Anyone who’s read my work for any period of time knows that I place a great deal of emphasis on current yield. There are several reasons for this. One is the saying, “A bird in the hand is worth two in the bush.” In other words, an investment that can pay you cash today is more certain than one that you’re hoping will be able to pay you twice as much down the line. This is because there are macroeconomic risks, execution risks, technological disruption risks, management risks, and competition risks that can get in the way of that growth potential materializing. As a result, a lot of bad things can happen between now and the future payoff date for a long-term growth-oriented investment that can get in the way of you and your targeted returns. In contrast, a company that pays a very dependable and attractive current yield is a much less risky compounding proposition, even if it may not offer the same degree of excitement as a growth investment does.

Another reason why I like high current yields so much is that stocks that have lower growth, but higher yields, are much easier to value because there’s relatively little speculation about the future involved. Instead, the company just needs to continue paying its current distribution and then grow it to some degree over time to generate a decent total return. In addition to being more certain, as already discussed, this also makes it much easier to implement an opportunistic capital recycling program because you can have a much greater degree of confidence in whether the stock is overvalued or undervalued. Once it reaches full or overvalued territory, you can sell it and recycle the capital to another stock with a fairly high degree of confidence that it will deliver a higher total return. By repeating this strategy, you can turn stocks that generate pretty dependable, but not terribly exciting, returns and use capital recycling to further accelerate the compounding process, generating market-crushing total returns. This is something I’ve been able to implement fairly well in the high-yield space and have been able to significantly beat not only the broader high-yield and dividend growth sectors (SCHD) but also the overall S&P 500 (SPY) over time, despite never holding exciting market-crushing stocks like NVIDIA (NVDA) or Microsoft (MSFT).

That being said, however, dividend growth is also very important for three big reasons.

1. Current Income and Inflation: While current income is great, in an age where inflation is a big problem, being able to grow that income stream at a rate that exceeds inflation is important for not only preserving but increasing the long-term purchasing power of your income stream and ultimately, your overall wealth.
2. Stock Price Growth: A company that can grow its dividend at a brisk pace over time is almost certainly going to see its stock price move higher as well. Dividends generally serve as a floor for the stock price. If the dividend is growing fast, the floor of the stock price is also going to rise, which means that over the long term, as the lows get higher, so too will the stock’s highs in all likelihood.
3. Sustainability of the Business: A company that can sustain a high growth rate over an extended period means that it is likely investing aggressively and has a dynamic business model well-positioned to not only survive but thrive in an increasingly fast-changing world. Such companies often generate significant shareholder wealth over the long term.

As a result, while I like to fill my portfolio with high-yielding blue-chip stocks that generate relatively low dividend growth, I also like to supplement those stocks with some higher-growth dividend stocks. In this article, I’ll discuss four of them.

#1. Brookfield Asset Management (BAM)

While its 4.1% dividend yield will not blow anyone away, when it is combined with the expected double-digit dividend growth rate of 15%+ for the foreseeable future, the investment thesis suddenly looks extremely compelling. The company believes it can grow so rapidly due to its strong fundraising momentum across its infrastructure, renewable power, real estate sectors, and especially its private credit direct lending and insurance solutions businesses.

Such strong fundraising momentum and an asset-light business model enable the company to generate enormous amounts of free cash flow and return much of that free cash flow to shareholders. As a result, Brookfield Asset Management is one of the most dynamic dividend growth stocks in the market today. Additionally, its position as the second-largest alternative asset manager in the world gives it a strong competitive advantage, and it has no debt on its balance sheet alongside significant cash reserves, giving it a very strong balance sheet and the ability to act opportunistically to create value for shareholders.

#2. Broadcom (AVGO)

Broadcom is another dynamic dividend growth stock. It has benefited significantly from the AI boom, which is boosting the company’s earnings and stock price, enabling it to deliver long-term total returns that have completely crushed those of the broader market:

Analysts expect its dividend growth rate to be around 14% CAGR through 2027 as the growing AI demand should boost the company’s earnings significantly and enable it to grow its dividend at a brisk pace even as it invests to grow the business faster. For example, its normalized earnings per share are expected to grow at a whopping 27.6% over that same period. As a result, while its 1.3% dividend yield is nothing to get excited about, Broadcom is an exciting dividend growth stock due to its robust growth prospects driven by the AI boom.

#3. General Dynamics (GD)

General Dynamics Corporation appears poised to continue soaring for years to come due to the global arms race between Russia, China, Iran, North Korea, and the United States and its allies.

General Dynamics should be able to enjoy robust demand for its cutting-edge defense products for years to come, particularly its submarine-building capabilities, which will be indispensable to the US and its allies’ efforts to deter China, who are engaged in a massive warship buildup of their own. While the 1.9% dividend yield is not particularly exciting, the company recently hiked its dividend by 8% and is expected to continue growing it at a ~8% CAGR through 2028. Given the strength of the company’s moat and the potential for accelerating geopolitical tensions to drive even stronger growth, we think that an 8% dividend CAGR outlook for the company is fairly modest, as it is based on a projected 9.3% earnings per share CAGR over that period. However, given the geopolitical tailwinds, we think that GD may very well end up growing its earnings per share at a meaningfully higher rate in the coming years than 9.3%.

#4. Brookfield Infrastructure Partners (BIP)(BIPC)

Last but not least, Brookfield Infrastructure Partners is another very exciting dividend growth stock, as it is expected to grow its dividend at a 7% CAGR through 2028 alongside a current 6.1% dividend yield. This makes for an exciting combination of current yield and dividend growth backed by a world-class and diversified portfolio of infrastructure assets, a BBB+ credit rating from S&P, and an impressive long-term track record of delivering market-beating returns and strong dividend growth. Additionally, it benefits from the backing and deal flow from Brookfield Asset Management.

Investor Takeaway

There are many other dynamic dividend growth stocks out there, but these four seem particularly well-positioned to benefit not only from their strong business models but also from major macro trends. These include soaring demand for alternative investments benefiting Brookfield Asset Management, the AI boom helping Broadcom, the major global arms race providing a tailwind for General Dynamics, and the massive demand for infrastructure buildout driving strong returns for Brookfield Infrastructure Partners in the coming years.

By combining high-yielding blue-chip stocks with dynamic dividend growth stocks, investors can build a powerful passive income snowball portfolio that generates dependable income today while also providing strong growth potential for the future.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.