Key Points

Dividend growth stocks often deliver returns that are superior to the benchmark S&P 500. AbbVie and W.W. Grainger are elite dividend growth stocks that would be solid additions to any income-focused portfolio. 10 stocks we like better than AbbVie ›

Dividend growth stocks have long been reliable engines of wealth creation. Historically, companies with 10-year annualized dividend growth rates above 6% have consistently outperformed the S&P 500.

The reason is simple. Sustained dividend growth typically signals strong underlying business fundamentals. Businesses that can raise their payouts at a high single-digit-percentage clip (or more) each year tend to deliver stable earnings and generate ample free cash flow -- two hallmarks of long-term financial strength.Image source: Getty Images.

So, which dividend growth stocks stand out as compelling buys right now? Pharmaceutical powerhouse AbbVie(NYSE: ABBV) and industrial distributor W.W. Grainger(NYSE: GWW) are both time-tested performers with stellar dividend growth records. Here's why these top dividend growers are worth buying and holding as part of a well-diversified income portfolio.

A pharmaceutical dividend powerhouse

AbbVie is one of healthcare's most reliable dividend payers, offering investors a compelling combination of current income and long-term growth. At the current share price, the pharmaceutical giant's payout yields 3.5% -- well above the S&P 500's modest 1.3% yield. Best of all, AbbVie sports an incredible 53-year streak of dividend increases (if one includes the period when it was still a part of Abbott Laboratories, before its 2013 spinoff).

What makes AbbVie particularly attractive, though, is its valuation relative to its bottom line. The stock trades at just 15.3 times forward earnings, a substantial discount to the S&P 500's 21.4 forward price-to-earnings ratio. While its 268% payout ratio might alarm some investors, AbbVie's growing cash flows should be sufficient to support the dividend over the next several years, despite the looming challenges of Humira losing patent protection and the potential for downward pressure on drug prices stemming from a recent executive order signed by President Donald Trump.

Most impressively, AbbVie has delivered dividend growth at a blistering 13.2% annualized rate over the past 10 years, showcasing management's commitment to rewarding shareholders. This top pharmaceutical stock thus offers income-focused investors a rare combination of an above-average yield, double-digit percentage dividend growth, five-plus decades of annual dividend increases, and an attractive valuation relative to the broader market.

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An industrial dividend stalwart

W.W. Grainger ranks among the most consistent dividend payers in the industrial sector, offering investors steady income growth backed by a rock-solid business model. While its 0.8% yield at current share prices will appear modest at first glance, the company's 53-year streak of annual dividend increases demonstrates management's unwavering commitment to its shareholders. What's more, Grainger's conservative 21% payout ratio provides ample room for continued dividend growth well into the future.

From a valuation perspective, W.W. Grainger stock trades at 27.2 times forward earnings -- a premium to the S&P 500. However, this premium is increasingly justified by the company's strengthening competitive position.

W.W. Grainger offers an unparalleled breadth of products and an extensive distribution network that creates powerful economies of scale. These advantages allow it to generate higher margins and returns than smaller competitors, even as it faces challenges from e-commerce giants like Amazon.

W.W. Grainger's dividend growth story is supported by two powerful tailwinds: an intensifying skilled labor shortage that's driving businesses to outsource non-core functions to specialists, and ongoing opportunities to expand its product catalog to capture greater wallet share from existing customers. These tailwinds ought to provide significant opportunities for the company in the years ahead.

With a 6.7% annualized dividend growth rate over the past 10 years, disciplined capital allocation, and a proven ability to adapt to changing market conditions, W.W. Grainger stock offers an attractive combination of dividend reliability, moderate growth, and a wide competitive moat, making it a superb addition to an income-focused portfolio.

Should you invest $1,000 in AbbVie right now?

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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. George Budwell has positions in AbbVie and Abbott Laboratories. The Motley Fool has positions in and recommends AbbVie, Abbott Laboratories, and Amazon. The Motley Fool has a disclosure policy.

2 Incredible Dividend Growth Stocks to Buy Now was originally published by The Motley Fool

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