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3 Dividend Stocks to Buy Before Their August Payout Raise

Dividend hikes are positive signals for investors, and not just because they promise an imminent income boost. Companies that raise their payouts are often flush with cash and enjoying improving growth opportunities that can deliver market-thumping returns to shareholders.

Not all dividend hikes are notable for these reasons, as most simply reflect modest gains in core operating metrics. But the August raises from Kroger (NYSE: KR), Levi Strauss (NYSE: LEVI), and Darden Restaurants (NYSE: DRI) reflect a more fundamental change in these businesses. Let's look at why you might want to buy these stocks before their dividends head higher in a few weeks.

A grocery store employee stocks fresh vegetables.

Image source: Getty Images.

Kroger

Before 2018, Kroger stock was a Wall Street darling. The supermarket chain had steadily won market share from rivals like Walmart over the previous decade, but that trend ended just before the pandemic struck as the world's biggest retailer raised the bar on fresh foods and upgraded its delivery and in-store pickup platform.

But Kroger is back on offense today. The grocery giant's sales are up 15% over the past two years to roughly match Walmart's gains. Its fresh food section is driving shopper loyalty again, and its online business is competing with industry leaders like Target.

That success has CEO Rodney McMullen and his team eager to return more cash to shareholders even as they continue to invest in the business. Kroger's fundamentally faster sales and earnings growth convinced the chain to raise the dividend by 17% for 2021 (effective on Aug. 13), putting the yield close to 2% as of mid-July.

Levi Strauss

Apparel retailers have a lot going for them right now as pent-up demand lifts the entire industry following last year's slump. The tilt toward direct online purchasing is also boosting margins for leaders like Nike and Lululemon Athletica. And that profitability spike is being amplified by a shift toward premium apparel.

Investors looking for another winner in this growth story might consider Levi Strauss. The jeans specialist recently returned to year-over-year sales growth in a dramatic fashion, with revenue spiking 156% in the second quarter. Like Nike and Lululemon, Levi credits its online platform for creating a stronger, more profitable connection with shoppers.

Levi's small payout and tiny track record mean it will be several years before investors can call it a reliable dividend source. But the 25% increase hitting investors' accounts in August will mark a return to pre-pandemic levels, and might be just a small down payment on many years of growth ahead as the business expands its sales footprint and moves into new fashion categories outside of jean pants.

It has an opportunity to reach more demographics, too, especially as it creates more premium fashion products. These shifts should support higher margins over time, with rising dividends just as likely.

Darden Restaurants

Darden is back to posting growth in customer traffic as of late May. The restaurant chain's comparable-store sales were up 2.4% that month as compared to two years earlier, before the pandemic struck, management said in late June. Earnings are improving much faster as cost cuts and price increases offset rising expenses. Darden is predicting EPS as high as $7.50 this year, compared to just under $6 in 2019.

There's no denying that this restaurant stock is expensive today. At nearly three times annual sales, the Olive Garden owner's valuation is well above anything investors have seen in the past several years.

But Darden's quickly rising dividend, which is slated to jump 25% to $1.10 per share in early August, helps offset some of the risk you'd take in overpaying for this stock. And investors have a decent shot at enjoying more gains ahead thanks to the chain's strong cash position, low debt, and opportunities for growth in the takeout and delivery niches.

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Demitri Kalogeropoulos owns shares of Nike. The Motley Fool owns shares of and recommends Lululemon Athletica and Nike. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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