Monday, March 21, 2016

Focus on Dividend Growth In conjunction with Dividend Yield

Dividend Growth Investing is a strategy where an investor acquires shares in a company that has a track record of regular annual dividend increases. Only companies that have a certain type of business model can afford to grow dividends every single year for at least a decade. A track record of so many years of dividend hikes serves as a mechanism that narrows down the list of candidates for further research. In a large portion of cases I study, I am finding that companies have managed to boost dividends for at least a decade, because they also grew their earnings.

In my strategy, I look for companies that have raised dividends for at least ten years in a row. I also add things like P/E, yield requirements and growth requirements. If you have read my stock analyses before, you would note that I also look in trends in earnings per share, dividends per share, dividend payout ratios, as I gauge stability of the business, the dividend and try to make an educated guess whether the good times can continue on.


I believe I have focused a lot more than I should on the initial yield. I do not believe I have discussed the importance of looking at that yield in conjunction with its corresponding dividend growth part. If you have a minimum yield requirement, you may consider rethinking the way you do things, because you may be missing out on the next great dividend growth story merely because it never yielded a certain percentage. As I have discussed before, I will consider looking at yield but only in conjunction with the dividend growth I see.

I ran a screen for dividend champion companies that have managed to boost dividends/distributions by 5%/year in the past 1,3,5,10 year periods. My screen came out with 58 companies. Thirty-six of those companies had yields exceeding 2% as of the end of January, and twenty-two had yields that were lower than 2%. The results can be accessed from this spreadsheet.

