While growth stocks have commanded the spotlight since the 2008 financial crisis, dividend-paying equities have quietly dominated U.S. stock returns since 1900. The secret weapon? Compounding.

Companies that consistently increase dividends, known as "dividend growers," often outperform the benchmark S&P 500 over five- to 10-year periods. These stocks typically feature strong fundamentals, proven business models, and management teams focused on shareholder returns. Investors who reinvest these growing dividends harness the power of compounding, potentially amplifying their long-term gains.

Two critical metrics help identify winning dividend growth stocks: the payout ratio and the dividend growth rate. A sustainable payout ratio (ideally below 75%) helps ensure the company can maintain its dividend even if earnings dip. Meanwhile, a high dividend growth rate typically indicates a quality company capable of weathering economic storms and market volatility.

With this framework in mind, let's examine two top dividend growth stocks that meet these crucial criteria, making them worthy candidates for a long-term portfolio.

General Dynamics: A defense sector dividend powerhouse

General Dynamics (NYSE: GD), founded in 1899, has established itself as a leading force in the aerospace and defense industry over its 125-year history. The company's diverse portfolio spans Gulfstream business jets, naval vessels, combat systems, and advanced technologies.

General Dynamics' stock stands out as a top pick thanks to its robust dividend profile. It currently offers a healthy yield of 1.86%, boasts a five-year annualized growth rate of around 5%, and maintains a fairly conservative 42.7% payout ratio.

The company also offers long-term visibility into its earnings power due to the strong demand for Gulfstream jets and a substantial backlog in its marine division. However, as a defense contractor, General Dynamics' revenue is heavily dependent on government defense spending, which can fluctuate with political priorities.

All told, General Dynamics presents a compelling option for investors seeking long-term growth and sustainable dividend payments. Its diversified business model and status as a prime U.S. defense contractor make it a potent dividend growth play.

GE Aerospace: Propelling dividend growth

GE Aerospace (NYSE: GE) emerged as a stand-alone company following the spin-off of GE Vernova earlier this year. The company, which retained General Electric's listing on the New York Stock Exchange, is a longtime leader in the aircraft engine industry, powering about three of every four commercial airline flights worldwide.

GE Aerospace's substantial 250% dividend hike following the spin-off, combined with its established market position and strong brand recognition, makes it a particularly intriguing dividend growth stock. The company currently offers a modest 0.60% yield with a highly conservative 14% payout ratio, suggesting ample room for future increases to its quarterly cash distribution.

GE Aerospace's business model combines new engine sales with a lucrative aftermarket service segment. The parts and services division accounts for about three-fourths of its commercial engine revenue, providing a steady stream of income throughout the long lifecycle of its products.

GE Aerospace's long-term earnings visibility is bolstered by strong demand for its engines and a substantial backlog in its aviation division. However, like many companies in the aerospace industry, its revenue is tied to the cyclical nature of the aviation industry, which can impact short-term performance at times.

GE Aerospace offers a compelling mix of industry leadership and dividend growth potential. Its recent dividend hike, low payout ratio, and strong market position make it an attractive option for investors bullish on the aerospace industry's long-term prospects and for those seeking significant dividend growth potential.

Powering portfolio growth

Both General Dynamics and GE Aerospace demonstrate the key qualities of excellent dividend growth stocks: strong market positions, sustainable payout ratios, and a proven commitment to increasing shareholder returns. While each stock comes with its own set of risks and considerations, both equities offer investors the opportunity to benefit from the power of compounding through dividend reinvestment and regular increases to the quarterly distribution.

Should you invest $1,000 in General Dynamics right now?

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George Budwell has positions in GE Aerospace. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

2 Top Dividend Growth Stocks With Payout Ratios Below 50% was originally published by The Motley Fool