Dividend Growth Companies are businesses that have managed to increase annual dividends for several years in a row. Typically, established dividend growth companies need at least 10 years of annual dividend increases before they could be added to the dividend achievers list. If they have at least a 25 year track record, they are added either to the list of dividend aristocrats (if they are members of S&P 500) or the dividend champions list. Some folks also use a 5 year track record to establish presence in the dividend growth investing universe, believing that they can potentially identify future stars earlier than everyone else.
I wanted to take a look at the ten largest Dividend Growth Companies in the US, in order to look for value. I narrowed the list down to the largest publicly traded companies in the US, which have managed to increase dividends for at least 10 years in a row.
These are well-known, established and highly followed and widely owned companies. If you had bought them a decade ago, you would have locked in good starting valuations, and enjoyed a decade of solid dividend growth and total returns. All of those were driven by growth in earnings per share over the past decade.
The question of course is whether they are worth adding to today. Let's take a look at them:
Frankly, those companies all look expensive to me. Perhaps J.P. Morgan Chase is the one that looks close to fairly valued today, albeit 15 times for a financial and a dividend yield below 2% may be a stretch too.
I love the dividend growth stats for Microsoft, Broadcom, Eli Lilly, Visa, Mastercard and Costco. However, those multiples are pretty steep if you ask me. I would not pay more than 25 forward for these growth stories, in order to get some margin of safety in case growth slows down and to take into consideration the risk I am taking. It is quite possible that a lost decade where P/E multiples shrink could cause low returns, even if growth turns out to be reliable and durable (which it is not always the case). If I start out with a low yield in the first place, I may not be paid much to wait either. Either way, I love those companies and would love to buy/add to them at the right price.
In the case of Apple, I dislike the high valuation and the slowdown in dividend growth. Plus, the dividend yield is low. Hence if earnings stagnate from here there is low margin of safety and I am not paid much to wait.
Wal-Mart is expensive as well, given their slow dividend growth and low yield. The company is trying to transform its business to better compete with online retailing, which has taken out some capital from dividend growth initiatives. They are starting to crank up dividend growth again, but the valuation is still rich for a large company like that. I would love to buy more at the right valuation.
As for Exxon Mobil, it is optically cheap at a 16 times forward earnings and a dividend yield of 3.67%. This is a company that has paid dividends for decades, and increased them for 42. They didn't cut dividends during the past decade, which was very hard on the energy sector, amidst glut of production, disruptions, and negative prices at one point in 2020. Hence I have a high degree of confidence (as much as you can have confidence of course) that this dividend is important to management and shareholders, and won't be just cut on a whim. However, dividend growth has been very slow in the past decade. The business was not easy in the past decade however, and a lot of competitors ended up cutting or suspending dividends at least once in the past decade. Hence, that slow growth in dividends is actually a win.
Well, there you have it, my opinion on the largest dividend growth companies in the US. Note, they are weighted heavily in several popular dividend growth funds in the US. Unfortunately, those valuations are high, which could weigh on future returns.
The other fun fact to consider is that the ten largest dividend growth companies of 2035 mey turn out to be a list that is much different than this list above.
Just for reference, the ten largest dividend growth companies in 2015 were:
Wal-Mart, Johnson & Johnson, Coca-Cola, PepsiCo, Qualcomm, Exxon Mobil, CVS Health, IBM, 3M and United Technologies.
Either way, the way to succeed is to find good quality dividend growers, but acquire them at a good valuation.
