Buying stocks that can raise their dividends year after year is a great way to build a portfolio. Not only will you receive a growing stream of income, but dividend growth stocks also historically outperform the S&P 500. Dividend growers and initiators produced annual total returns of 10.2% from 1973 to 2023, according to research from Hartford Funds. By comparison, the average stock in the S&P 500 returned just 7.7% per year in that period.

If you can find a great dividend growth stock trading at a fair price, you can hold it for decades and see the yield on your original investment compound with each annual increase. So even if you’re starting with just $1,000, you could end up with hundreds in annual dividends down the line. Here are three great candidates for your portfolio.

Image source: Getty Images.

1. Visa

Visa (NYSE: V) is the leading payment network in the world. Whenever you swipe a credit or debit card with the Visa logo on it, the company collects a small percentage of your payment. That’s the fee it takes to ensure payment moves from your bank or credit account to the merchant’s bank account.

Importantly, Visa is not a bank itself. It doesn’t offer credit to consumers and it doesn’t hold deposits. It simply partners with banks that want to issue a credit card. And they choose Visa because it works with more merchants than any other payment network.

So Visa’s business relies entirely on increasing payment volume and winning more customers. And while it’s already a massive business, accounting for $15 trillion in payment volume across 276 billion transactions last year, there’s still room for it to grow. That’s particularly the case internationally. Cross-border transaction volume increased 16% year over year in the second quarter, fueling 8% overall growth in payment volume.

Visa benefits from leveraging its existing network, so as payment volume grows, its operating margin generally improves. Operating income through the first six months of the year is up 8.5%. That leads to strong free cash flow growth, which supports an ever-increasing dividend, part of a larger capital return program.

Visa raised its dividend 16% last October to $0.52 per share. That marks its 16th consecutive year of raising its dividend, and investors should expect many more dividend raises in the future. The dividend remains just a small part of its overall capital return program, which includes a $25 billion share repurchase authorization. With a network effect protecting its business from new competitors, investors should expect Visa to continue increasing payment volume and profit for years to come.

2. T-Mobile

T-Mobile (NASDAQ: TMUS) is a relatively new dividend payer in an industry well known for paying out high yields on their stocks. The wireless competitor spent a decade or so building up its customer base and pouring tons of cash into building its network, acquiring wireless spectrum licenses, and marketing its service. Following the merger with Sprint, it has a customer base comparable in size to its biggest competitors, and it can leverage its fixed network costs to produce positive free cash flow.

And it’s producing a lot of free cash flow. Management expects to produce between $16.4 billion and $16.9 billion in cash this year. It’s using that cash to repurchase shares and pay a dividend it just initiated last fall. So far, it’s used $4.4 billion of its authorization, with an additional $11.7 billion remaining through the end of the year.

T-Mobile consistently produces industry-leading postpaid net customer additions, and its foray into home internet has been a success as well. It now counts over 30 million total postpaid accounts among 99 million customers and over 5 million home internet connections.

Importantly, T-Mobile shows no signs of slowing down anytime soon. It’s seeing improved customer retention, and its 5G network buildout is ahead of its competitors. It’s pushing customers to higher-priced plans, offering them incentives over old plans. And it’s becoming increasingly cost-effective as it amortizes its fixed costs over a larger customer base. That should produce great free cash flow for years to come.

When T-Mobile initiated its dividend last fall, management said it plans to raise the dividend by 10% per year for the foreseeable future. That should be an easy target to hit for T-Mobile.

3. Meta Platforms

One of the newest dividend payers in the market is Meta Platforms (NASDAQ: META). The company surprised investors when it announced a small dividend alongside its fourth-quarter earnings report in February.

Meta operates Facebook, the largest social network in the world. It counts over 3 billion monthly active users on that platform alone. When you include its Instagram, WhatsApp, and Messenger apps, it has about 4 billion unique users logging in at least once a month. That’s over half the world’s population, and that makes it very attractive to advertisers.

Advertisers spent a whopping $35.6 billion on Meta’s apps in the first quarter alone, a 27% year-over-year increase. And it’s making big investments, particularly in artificial intelligence (AI), to keep growing at that pace.

Meta’s annual spending on AI-related expenses will be in the tens of billions of dollars this year. But AI touches just about everything it does. From content recommendations to ad targeting to helping marketers create new campaigns on its platform, AI is integral to Meta’s operations. It’s investing in an effort to become a leader in generative AI, which CEO Mark Zuckerberg sees as a big business opportunity in the future.

But Meta is still returning heaps of cash to shareholders. The dividend is just a small portion of its overall capital return program, which includes $66 billion in share repurchase authorization as of the end of the first quarter. Its current total annual dividend payment of about $5 billion has plenty of room to grow.

Should you invest $1,000 in Visa right now?

Before you buy stock in Visa, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Visa wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005… if you invested $1,000 at the time of our recommendation, you’d have $652,342!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*.

See the 10 stocks »

*Stock Advisor returns as of May 28, 2024

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Adam Levy has positions in Meta Platforms and Visa. The Motley Fool has positions in and recommends Meta Platforms and Visa. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.