This Is My Absolute Best Dividend Stock Idea Right Now

Investors seeking dividend income have to make trade-offs. If you're always reaching for a high dividend yield, you could get some nice dividend checks. But you also might end up owning a struggling business that's cutting its payout. On the other hand, if you only buy the safest, most predictable dividend stocks, you may accept a tiny yield and limited growth.

This is why a safe place for dividend investors is often somewhere in the middle of these two extremes: a modest dividend yield and a strong underlying business with great long-term growth potential. Find an investment like this, and you may be rewarded with not only a growing dividend stream but also an appreciating stock price.

Marriott International (NASDAQ: MAR) fits this latter profile well right now. The dividend yield is only about 0.8% at today's price, but the business behind it has significant growth potential -- and management is returning tons of cash to shareholders beyond the dividend check through share repurchases.

Here's a closer look at what makes Marriott stand out.

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A dividend built for growth

A dividend yield of less than 1% isn't going to get the attention of most dividend investors. But I think bypassing this idea could be a mistake.

The bull case for Marriott as a dividend stock starts with the fact that its unique business model allows it to grow without having to constantly pour huge sums of money into building and owning hotels.

That's because much of Marriott's business is "asset light." In other words, Marriott-branded hotels are usually owned by other companies. Marriott is the platform operator, earning fees for providing the software and services that help these owners manage their hotels and attract loyal customers. That structure can create strong cash flow, because Marriott doesn't need to own the real estate behind the new hotels opening under its brands.

You can see this in the company's recent results. In Q3, Marriott's total revenue rose 4% year over year to about $6.5 billion. And its base management and franchise fees totaled about $1.2 billion, up nearly 6% from the year-ago quarter. Even more, net income for the period rose even faster, climbing 25% year over year.

In addition, the company's strong year-to-date cash generation has allowed the company to return a total of $3.1 billion to shareholders through a combination of dividends and share repurchases (mostly share repurchases) over the past three quarters. For the full year, the company expects to return about $4 billion to shareholders -- solid for a company with a market capitalization of about $88 billion.

Understanding the growth opportunity

A dividend can only grow over time if the business keeps strengthening. Fortunately, there's good reason to expect Marriott's robust business growth to persist for the foreseeable future, driven by a combination of more hotels, more rooms, and deeper loyalty engagement.

In Q3, Marriott added about 17,900 net rooms -- up 4.7% year over year. Even more, its development pipeline hit a new record: about 3,900 properties and more than 596,000 rooms.

As this development pipeline comes online, it will drive both more fee growth for Marriott and likely new customer growth. And given the company's successful loyalty program, many of its new customers will likely turn into repeat customers.

Diving into the company's loyalty program, it's a major advantage for Marriott. Management said the company added 12 million members to its Marriott Bonvoy loyalty program in Q3, bringing total membership to nearly 260 million -- up 18% year over year. A large, engaged loyalty base helps fill rooms, support pricing power, and make Marriott's brands more valuable to hotel owners. And these outcomes, of course, lead to more hotel signings and more rooms over time. It's a virtuous cycle -- one that should support steady business growth and ultimately robust dividend growth.

There are risks. Travel demand can soften if the economy weakens, and Marriott pointed to "ongoing macroeconomic uncertainty" during its third-quarter earnings call. It also flagged weaker demand tied to reduced government travel, which contributed to a 0.4% decline in revenue per available room (RevPAR) in the U.S. and Canada. Globally, however, RevPAR rose only 0.5% in the quarter, highlighting the benefits of being a geographically diversified hotel operator.

There's also balance sheet risk to watch. At the end of the third quarter, Marriott had $16.0 billion in total debt and about $0.7 billion in cash and equivalents.

Of course, investors will have to pay up to get into a growth story like this. The stock currently trades at a price-to-earnings ratio of 34 and a forward price-to-earnings of 27. Still, as a dividend stock idea, Marriott stands out because it doesn't rely on a high yield to do the heavy lifting. The dividend is supported by a fee-based model, an unusually powerful loyalty platform, and steady room growth -- factors likely to lead to both share price appreciation and dividend growth over the long haul.

Daniel Sparks and his clients have no position in any of the stocks mentioned. The Motley Fool recommends Marriott International. The Motley Fool has a disclosure policy.