One of my favorite stock lists that includes quality dividend stocks is the Dividend Aristocrats list, maintained by Standard & Poors. In order for a company to qualify for membership in this elite group it has to have increased its dividend payments to shareholders for at least 25 consecutive years.
The typical dividend aristocrat is a mature company that has weathered the storms of many boom and bust cycles while continuing to increase dividend payments to shareholders. These companies as well as the dividend champions are the cornerstone to my dividend growth strategy. Although the list as a whole yields a little bit better than the overall market represented by the S&P 500, there are some hidden gems which have consistently achieved an above average dividend growth rate. A company which has a 12% dividend growth would double its dividend payment in 6 years. Thus if this stock has a dividend yield of 2% right now, 6 years from now the yield on cost would be 4%. If the dividend payment keeps growing at the same growth rate, the yield on cost would be close to 12% in twelve years after the initial investment. In order to find such stocks, I researched the dividend aristocrats and selected the 20 stocks with the highest dividend growth for the past 10 years. (Period ending in 2007). You could also open the spreadsheet from here.
Just because the dividend growth rate for a particular stock is not in the double digits does not automatically mean that the stock is not a buy and vice versa. It all depends on your investing goals and experience. If you are a retiree looking for another source of income then the higher yielding slower growing dividend stocks like ED or TEG would constitute the majority of your portfolio. However if you are not going to tap your dividend income for one or two decades then the lower yielding high dividend growth stocks will have a higher weight in your income portfolio.
The only thing that is constant of course if change, thus a company which is rapidly growing its dividends might not grow them at such a fast rate in the future or might even consider cutting the payments to shareholders and vice versa. Thus, a successful dividend investor would construct a portfolio that is a blend of higher yielding and lower yielding dividend stocks, growing their payments at varying rates.
Full Disclosure: Long MCD, WMT, MTB ,ADP, JNJ, SHW, ED
Relevant Articles:
- The Rule of 72
- Why do I like Dividend Aristocrats?
- Long term returns of S&P high-yield aristocrats
- Dividend Conspiracies
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Nice list DGI. I didn't realize MCD was growing it's dividend so fast. Wow
ReplyDeleteJake,
ReplyDeleteThanks for stopping by. The issue with MCD is that unless they increase the dividend payment in 4Q they are going to lose their dividend aristocrats status. And have to wait for 25 years before they reach it again:-)
DGI: Very nice read! Thanks for including a link to my TEG analysis!
ReplyDeleteBest Wishes,
D4L
Thanks for this...good to see the longer-term perspective of increasing dividends. I'm new to investing and since finding stocks with healthy dividends is one of my goals I've naturally been curious about REITs--ABR, NRF, RAS etc. in particular which are promising yields of 15% or more. Considering that their prices seem to have stabilized in the past few months, would you consider these stocks as part of a viable income-generating plan? There may not be room for the dividend itself to grow, but the potential capital gains would surely make up for it. Would love to know your thoughts on this in a future post perhaps. I know you've covered other REITs previously, but none which had such a high starting yield.
ReplyDeleteCurious,
Liana
Liana,
ReplyDeleteNaturally, ABR and NRF haven't been around for at least 10 years, so there isn't enough historical data to analyze. As for RAS i notice that it cut its payment in 2007 by almost 50%. I tend to dislike dividend cutters. I think that RAS could cut its payment pretty soon, as the current dividend payment appears unsustainalble to me. Sorry to burst your enthusiasm.