All companies fall into one of two categories: dividend stock or growth stock. Growing companies need to sacrifice shareholder rewards (and sometimes even net income) to expand their sales. Dividend stocks have made a commitment to reward shareholders and must dedicate a portion of earnings for this every year.
However, a dividend-growth stock is the rare company that can manage to deliver both. This is the kind of stock that can deliver a dividend yield that’s far higher than your high-interest savings account, while promising double-digit annual sales growth. Exceedingly few companies fit into this category.
Nevertheless, I believe Magna International (TSX:MG)(NYSE:MGA) is the ideal candidate. Here’s why Magna is the top dividend-growth stock.
Top dividend stock thesis
Magna stock offers a 2% dividend yield at current market price. Now, 2% isn’t a lot but it is on par with the best high-interest savings accounts. It’s also far lower than what Magna can afford to pay. Over the past year, Magna’s payout ratio was 63%, which means it can roughly double the dividend yield without much trouble.
However, management is being conservative with dividend increases. Over the past year, they raised the dividend by 6%. Over the past 3 years, the average annual dividend growth rate has been 13.4%. Management intends to keep raising dividends for the foreseeable future.
This reliably expanding payout is possible because of Magna’s strategic position in the global auto industry. That position is the basis for its growth thesis.
Top growth stock thesis
As an auto parts supplier, Magna is the provider of pickaxes during a gold rush. Automobile manufacturers across the world are in a fierce race for market share. They’ve collectively invested billions in making their vehicles electric, capable of self-driving and as efficient as possible.
As the largest supplier and contract manufacturer of auto parts, Magna benefits from this competition and the growing investments in auto innovations. It’s already partnered with major European car makers to deploy a self-driving tech platform. The company could be a key manufacturer of the rumored Apple electric car.
Magna’s portfolio is so diverse that it stands to benefit no matter how consumer preferences evolve. If consumers buy more electric cars over traditional ones, or car ownership declines because ridesharing is more popular, or trucks become preferable to sedans, Magna supplies it all.
This strategic position as a key supplier is the reason Magna’s sales could continue to expand as long as the global population and auto sales grow.
Bottom line
Magna’s position as a key supplier to the global automobile industry should create immense value for shareholders. While sales and margins expand over time, management has been conservative with shareholder rewards. The stock’s 2% dividend yield could steadily increase over time.
Magna stock is an ideal growth stock and a lucrative dividend stock. This one should certainly be on your long-term watch list.
