Wednesday, July 14, 2010

14 Dividend Stocks with Dividend Growth Potential

Over the past 80 years, stocks have returned almost 10% annually. Dividends have accounted for approximately 40% of average annual returns. At the same time inflation has averaged 3% annually. These numbers are all averages however – investors cannot expect to generate 10% per year in total returns every single year. Stock returns fluctuate over time. While stock prices gyrate wildly up and down dividends provide a more stable component of total returns.

The relative stability of dividend payments makes them an ideal source of retirement income for individuals looking to live off their investments. Not only are dividend payment stable however, but they also tend to rise faster than the rate of inflation over time. Over the past 80 years, dividends have increased by 5.4% on average, which was almost 2.4% higher than the rate of inflation. Earnings per share, which is the ultimate driver behind dividend growth, increased by 5.50% over the same time period. Without earnings growth, companies could not afford to raise distributions consistently.

Investors should realize of course that these numbers fluctuate from year to year. As a result it is important not to get too optimistic in estimating future dividend growth prospects. For example, most of the times I have added any stocks to my dividend portfolio, they had all shown a strong dividend growth pattern over the preceding decade. Things do happen however, and dividends do get frozen, cut or eliminated. Since I own a diversified portfolio of dividend stocks I am not exposed too much on these risks from a single individual company. As a result, my overall portfolio projections for dividend growth are typically equal to 5% or 6% on average.

While I also require at least a 2.50% initial yield before purchasing a stock, my target portfolio yield is closer to 4%. This could be achieved by purchasing a small position in a higher yielding stock such as Royal Dutch Shell (RDS.B) or Kinder Morgan (KMP), which increases my current yield. In a portfolio of 40 stocks one could have 25 stocks yielding three percent, seven stocks yielding four percent, five stocks yielding six percent and four stocks yielding eight percent in order to achieve a portfolio yield of 4%. The negative side of this exercise of course that it reduces my portfolio dividend growth. As Dave Van Knapp’s article 10 by 10: A New Way to Look at Yield and Dividend Growth illustrates, the balancing act of current income versus future growth is important in dividend investing.

The stocks with strong dividend growth which are attractive buys at the moment include:

For a brief description of each company, check the overview below:

Abbott Laboratories (ABT) engages in the discovery, development, manufacture, and sale of health care products worldwide. It operates in four segments: Pharmaceutical Products, Diagnostic Products, Nutritional Products, and Vascular Products. Abbott Laboratories has increased dividends for 38 years in a row. (analysis)

Automatic Data Processing, Inc. (ADP) provides technology-based outsourcing solutions to employers, and vehicle retailers and manufacturers. This dividend aristocrat has raised dividends for 35 consecutive years and yields 3.30%. (analysis)

Air Products and Chemicals, Inc. (APD) offers atmospheric gases, process and specialty gases, performance materials, and equipment and services worldwide. The company has increased payments to common shareholders every year for 28 years. (analysis)

The Chubb Corporation (CB), through its subsidiaries, provides property and casualty insurance to businesses and individuals. This dividend aristocrat has raised dividends for 45 consecutive years and yields 2.90%. (analysis)

The Clorox Company (CLX) engages in the production, marketing, and sales of consumer products in the United States and internationally. The company operates through four segments: Cleaning, Lifestyle, Household, and International. The company has increased payments to common shareholders every year for 32 years. (analysis)

Johnson & Johnson (JNJ) engages in the research and development, manufacture, and sale of various products in the health care field worldwide. JNJ has been consistently increasing its dividend for 48 consecutive years. (analysis)

Kimberly-Clark Corporation (KMB), together with its subsidiaries, engages in the manufacture and marketing of health and hygiene products worldwide. The company has boosted distributions for 38 years in a row. (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 48 years. (analysis)

The McGraw-Hill Companies, Inc. (MHP) provides information services and products to the financial services, education, and business information markets worldwide. The company operates in three segments: McGraw-Hill Education, Financial Services, and Information & Media. The company has raised distributions for 37 consecutive years. (analysis)

PepsiCo, Inc. (PEP) manufactures, markets, and sells various foods, snacks, and carbonated and non-carbonated beverages worldwide. The company has raised distributions for 38 years in a row. (analysis)

The Procter & Gamble Company engages in the manufacture and sale of consumer goods worldwide. The company operates in three global business units (GBUs): Beauty, Health and Well-Being, and Household Care. This dividend aristocrat has raised distributions for 54 consecutive years. (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants in the food service industry worldwide. The company has been consistently increasing its dividends for 33 consecutive years. (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. Wal-Mart Stores has consistently increased dividends every year for 35 years. (analysis)

Exxon Mobil Corporation engages in the exploration, production, transportation, and sale of crude oil and natural gas. Exxon Mobil has been consistently increasing its dividends for 28 years in a row. (analysis)

Full Disclosure: Long all stocks listed above

This article was featured on Carnival of Personal Finance #267 at Beating Broke

Relevant Articles:

- The case for dividend investing in retirement
- 10 by 10: A New Way to Look at Yield and Dividend Growth
- Should you sell after a dividend cut?
- A dividend portfolio for the long-term


  1. DGI,
    What do you make of the high payout ratio of KMB and KO? I read your analysis of each, and each has been paying out over 50% the past decade. But nearly 60% seems high. It seems that slower dividend growth is a possibility in the future. Or is there something about these companies that makes that sustainable?

  2. DGI-guy,
    Thanks, as always, for some helpful information based on specific data (as always!).

    Unfortunately, one piece of info is missing - what term (time) has been used for the dividend growth calculation? one fiscal year? five? ten?

    One good "pop" or very modest increase can distort these figures. Agreed that over the long run dividend growers tend to keep doing so, but % of growth may well vary year to year based on annual corp financials... one more column, so we know "last year's increase" and then 5 or 10 year increase would be helpful.

    Hope this is read in the appreciative vein it is intended!

  3. Brad,

    I am playing with fire on KO and KMB. My reasoning is that the EPS growth would sooner or later compensate by being higher than dividend growth, leaving DPR lower. Of course KMB and KO have stable cash flows, being consumer staples. And if they have managed to pay out over 50% in earnings for several years in a row this could signal that management simply wants to return more to sharheolders. The 50% is more of a judgement call, not set in stone. If I "like" a stock i could purchase it at a yield of less than 2.50% or DPR of over 50% as long as the deviation is not too big.


    The dividend growth is for 10 years. I thought I had included it.

  4. DGI,
    Thanks for the clarification. I will have to check both stocks to see if the increasing DPR is due to lower or more slowly growing EPS, or due to more rapid dividend growth. That is, whether the dividend or the divisor is changing. As long as EPS is growing at a healthy pace, I don't think the nearly 60% payout is a deal breaker. I wouldn't want it to get too much above that level, however.

  5. @DGI - what do you mean, playing with fire with KO? Isn't that a great purchase for the long-haul?
    Coca-Cola seems reasonably priced to me!?

    They will probably increase their dividend again in 2011 to $0.46 or $0.47/quarter.


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