In a previous article I outlined three basic types of dividend growth stocks. One group of stocks included companies which are rapidly growing earnings through expansion. This could be through organic growth, acquisitions or through a combination of both. Most of these enterprises tend to reinvest a large portion of their earnings back into the business, which helps them to further generate higher profits. As a result, these companies tend to yield less than the average yield for S&P 500. In addition to that, because of their strong earnings growth, investors typically bid up these shares and they trade at rich valuations.
During recession however, investors start discounting future growth and indiscriminately start selling stocks off. This typically is the best time to purchase quality dividend growth stocks at attractive valuations. The tricky part is determining whether the long-term growth picture for the company is still intact. If investors manage to purchase these shares at attractive valuations, they stand a strong chance of generating market beating total returns as well as double or even triple digit yields on cost.
For example, investors who purchased $1,000 worth of shares of Wal-Mart Stores (WMT) at the end of 1984, and spent distributions each quarter, would be generating $1,321/year in dividends. By the end of 1984, Wal-Mart Stores had managed to boost dividends for ten consecutive years.
The companies on my wish list include:
Casey’s General Stores, Inc. (CASY), together with its subsidiaries, operates convenience stores under the Casey’s General Store, HandiMart, and Just Diesel names in 11 Midwestern states, primarily Iowa, Missouri, and Illinois. The company has raised dividends for 13 years in a row. Over the past decade, it has managed to boost distributions by 20.20%/year. Earnings per share are expected to grow by 11.50%/year over the next five years. The company trades at 18.30 times earnings and yields 1.20%. (analysis)
Family Dollar Stores, Inc. (FDO) operates a chain of self-service retail discount stores primarily for low and middle income consumers in the United States. The company has raised dividends for 36 years in a row. Over the past decade, it has managed to boost distributions by 12.70%/year. Earnings per share are expected to grow by 11%/year over the next five years. The company trades at 15.70 times earnings and yields 1.50%. (analysis)
YUM! Brands, Inc. (YUM), together with its subsidiaries, operates as a quick service restaurant company in the United States and internationally. The company has raised dividends for 9 years in a row. Over the past five years, it has managed to boost distributions by 17.80%/year. Earnings per share are expected to grow by 13.60%/year over the next five years. The company trades at 19.70 times earnings and yields 2%
Visa Inc. (V), a payments technology company, engages in the operation of retail electronic payments network worldwide. The company has raised dividends for 5 years in a row. Earnings per share are expected to grow by 18.30%/year over the next five years. The company trades at 51 times earnings and yields 0.80%.
These companies have shown solid earnings and dividend growth over the past decade. In addition, their earnings prospects for the foreseeable future look bright. This has made shares perennially overvalued, and thus makes it difficult to add to existing positions. If the market were to decline, it could probably bring these companies down to my value territory. If any of these companies stumbles in the short-term however, their stock prices could also fall to value territory. However, if any of these companies manages to raise dividends while the stock price remains flat or declines, they would be in buy territory for me. Buy territory would occur when stocks yields above 2.50% and trade at less than 20 times earnings.
Full disclosure: Long FDO, CASY, YUM, V, WMT
Relevant Articles:
- Three Dividend Strategies to pick from
- My Entry Criteria for Dividend Stocks
- Casey’s (CASY) Dividend Stock Analysis
- Family Dollar Stores (FDO) Dividend Stock Analysis
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Do you ever look at selling puts to help you get into stocks at good valuations?
ReplyDeleteI'm sitting about 30% in cash right now and I'm afraid to go long this market with so much uncertainty. Would selling puts be an interesting idea?
You say you would like to buy Visa when it's attractively valued but in the disclaimer you say you are long V. I'm interested to know at what stage in the game you acquired visa, since that would indicate a deviation from your strategy . Thanks.
ReplyDeleteThese are great dividend growth investments for young folks or anyone with a 5 year or more time frame. They don't meet the higher yield requirements that most of us older folks set, often around 3%, because we are looking for income today.
ReplyDeleteIf you're under 55 great! These are for you.
Best, Bob J
DGI,
ReplyDeleteI'm long Visa also (as well as Mastercard). These companies can afford to substantially lift there dividends from where they are, and I think they'll eventually do so. Wide moats, substantial cash generation, not much too not like except their current low dividend rate. They're expensive now. I picked up Visa in early 2012 when it was much better value in my view. I've held MA since its IPO in 2005-2006.
Integrator
The targets, I believe, that you have set are in some instances rather hard to achieve except under drastic circumstances. For example, Casey’s General Stores, Inc. What would be the market situation that would allow the yield to get to 2.50%? The stock would have to fall substantially or the dividend doubled?
ReplyDeleteIt's a "Wish List", I don't think he's suggesting that some of these stocks will ever hit his range.
ReplyDeleteZach I'm where you are (actually 40% in cash) and everything in this market looks fairly or overvalued. Almost no margin of safety and I'm hoping that DC creates one for us in the near term.
DGI,
ReplyDeleteThis pick of V seems like you're taking a shot at a stock that you think has substantial growth possibilities. Normally, you focus on ten years of dividend growth or more, as I recall. So if you are interested in taking a shot, how about this...PRU. This company has increased it's dividend substantially over the last four years. Previous to this, it had increased them for five years I believe, before cutting it (financial crisis possibly). They also just went from a yearly dividend to quarterly. Old company, been around a while. I have a small position. Thought I would throw the idea out there for research. I've done almost no research on the stock.
As always, thanks for your writings. They serve to enlighten, challenge and inform.