For income investors, dividend stocks are often the primary investment choice. That said, if you’re picking from more mature companies like the Dividend Aristocrats or Dividend Kings, many of the potential names come with sluggish growth rates, or worse, declining shareholder value. Is it possible, though, to have the best of both worlds? Dividend stocks that have the potential to skyrocket? I say yes – but with a twist.
For starters, if I were to start a new position, I would need to see companies with three specific characteristics.
They need to be growing their top and bottom lines. As an income investor, revenue growth without net income growth is a problem. Furthermore, I would like to see how the company manages its dividend. Are they paying out too much? Too little? It needs to be just right. Let’s call it the “goldilocks zone”. And then, we need confirmation. What do analysts think about the company – and how big is the consensus?
All this leads to a confirmation of whether or not a dividend stock has legs.
With Barchart’s Stock Screener tool, I used the following filters to get my list:
5-YR Percent Change: 200% and above. I only want to see companies with substantial long-term growth. This metric also translates to solid business fundamentals and execution that tripled shareholder value.
Annual Dividend Yield: I left this blank so I can rearrange the list from highest to lowest yielding dividend stock. I only want the best-yielding ones.
Current Analyst Rating: 4 to 5. Moderate Buy (yet very close to Strong Buy) and Strong Buy recommendations only.
Dividend Payout Ratio: 30% – 50%. An acceptable range where companies reward shareholders generously while retaining cash to grow the business.
Number of Analysts: 10 or above. More analysts mean more reliable ratings. Multiple data points reduce bias than those with limited coverage.
Net Income Growth: 50% or more. A notable increase in profitability indicates effective cost management and execution, which are essential for long-term portfolio success.
After setting the filters, I ran the screener and got exactly seven companies on the list:
Then, I organized the list from highest to lowest dividend yield by clicking the Div Yield (a) column section, and ended up with Permian Resources Corp. (PR), Archrock Inc. (AROC), and Targa Resources (TRG) as my top three dividend stocks with potential for growth.
First on my list is Permian Resources Corporation, an independent oil and gas company based in Texas that operates in the Permian Basin region, spanning West Texas and New Mexico. The company was formed in September 2022 through the merger of Centennial Resource Development and Colgate Energy, and is now trading on the New York Stock Exchange with the ticker symbol “PR.”
In its most recent annual financials, the company’s FY ’24 revenue rose 60% to $5 billion, while its net income for the same period increased 106% to $984 million, or a basic EPS of $1.54. In terms of dividends, Permian Resources’ forward annual payout is $0.60 a share ($0.15 per quarter), which reflects a dividend yield of 4.3%. Meanwhile, the company’s payout ratio is 45.58% of its earnings, indicating that it’s not paying out excessive cash solely to appease shareholders.
According to a consensus among 22 analysts, Permian Resources is rated a “Strong Buy” with a score of 4.73 out of 5. The highest price target is $22 per share, suggesting as much as ~58% upside potential from its current levels. Over the past five years, the stock has gained a life-changing 1,784% in value – an impressive return for a dividend stock.
Next on my list is Archrock Inc., which is a natural gas compression services provider. Specifically, they assist major oil companies in moving gas efficiently through pipelines and processing facilities. The company operates through two main business lines: providing contract compression services, where it owns the equipment at customer sites, and manufacturing the same compression equipment.
Archrock’s annual financials are also impressive. FY ‘24 revenue increased ~17% to $1.16 billion, while its net income rose 64% to $172.2 million, or $1.05 per share. Meanwhile, the company’s forward annual dividend is $0.84 a share, which is distributed as $0.210 every quarter, reflecting a competitive yield of 3.34%. The company pays out 49.76% of its earnings as a dividend, which is also quite acceptable.
Over the past 5 years, the company’s dividend has grown 21.82%, while the return on its stock reached 316.97% over the same period, which means if you owned the shares over the last five years, you’d have had both dividend growth and capital appreciation. A consensus among 10 analysts rate the company as a “Moderate Buy” with a score of 4.40 out of 5. The analysts’ highest price target is $33 per share, which suggests almost 31% upside potential from the stock’s current levels.
The last dividend stock on my list is Targa Resources, another large energy company that helps content natural gas and oil producers with its extensive network of pipelines and facilities. Specifically, they gather natural gases from wellheads and transport these materials to refineries after processing them into sellable products, such as propane and ethylene.
The company’s FY ‘24 revenue rose 2% to $16.38 billion, while net income rose 53% to $1.28 billion or $2.94 per share – significantly higher than the previous year’s $1.28. The annual forward payout is $4.00, which is paid as $1 per quarter, resulting in a yield of 2.46%. Quite respectable in today’s market. Meanwhile, the payout ratio is 46.13%, which is still within an acceptable range.
A consensus among 21 analysts covered Targa Resources and rate the company a “Strong Buy” with a score of 4.67 out of 5 – the highest on this list. The highest price target is $240 per share, representing approximately ~45% upside potential from its current levels. Over the past 5 years, the stock has gained over 975%, which is also quite impressive for a dividend company.
The companies mentioned above are among the most viable options for inventors seeking long-term potential in both dividend yield and capital appreciation. That said, the market can become unpredictable, even for the most established companies.
Before starting a long-term position, investors should always analyze the business’s future by examining its history, recent financials, and sectoral tailwinds/headwinds that may arise in the future.
All things being equal, the companies mentioned above are a sound investment choice considering the current environment.
On the date of publication, Rick Orford did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com
