10 Big Dividend Growers For A Powerful Passive Income Snowball

Summary

• Investing in dividend-growth stocks is arguably the best way to build a passive income snowball.
• We discuss why this is.
• We also discuss 10 big dividend growers that can help build a powerful passive income snowball.

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Investing in dividend growth stocks is one of the best ways to build a powerful passive income snowball. This is because they generate truly passive income, as you do not have to run a business or do any other administrative or excessive management tasks to sustain them, unlike rental properties or franchise businesses. Additionally, by definition, dividend growth stocks are ones that increase their dividend payouts year after year, thereby making them extremely effective compounders.

On top of that, you benefit from three sources of increasing income on your original investment. First, the original stock you hold will increase its dividend payout each year due to the company's dividend growth. Additionally, the dividends that stock pays out can be reinvested into buying more shares of stock in that company, further increasing the passive income you receive from your investment. Finally, those new shares that you purchase will also begin to increase their dividend payouts each year as the company continues to grow its dividend payout, thereby providing another source of income growth year after year.

This ultimately can turn into a very powerful dividend snowball, with exponential growth in passive income for patient, long-term investors. To help readers get started on building their own powerful passive income snowball, here are 10 big dividend growth investments.

10 Dividend Growers For Financial Freedom

First and foremost, for investors who want quick and powerful diversification for their passive income snowball, the Schwab U.S. Dividend Equity ETF (SCHD) is a great way to do that. It offers a 3.4% dividend yield that is more than double what is currently offered by the S&P 500, instant diversification across 103 blue-chip dividend growth stock holdings that are well-diversified across numerous sectors, and a very low expense ratio of just 0.06%. Additionally, with a very strong dividend growth track record of 12 consecutive years and a dividend CAGR of 11.01% over the past 10 years, 12.88% over the past five years, 9% over the past three years, and 8.86% over the trailing 12 months, SCHD is a great way for investors to instantaneously build a well-diversified portfolio that pays a decently attractive dividend yield and is highly likely to grow at a rate that significantly exceeds inflation for years to come.

That being said, for some investors, a 3.4% starting dividend yield is simply too low to be able to meet their objectives. Additionally, the fund is so diversified that it may be unlikely to deliver meaningful alpha relative to the broader market. As a result, for investors who are in pursuit of higher total returns and/or current yield, picking individual stocks may be a better fit.

One of these is Main Street Capital (MAIN), which is one of the preeminent blue-chip business development companies (BIZD). This internally managed BDC has one of the lowest management costs in the entire sector and an exceptional track record of delivering significant total return outperformance over the long term, as well as solid dividend growth. On top of that, it offers a 7% next 12-month expected dividend yield, making it a very attractive high-yield dividend stock. Meanwhile, from 2007 through 2023, the stock has grown its dividend at a 14.2% CAGR, though the dividend has grown at a more pedestrian 7% CAGR over the past five years. Additionally, moving forward, dividend growth is expected to slow even further, with dividend growth of just 1.5% expected for 2025. Still, with a high yield and an attractive long-term total return and dividend growth track record, along with exposure to middle-market companies, MAIN can provide attractive diversification for a portfolio, as well as a higher yield than what SCHD alone can offer.

Other really attractive dividend growers can be found in the midstream sector (AMLP), with blue chips like Enbridge (ENB), Energy Transfer (ET), and Enterprise Products Partners (EPD) offering yields in the range of 7% to 8% along with 3% to 5% annualized dividend growth CAGRs, strong balance sheets, and very defensive, stable cash flow and business models. EPD and ENB, in particular, have very impressive dividend growth streaks of a quarter-century or greater and very strong balance sheets, with EPD having an A-minus credit rating and ENB having a BBB+ credit rating. ET is a little bit higher risk with a BBB credit rating and a much less impressive dividend track record, but it also offers the highest yield of the three at about 8%. Ultimately, all three can significantly boost a portfolio's yield while also offering dividend growth that is likely to meet or exceed inflation for years to come.

More great opportunities can be found in the infrastructure space. In particular, Brookfield Infrastructure Partners (BIP)(BIPC), Brookfield Renewable Partners (BEP)(BEPC), and Clearway Energy (CWEN.A)(CWEN) all offer attractive dividend yields in the 5% to 6% range, while also likely to grow their payouts at a mid- to high-single-digit annualized rate moving forward. On top of that, they also have highly contracted assets with lengthy terms to maturity, strong balance sheets with few near-term maturities, and significant exposure to growth sectors like renewable energy and data centers.

BEP, in particular, looks attractive right now, as its dividend yield is around 6%, its balance sheet is very strong with a BBB+ credit rating, with a weighted average term to maturity on its debt of well over a decade, very little floating rate exposure, billions of dollars in liquidity, and expected FFO per unit growth of over 10% per year for the foreseeable future. Additionally, it has significant indexation to inflation in its cash flows, making it particularly resistant to a higher-for-longer inflation and interest rate environment. A meaningful decline in interest rates would also boost the company by reducing its cost of capital and enabling it to invest more aggressively for growth.

BIP, meanwhile, is a more diversified infrastructure business that - unlike BEP and CWEN.A, which has significant exposure to renewable energy production - is diversified across the midstream, utilities, transportation, and data sectors. It enjoys attractive growth verticals, particularly in the data center space, which is being fueled by the AI boom, thereby giving investors an attractive source of profit from the AI boom while still generating very attractive and defensive yields. BEP is also being boosted by the AI boom, as it recently signed a mega deal with Microsoft to provide renewable power for its AI expansion.

Last but not least, the alternative asset management space offers attractive growth opportunities as well, with Brookfield Asset Management (BAM) and Blue Owl Capital (OWL) in particular offering attractive opportunities with dividend yields in the 4% to 5% range expected over the next 12 months, and dividend growth rates expected in the mid-to high-teens for the foreseeable future, as their asset-light business models enable them to pay out very generous payout ratios to shareholders while also still generating very strong growth due to significant fundraising.

Investor Takeaway

By buying dividend payers such as the 10 mentioned in this article, investors can build a portfolio that offers an attractive combination of high yield that can give them a strong head start towards building a passive income stream that is enough to cover their monthly expenses while also delivering compelling dividend growth that should meet or exceed the rate of inflation for years to come, thereby not only protecting their current purchasing power but accelerating its growth process, enabling them to achieve financial freedom sooner than they likely otherwise would.