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Are these dividend shares the best stocks to buy now?

Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper
Mature Caucasian woman sat at a table with coffee and laptop while making notes on paper

Sometimes the best investment opportunities aren’t obvious. Quite often, this can be the case with dividend shares.

Big dividend yields can be attractive. But I think that there are some great opportunities in stocks that are increasing their dividends rapidly, even if the current yield isn’t that high.

The stocks

Two stocks on my list are Diploma (LSE:DPLM) and Starbucks (NASDAQ:SBUX). At first sight, neither is an obvious choice for income investors.

At today’s prices, Diploma has a dividend yield of 1.8%. Starbucks is only slightly higher, with a yield of 2.4%.

Those numbers don’t immediately jump out at me, as an investor. But both companies have been growing their dividends substantially, though.

Over the last five years, Diploma’s dividend has increased by 16.5%. Starbucks has been increasing its dividend per share by an average of just over 15% per year.

If this continues, buying shares in either company today will yield significant returns in the future. The dividends might not be the most eye-catching today, but they will be after a few years.

Dividend growth

If Diploma continues to average 16.5% annual dividend growth, then a £1,000 investment will be distributing £83 per year 10 years from now. And that’s not all.

By reinvesting my dividends, I can boost my ownership in the company. If the stock grows at the same rate as the dividend, I’ll have 18% more shares a decade from now.

That could push my annual passive income up to £98 per year. On a £1,000 investment that’s an annual return of 9.8%.

Starbucks might be even more impressive. If the company continues to grow its dividend at 15%, then a £1,000 investment today will be generating £104 annually in dividends after 10 years.

On top of this, reinvesting my dividends at the same rate will boost my stake by 27% after a decade.

That means my investment could return £132 in annual passive income.

Risks and opportunities

I think that there are impressive returns on offer with both Diploma and Starbucks. But this depends on the underlying businesses increasing their dividends at the same rate, which is by no means guaranteed.

In the case of Diploma, a recession could be a significant headwind to the company’s organic growth. And a recession seems likely to me in the next couple of years.

Over the last decade, the number of Starbucks stores has roughly doubled. This has been key to the company’s growth, but I don’t think it’s realistic to expect that rate of expansion to continue.

In both cases, though, I think that the risks are mitigated by other factors. That’s why I think that these are two of the best dividend shares I could buy today.

With Diploma, a recession could actually bring some benefits. A substantial part of the company’s growth comes from acquiring other businesses, which could be easier in a recession.

Over the last five years, Starbucks has been reducing its share count at a rate of 4.5% per year. This is something that I expect to continue, making up for the slowing growth in the underlying business.

That’s why I think Diploma and Starbucks are some of the best dividend shares to buy today. I’ll be looking to buy both later in the month.

The post Are these dividend shares the best stocks to buy now? appeared first on The Motley Fool UK.

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Stephen Wright has positions in Diploma. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022