Showing posts with label strategy. Show all posts
Showing posts with label strategy. Show all posts

Wednesday, October 15, 2014

Top Dividend Growth Stocks of the past decade

Dividend growth investing is sustainable when derived from consistent earnings growth. In its true form, successful dividend growth investing is characterized by instances where annual earnings and dividend growth are almost identical. In addition, companies that exhibit such traits tend to have their current yields being in the same range of 2% - 3% during prolonged periods of time. Ordinary yield chasing investors tend to ignore such companies, because they lack the patience or forward thinking to care for high future yields on cost or strong total returns. As a result, many of these companies offer low current yields, which tend to stay low for extended periods of time. The lucky investors who purchased such securities however are able to generate high yields on cost over time.

I selected the fifteen dividend champions which have achieved the highest ten year dividend growth rates:

Name
Ticker
Yrs Consecutive Div Increase
10 Year Annual Div Growth
P/E Ratio
Yield
Div Payout Ratio
Stock Analysis
AFLAC Inc.
AFL
31
16.8%
8.90
2.60%
23%
Becton Dickinson & Co.
BDX
42
17.6%
20.50
1.70%
35%
Computer Services Inc.
CSVI
43
17.0%
19.30
2.30%
44%

Donaldson Company
DCI
28
18.4%
21.70
1.70%
37%

Helmerich & Payne Inc.
HP
42
23.3%
13.10
3.10%
41%

Lowe's Companies
LOW
52
29.2%
22.40
1.70%
38%
McDonald's Corp.
MCD
39
22.8%
16.70
3.70%
62%
MSA Safety Inc.
MSA
43
16.5%
22
2.50%
55%

Nucor Corp.
NUE
41
22.1%
27.20
3.00%
82%

Raven Industries
RAVN
28
19.2%
21.10
2.20%
46%

T. Rowe Price Group
TROW
27
16.2%
17.40
2.30%
40%
Target Corp.
TGT
47
19.8%
19.00
3.30%
63%
W.W. Grainger Inc.
GWW
43
17.2%
21.60
1.70%
37%

Walgreen Company
WAG
39
22.0%
17.50
2.20%
39%
Wal-Mart Stores Inc.
WMT
41
18.0%
16.10
2.50%
40%

High dividend growth does not make companies automatic buys. Investors need to evaluate each company in detail, and understand where future growth will come from. A solid plan with concrete deliverables communicated from the company is just one instance of something that could propel solid dividend growth going forward. Other variables that could translate into high earnings and dividend growth include taking advantage of favorable demographic trends in healthcare, baby boomers needs for retirement saving, and the rise of the emerging markets middle class.

Investors should also take with a red flag companies whose dividend growth has been slowing down considerably in the past five years or less. Nucor (NUE) rode the boom in steel prices in the first half of the decade, only to reach a plateau at the onset of the financial crisis of 2007 – 2009. The dividend growth has been miniscule for the past five years.

Investors should also look into the valuation of each company, prior to investing. Purchasing even the best company in the world that is guaranteed to boost earnings and dividends for the next 10 years could still lead to losses, if investment is made at very high valuations. Investors in Wal-Mart Stores (WMT) in 1999 and Coca-Cola (KO) in 1998 can certainly attest to this fact.

However, a booming business can be rewarding eventually even for the most unlucky investors, provided they are true long-term investors. Great businesses like Wal-Mart and Coca-Cola are attractively priced today, and have managed to record better sales, profits and dividends since hitting all-time-highs at the end of the last millennium. If they can continue pushing forward, their investors will eventually make good profits.

Full Disclosure: Long WMT, KO, NUE, LOW, AFL, BDX, MCD, TGT, WAG

Relevant Articles:

The Tradeoff between Dividend Yield and Dividend Growth
Why Dividend Growth Stocks Rock?
Four Characteristics of The Best Dividend Growth Stocks
Living off dividends in retirement
Four Percent Rule for Dividend Investing in Retirement

Wednesday, October 8, 2014

Is international exposure overrated?

International diversification has always been sold on individual investors, as a means to reduce volatility in returns and enhance their portfolio returns. In essence, when US markets zig, the international markets would zag and vice versa. This might have been a great strategy a few years and decades ago, but in out globalized society, it might be less of a factor. Presently, global markets are increasingly moving at same pace, because of globalization. This correlation was evident during the financial crisis of 2007 – 2009, when all global markets tanked.

In a previous article I discussed the pros and cons of international diversification. I came up with more cons for dividend investors than pros. I tried to look at international exposure using another angle, and calm down US dividend investors that increased international exposure would not really add that much to the stability of their dividend incomes.

In the table below, I have listed the ten companies with the highest weight in the S&P 500. In addition, I have also listed the percentage of revenues that each one of these companies derives from their international operations. The ten companies with highest weight in the index accounted for approximately 18% of S&P 500. On average, these global companies derived 48% of their revenues from international operations.

Name
Ticker
Sector
Weight
International Sales
Apple Inc.
AAPL
Information Technology
3.46
61%
Exxon Mobil Corporation
XOM
Energy
2.3
64%
Microsoft Corporation
MSFT
Information Technology
2.18
52%
Johnson & Johnson
JNJ
Health Care
1.69
55%
General Electric Company
GE
Industrials
1.46
53%
Berkshire Hathaway Inc. Class B
BRK.B
Financials
1.45
16%
Wells Fargo & Company
WFC
Financials
1.41
5%
Procter & Gamble Company
PG
Consumer Staples
1.3
65%
Chevron Corporation
CVX
Energy
1.29
59%
JPMorgan Chase & Co.
JPM
Financials
1.28
45%

Each of these companies has different year-end dates. I tried to analyze the latest annual reports and other publicly available corporate information out there, which was 2013 for the majority of situations. 

If we were to extrapolate the results from this sample to the whole universe of stocks in the S&P 500, one can conclude that a large portion of revenues for US companies is derived from international operations. As a result, US investors who purchase shares in US multinationals such as Procter & Gamble (PG) or Johnson & Johnson (JNJ) can gain international exposure simply by investing in these US stocks. These global conglomerates operate businesses in many countries, and generate diversified streams of income from these international locations. These cashflows are then used to grow the business, with the excess distributed to shareholders as dividends.

As a result, I believe that adding internationally listed stocks would not dramatically improve the performance of a dividend portfolio. By purchasing US stocks with global operations, the domestic US dividend investor gains exposure to global income streams, without the hassle of international taxation or learning international accounting rules.

Full Disclosure: Long XOM, JNJ, GE, BRK/B, WFC, PG, CVX

Relevant Articles:

International Dividend Stocks – Pros and Cons
Dividend Investors Should Ignore Market Fluctuations
Dividend Growth Investing Works for Everyone Willing to Put the Time Into It
My Retirement Strategy for Tax-Free Income
Do not despise the days of small beginnings

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