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Income investors might make their investment decisions based primarily on the current dividend yield of stocks. However, dividend growth rate is sometimes more important than the dividend yield of a stock. Companies that grow their dividends at a fast pace usually have the best long-term growth prospects.

In this article, we will discuss the prospects of three top dividend growth stocks. These stocks have low payout ratios and promising growth prospects and can continue raising their dividends at a fast pace for many more years.

Target Corporation (TGT)

Target is a discount retailer giant with about 1,850 big box stores, which offer general merchandise and food, as well as serving as distribution points for the company’s burgeoning e-commerce business. Target should produce about $110 billion in total revenue this year. Target posted first-quarter earnings on May 17th, 2023, and results were better than expected on both the top and bottom lines.

Adjusted earnings-per-share came to $2.05, which was 29 cents better than expected. Revenue was up fractionally year-over-year to $25.3 billion, beating estimates by $40 million. Traffic was up 0.9% year-over-year, down from 3.9% in the same period a year ago. Comparable sales were up 0.7%, offset by a decline in comparable digital sales, so the company missed estimates of growth of 1.1%. Adjusted EBITDA came to $2.02 billion, which was much better than the $1.81 billion expected.

Guidance for the year was unchanged at $7.75 to $8.85 in adjusted earnings-per-share. Target has grown its dividend for more than five decades, making it a Dividend King.

Target’s competitive advantage comes from its everyday low prices on attractive merchandise in its guest-friendly stores. However, given the price war in the retail sector, Target’s moat faces decline. In addition, as consumers tend to curtail their consumption during recessions, the company is vulnerable in such periods.

Dominos Pizza (DPZ)

Domino’s Pizza was founded in 1960. It is the largest pizza company in the world based on global retail sales. The company operates more than 20,000 stores in more than 90 countries. It generates nearly half of its sales in the U.S. while 99% of its stores worldwide are owned by independent franchisees.

In late April, Domino’s reported (4/27/23) financial results for the first quarter of fiscal 2023. Its international same store sales grew 1.2% over the prior year’s quarter and its U.S. same-store sales grew 3.6%, mostly thanks to price hikes. Earnings-per-share grew 17%, from $2.50 to $2.93, and exceeded the analysts’ consensus by $0.21 thanks to price hikes, the opening of new stores, and share repurchases. Company management expects ~5% global unit growth and 4% global sales growth in 2023, both at the low end of the 3-year outlook.

The growth potential for Domino’s is exciting, as the pizza chain has ample room to keep growing for years. Its management sees potential for the addition of more than 5,500 new stores in its top 15 markets. As the current store count in these countries is approximately 10,000, it is evident that there is still tremendous growth potential even without taking into account the growth potential in the other ~75 markets where the company is present.

Overall, Domino’s aims to increase its store count to 25,000 by 2025. The company grows its earnings-per-share at a fast pace thanks to three factors: many new stores, high same-store sales growth, and share repurchases. DPZ stock yields 1.5%.

Texas Instruments (TXN)

Texas Instruments is a semiconductor company that operates two business units: Analog and Embedded Processing. Its products include semiconductors that measure sound, temperature, and other physical data and convert them to digital signals, as well as semiconductors that are designed to handle specific tasks and applications.

Texas Instruments reported its first-quarter earnings results on April 25. During the quarter Texas Instruments generated revenues of $4.38 billion, which beat analyst estimates by $10 million, as the analyst community had forecasted a weaker sales performance. Texas Instruments managed to keep its gross profit margin at an attractive level of 65%, while the company’s operating profit margin of 44% remained strong as well.

Thanks to its cash generation, Texas Instruments was able to finance shareholder returns of $7.5 billion during the last four quarters. Spending on buybacks was lowered during the first quarter, however, relative to the previous quarters. Texas Instruments guides for revenues of $4.35 billion and for earnings-per-share of around $1.75 for the second quarter of 2023. TXN stock yields 2.8%.

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