Dividend investing is often seen as a slow and boring method for making money. For a select few investors however, dividend investing has translated into financial independence. Retired investors typically purchase dividend paying stocks, and then enjoy the stream of dividend income every quarter, which is deposited in their accounts. This slow and steady method works well, and generates a return on investment in any market environment.
There are many dividend companies however, which not only pay dividends but also grow them out of their rising earnings. Furthermore, this rising earnings tide has led to market-beating total returns.
The perfect dividend growth stock is the one that grows earnings and dividends at a similar high pace, and whose current yield stays in a constant range. Over time, the growth in profitability makes the firm more valuable to investors, who push the stock price higher. As a result, despite the growth in earnings and distributions and share prices, the shares seem to spot the same yield in the range mentioned above for new investors for extended periods of time. For earlier investors however, the rising dividends over time lead to increase in the yield on cost and total passive incomes to pretty impressive amounts.
Casey’s General Stores, Inc. (CASY), together with its subsidiaries, operates convenience stores under the Casey’s General Store name in 11 Midwestern states, primarily Iowa, Missouri, and Illinois. The company has raised distributions for 13 years in a row and over the past decade boosted them by 20.20%/year. Earnings per share have increased from $0.80 in 2003 to $3.07 by 2012. Analysts expect further EPS growth to $2.98 in 2013 and $3.41 in 2014. Currently, the stock is trading at 19.80 times earnings and yields 1.20%. Check my analysis of Casey's.
Sigma-Aldrich Corporation (SIAL), a life science and high technology company, develops, manufactures, purchases, and distributes various chemicals, biochemicals, and equipment worldwide. The company has raised distributions for 37 years in a row and over the past decade boosted them by 16.60%/year. Earnings per share have increased from $1.37 in 2003 to $3.80 by 2012. Analysts expect further EPS growth to $4.16 in 2013 and $4.46 in 2014. Currently, the stock is trading at 20.50 times earnings and yields 1.10%.
W.W. Grainger, Inc. (GWW) engages in the distribution of maintenance, repair, and operating supplies, as well as other related products and services for businesses and institutions primarily in the United States and Canada. The company has raised distributions for 41 years in a row and over the past decade boosted them by 15.60%/year. Earnings per share have increased from $2.50 in 2003 to $9.71 by 2012. Analysts expect further EPS growth to $11.75 in 2013 and $13.33 in 2014. Currently, the stock is trading at 23.90 times earnings and yields 1.40%.
The Sherwin-Williams Company (SHW) engages in the development, manufacture, distribution, and sale of paints, coatings, and related products to professional, industrial, commercial, and retail customers primarily in North and South America, the Caribbean region, Europe, and Asia. This dividend champion has raised distributions for 35 years in a row and over the past decade boosted them by 10.10%/year. Earnings per share have increased from $2.29 in 2003 to $6.15 by 2012. Analysts expect further EPS growth to $7.81 in 2013 and $9.32 in 2014. Currently, the stock is trading at 27 times earnings and yields 1.20%.
Ecolab Inc. (ECL) develops and markets programs, products, and services for the hospitality, foodservice, healthcare, industrial, and energy markets. This dividend achiever has raised distributions for 21 years in a row and over the past decade boosted them by 11.50%/year. Earnings per share have increased from $1.07 in 2003 to $2.41 by 2012. Analysts expect further EPS growth to $3.55 in 2013 and $4.12 in 2014. Currently, the stock is trading at 32.70 times earnings and yields 1.20%.
A. O. Smith Corporation (AOS) engages in the manufacture and sale of water heaters and boilers to the residential and commercial markets primarily in the United States, Canada, and the People’s Republic of China. This dividend achiever has raised distributions for 19 years in a row and over the past decade boosted them by 7.20%/year. Earnings per share have increased from $1.20 in 2003 to $3.44 by 2012. Analysts expect further EPS growth to $3.45 in 2013 and $4.07 in 2014. Currently, the stock is trading at 21 times earnings and yields 1.10%.
The beauty of these firms is that they have been able to dramatically increase earnings per share over the past decade. As a result, each of these companies has managed to boost distributions significantly over the same period. The performance of these companies however shows that dividend yield might not be the most important component of investor’s selection process. Forecasting future profitability however is difficult, and is more art than science.
Unfortunately, the market has constantly overpriced these companies, except during the financial crisis. In addition, the current dividend yields on each of these companies leave much to be desired. The issue is that if the economy falls into recession, investors in these firms will have a lower margin of safety than an investor in McDonald’s when stock prices fall, since the dividend portion of total returns is so low. This could be the best time to initiate positions in these firms however.
That being said, the best investments could be those that yield a lot, while growing earnings, dividends and share prices in the process. If investor’s expectations about earnings growth do not pan out as planned, at least they would be receiving a very good return in the form of dividends.
In the interest of full disclosure, I do own a few of these companies. Unfortunately, in the case of W.W. Grainger and Sherwin-Williams, these positions are super small, whereas in the case of Casey’s General Stores I have a half lot.
Full Disclosure: Long GWW, SHW, CASY
- Why Dividend Growth Stocks Rock?
- Margin of Safety in Dividends
- Dividend Investors – Do not forget about total returns
- Control Your Cash
- Dividend Champions Index – Five Year Total Return Performance
- Dividend Stocks for Young Investors
Step Away from the Mall hosted the Financial Simplicity Carnival - The Welcome Back Kotter Edition and featured my post! Check it out!
I posted my goals for 2016 a few weeks ago. After some changes that I became aware of subsequent to posting the article, I have some change...
The first week of this year has been brutal for many investors. It is during times like these that you see who really is a long-term invest...
In the first two weeks of this year, the stock market has been down a lot . For someone who invests for dividends, I am relatively agnostic ...
It is nice to have a diversified income stream . While many seem to look for a focused method, I look for a diversified method of generating...
Today marks the eight year of Dividend Growth Investor website . I wanted to thank all of you who follow my humble site. I didn’t really exp...
ConocoPhillips (COP) just announced that it is cutting its quarterly dividend from 74 to 25 cents/share. This comes after management consta...
Warren Buffett is one of the best investors in the world . He is skilled in the art of capital allocation. I have always suspected that the ...
Most readers know me as a person that buys a stock in a company I like, and then I keep building a position as long as valuation and allocat...
To be honest, I didn’t do much investing wise in January. Of course, I didn't panic and I stayed the course . Per my earlier article I s...
The first three weeks of this month have been terrible for investors worldwide . It could be painful to watch your portfolio value decrease ...