With inflation running at annualized rates near 5 percent right now, the notion of locking up money in a 10-year government bond that pays just 1.5 percent seems ridiculous.
But rather than go all the way up the risk scale, investors looking for income can find better starting yields and even find opportunities to grow that income over time. But instead of the bond markets, those with a multi-year time horizon will likely do best with dividend growth stocks.
With many companies cutting, suspending, or failing to grow their dividends in the past year, a handful have started to announce dividend increases. These companies are typically in maturing businesses that have some growth, but consistent cash flows that can be used to pay a growing dividend payout.
One such company suspended its dividend, but has now brought it back at a higher rate. That company is Darden Restaurants (DRI). The holder of multiple restaurant chains is seeing traffic rise back to pre-pandemic levels as consumers rapidly return for pent-up demand for dining out.
Action to take: The company’s new starting yield is 1.1 percent, a number likely to grow over time with restaurants reopened for business. The company just had its first profitable quarter since the pandemic, trading at about 20 times forward earnings. That’s still leaving room to grow.
For traders, shares have been trading in a range but look set to break higher. The October $150 calls, going for about $6.80, could deliver mid-double-digit profits in the next few weeks on a breakout higher.
Disclosure: The author of this article has no position in the company mentioned here, but may make a trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.