that’s just below the specialty retail industry average of 9.6%.
Income-oriented investors will appreciate the stock’s 3% dividend yield, which beats the market. And with a dividend payout of around 24% in 2023, Williams-Sonoma’s dividend is expected to continue growing in years to come.
Even better, the stock’s forward price-to-earnings ratio of 8.2 is well below the specialty retail sector’s average forward price-to-earnings ratio of 15.6. This offers investors focused on dividend growth a hassle-free buying opportunity.
Cody Kester holds positions at Williams-Sonoma. The Motley Fool fills positions and recommends Costco Wholesale and Williams-Sonoma. The Motley Fool has a disclosure policy.