There's a mantra in investing that says, "Past performance doesn't guarantee future results." However, looking into the past returns of certain types of stocks can provide hints at what might drive future performance.
One data point that investors won't want to overlook is the total returns produced by dividend-paying stocks compared to non-payers. Over the last 50 years, dividend stocks have outperformed non-payers by more than 2-to-1 (9.2% average annual total return versus 4.3%, according to data from Ned Davis Research and Hartford Funds).
The data also shows that there has been a massive gap between companies that can grow their dividends and those that can't (10.2% return from dividend growers, 6.7% for maintainers, and -0.6% for cutters and eliminators). Given that difference, investors should focus on owning companies that can grow their dividends.
Here are a couple of top dividend stocks that investors shouldn't hesitate to buy in 2025. They're well positioned to continue producing above-average total returns in the future.
Realty Income
Realty Income(NYSE: O) has been a dividend growth juggernaut since coming public 30 years ago. The real estate investment trust (REIT) has increased its payout 128 times during that period, including every year and for the last 109 quarters in a row. It has grown its payout at a 4.2% compound annual rate, which has helped it produce a 14.1% compound annual total return since it came public.
As noted, past performance alone doesn't guarantee Realty Income will continue increasing its dividend in the future. However, the REIT is in an excellent position to keep pushing its payout higher.
Several factors drive that view. A big driver is the REIT's resilient real estate portfolio. It owns about 15,500 retail, industrial, gaming, and other properties net leased to many of the world's top companies. Net leases provide it with very stable rental income (tenants cover all operating expenses, including building insurance, real estate taxes, and routine maintenance) that steadily rises each year.
Meanwhile, the REIT pays out a conservative percentage of its stable cash flow in dividends (75% of its adjusted funds from operations, or FFO). That enables it to retain a meaningful amount of cash to fund new investments.Realty Income estimates that its internal growth drivers will add about 2% to its FFO per share each year.
On top of that, the REIT has an elite balance sheet, giving it ample financial flexibility to externally fund additional investments. It also recently launched a private fund management platform, which will enhance its access to capital and investment returns. These drivers should enable the REIT to continue growing its adjusted FFO at a mid-single-digit rate, which should support a steadily rising dividend.
With its dividend currently yielding around 6% and its earnings growing at a mid-single-digit rate, Realty Income could easily deliver double-digit total annual returns in the future.
Brookfield Infrastructure
Brookfield Infrastructure(NYSE: BIPC)(NYSE: BIP) has grown its dividend at a 9% compound annual rate since 2009 (right around its formation). That has helped fuel 13.3% totalannual returns since it came public.
The diversified global infrastructure operator (utilities, energy midstream, transportation, and data) is in an excellent position to continue growing its payout in the future (it's targeting 5% to 9% annual growth). Like Realty Income, it generates very stable cash flow. Long-term contracts or regulated rate structures supply 85% of its FFO, with that same percentage also either protected from or indexed to inflation. The company estimates that inflation escalators alone will add 3% to 4% to its FFO per share each year.
Brookfield Infrastructure also has a conservative dividend payout ratio (60%-70% of its FFO) and a strong investment-grade balance sheet. Those features give it a lot of financial flexibility to invest in organic expansion projects and make accretive acquisitions. The company currently has about $8 billion in capital projects in its backlog that it expects to complete over the next two to three years. The bulk of its investments are for new semiconductor manufacturing facilities and data centers.
Brookfield Infrastructure sees a lot of growth beyond its secured projects due to the enormous investment needed to maintain, upgrade, and build infrastructure around the world in the coming years. The company currently has over $4 billion in additional expansion projects under development and a rich pipeline of acquisition opportunities. These factors drive the company's view that it should be able to grow its FFO by more than 10% annually in the coming years.
With its dividend currently yielding around 4% and earnings growing by more than 10% annually, Brookfield Infrastructure could have the fuel to produce total annualized returns in the mid-teens.
Great dividend growth stocks
Dividend growth stocks have historically produced the best total returns over the long term. That has certainly been the case with Realty Income and Brookfield Infrastructure, which have delivered strong returns for investors thanks to their steadily rising dividends. They're in an excellent position to continue growing their payouts in the future. Because of that, investors shouldn't hesitate to add them to their portfolios this year.
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Matt DiLallo has positions in Brookfield Infrastructure, Brookfield Infrastructure Partners, and Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends Brookfield Infrastructure Partners. The Motley Fool has a disclosure policy.
