2 dividend stocks that can outperform the S&P 500 over the next five years

In the last 50 years, S&P 500 has historically delivered an average total annual return of around 10%. This yield also approximates the company’s average earnings growth over the long term. It follows that if you want to outperform the broader market, you should focus on stocks that are fairly priced and have above-average earnings growth prospects.

Investing in growth stocks is the easiest way to beat the market, but fast-growing companies typically don’t pay dividends. For investors interested in earning passive income while reaping strong share price returns, the options narrow down quite a bit. But there are still some actions that qualify. Here are two such dividend stocks you might want to consider.

1. Starbucks

Starbucks (SBUX 1.71%) the stock price recently jumped on the news that the chairman and CEO Chipotle Mexican Grill, Brian Niccol, will become the new CEO of Starbucks. Chipotle is the best-performing global restaurant stock, and its leadership is cited as one reason. There is hope that Niccol could deliver market-beating returns to Starbucks shareholders.

Starbucks has navigated a challenging consumer spending environment over the past two years, but its brand is still going strong. While global comparable sales have fallen this year, Starbucks continues to open stores and grow its loyalty program, with membership up 7 percent from last year to 33.8 million.

Starbucks is the world’s top-ranked restaurant brand, with Brand Finance placing the company at number 15 on its list of the most valuable global brands for 2024. Consumer awareness of the brand could pay dividends as it looks to fill the market in smaller cities, where management still sees substantial growth potential.

Despite weak sales this year, margins remain healthy, with a net profit margin of 11% over the past four quarters. The company’s consistent profitability funds a growing dividend, and Starbucks currently pays out more than 60% of its annual earnings in dividends. The quarterly payout is $0.57 per share, and with the stock price falling, the forward dividend yield has been raised to 2.46% — the stock’s highest yield in years.

Starbucks stock has underperformed the S&P 500 over the past five years. However, the next five years may tell a different story, as Niccol has successfully led Chipotle to consistently improve margins, leading to exceptional returns for investors.

The stock trades at a price-to-earnings ratio of 26, a discount from the S&P 500’s price-to-earnings average of 29. It’s a good bet that Niccol will guide Starbucks to its previous target for annual earnings growth of 15 %. Assuming the stock continues to trade around the 25 P/E and Niccol improves Starbucks’ margins, the stock could easily double in value by 2029 while paying an above-average dividend.

2. Casey’s General Stores

Investing in a chain store might not sound all that exciting, but it pays off Casey’s General Stores (CASY 1.63%) manage for shareholders they certainly do. The company’s return has doubled that of the S&P 500 over the past decade. With dividends reinvested, investors would have earned a total return of 478% since 2014, compared to 239% for the S&P 500.

Casey’s General Stores is expanding profitably across the country. It operates over 2,600 stores and has been growing continuously for over 50 years. The company began paying regular dividends in 1991 and recently increased its quarterly dividend by 15% to $0.50 per share, bringing the forward yield to 0.54%. At this growth rate, an investor’s return would double in five years to more than 1% of the stock’s current price.

This is a business sold with inherent competitive advantages. When people walk into one of its stores looking to fill up, there’s usually an incentive to make impulse purchases of drinks, food and other items that can be very large for a large chain like Casey’s. Casey’s is known for its freshly prepared food, especially pizza. In fact, it qualifies as the fifth largest pizza chain in the US

Casey’s has seen annual earnings per share growth of 15% over the past 10 years. Over the past year, earnings have grown 13%, and the company’s potential store openings should mean more growth going forward.

Casey’s is targeting at least 350 new stores from fiscal 2023 to fiscal 2026. It plans to accelerate its grocery business and improve operational efficiency, which points to higher revenue growth. Wall Street analysts expect the company’s earnings to grow at an annual rate of 13%.

Importantly, the stock trades at a reasonable forward PRE/E of 26. Assuming the stock continues to trade around the same P/E multiple in five years, Casey’s should deliver annualized returns close to future earnings growth, which would should be enough to beat the index.