Company Name
Ticker Symbol
No. 'Yrs
Dividend Yield
1-yr DG
3-yr DG
5-yr DG
10-yr DG
3M Company
MMM
58
2.83
19.9
20.2
14.3
9.3
AFLAC Inc.
AFL
33
2.76
6.8
5.6
6.7
13.6
Air Products & Chem.
APD
33
2.45
6.0
8.6
10.8
9.9
Altria Group Inc.
MO
46
3.67
8.4
8.4
8.4
11.6
American States Water
AWR
61
2.11
5.3
11.2
10.9
6.9
Archer Daniels Midland
ADM
41
3.43
16.7
17.0
13.3
12.7
Automatic Data Proc.
ADP
41
2.50
16.3
12.4
10.5
13.7
Becton Dickinson & Co.
BDX
44
1.79
10.1
10.1
10.7
13.1
Brown-Forman Class B
BF-B
32
1.38
8.9
10.4
9.9
9.4
C.R. Bard Inc.
BCR
44
0.50
7.0
5.7
5.6
6.3
Carlisle Companies
CSL
39
1.33
17.0
13.1
10.8
8.6
Cintas Corp.
CTAS
33
1.25
23.5
17.9
16.9
12.6
Clarcor Inc.
CLC
32
1.83
15.5
18.3
15.6
12.2
Coca-Cola Company
KO
54
3.25
8.2
9.0
8.4
9.0
Colgate-Palmolive Co.
CL
52
2.32
5.6
7.1
8.1
10.5
Computer Services Inc.
CSVI
44
2.78
23.7
21.0
18.1
16.2
Donaldson Company
DCI
29
2.41
5.5
24.2
22.0
16.9
Dover Corp.
DOV
60
2.76
5.8
13.9
12.9
11.5
Eaton Vance Corp.
EV
35
3.67
11.5
9.2
9.0
11.6
Emerson Electric
EMR
59
3.89
7.1
5.4
6.9
8.4
Erie Indemnity Company
ERIE
26
3.11
7.2
7.2
7.2
7.7
ExxonMobil Corp.
XOM
33
3.64
6.7
9.7
10.6
9.7
Federal Realty Inv. Trust
FRT
48
2.54
10.6
8.2
6.0
5.3
Franklin Resources
BEN
36
2.01
25.0
17.8
15.4
16.2
Genuine Parts Co.
GPC
60
2.92
5.2
7.7
8.2
6.9
Gorman-Rupp Company
GRC
43
1.66
9.5
9.1
8.5
8.2
H.B. Fuller Company
FUL
46
1.35
10.9
15.6
12.9
7.8
Hormel Foods Corp.
HRL
50
1.36
25.0
18.6
18.9
14.4
Illinois Tool Works
ITW
41
2.33
14.9
11.2
9.6
13.1
Jack Henry & Associates
JKHY
26
1.36
13.6
29.5
21.4
18.7
Johnson & Johnson
JNJ
53
2.85
6.9
7.1
6.9
8.8
Kimberly-Clark Corp.
KMB
44
2.82
6.9
7.5
7.1
7.6
Lancaster Colony Corp.
LANC
53
1.97
5.6
8.8
8.9
6.4
Lowe's Companies
LOW
53
1.66
24.4
19.3
20.6
26.1
McCormick & Co.
MKC
30
1.84
8.1
8.9
9.0
9.6
McGraw Hill Financial Inc.
MHFI
43
1.60
10.0
9.0
7.0
7.2
Medtronic plc
MDT
38
1.96
17.1
10.7
9.8
14.3
Nordson Corp.
NDSN
52
1.34
18.4
19.7
18.2
10.8
Parker-Hannifin Corp.
PH
59
2.49
21.7
15.9
18.7
16.0
Pentair Ltd.
PNR
40
2.77
16.4
13.3
11.0
9.4
PepsiCo Inc.
PEP
44
3.08
9.1
9.5
8.2
10.9
Questar Corp.
STR
37
3.55
12.0
8.1
9.2
6.6
Raven Industries
RAVN
29
3.40
6.1
8.7
10.9
14.7
RLI Corp.
RLI
40
1.21
5.6
6.0
5.6
9.6
RPM International Inc.
RPM
42
2.69
7.7
6.6
5.0
5.6
SEI Investments Company
SEIC
25
1.36
9.1
17.0
20.4
16.4
Sherwin-Williams Co.
SHW
38
1.24
21.8
19.8
13.2
12.6
Stanley Black & Decker
SWK
48
2.34
4.9
5.9
9.8
6.5
Stepan Company
SCL
48
1.53
5.8
8.0
8.3
6.4
T. Rowe Price Group
TROW
30
3.13
18.2
15.2
14.0
16.3
Target Corp.
TGT
48
2.86
13.7
17.8
20.8
19.6
Tompkins Financial Corp.
TMP
29
3.12
4.9
5.2
5.0
5.8
UGI Corp.
UGI
28
2.46
10.1
7.9
8.2
7.4
Valspar Corp.
VAL
38
1.69
13.9
15.4
14.0
11.9
VF Corp.
VFC
43
2.27
20.1
20.6
17.0
17.1
W.W. Grainger Inc.
GWW
44
2.16
10.1
14.5
17.2
17.4
Walgreens Boots Alliance Inc.
WBA
40
1.82
6.9
11.7
17.4
19.5
Weyco Group Inc.
WEYS
34
2.94
5.3
6.2
5.0
12.2

The next step is looking at each one of those, and making sure dividend growth was not a mere function of expansion in the dividend payout ratio. One still needs to focus on evaluating earnings for past and future growth. In my usual screens, I would also get rid of companies at the top of my acceptable valuation range. Some of these companies like Illinois Toolworks (ITW), W.W. Grainger (GWW) and V.F. Corp (VFC) are examples of what could fall through the cracks by merely focusing on screening criteria if I had used an entry yield higher than 2.50%.  Investors should look beyond screening criteria in an effort to improve the quality and breadth of potential candidates for their portfolios.

In my case, my holding period is the next 20- 30 years. Therefore, I do not focus on the yields today, but on the highest potential future yields on cost. A stock yielding 1% today that will generate an yield on cost of 20% in 20 years is potentially more valuable to me than a slow moving utility or a telecom company which is yielding 4% - 5% today, and will yield 8% - 10% on cost in 20 – 25 years.

On the other hand, the future is unknown. Therefore, it may make sense to hold both types of companies, since each group will work best under different conditions. To reiterate the information in the paragraphs above, you need to consider the trade-off between yield and growth on the individual company level and at the portfolio level.This will ultimately strengthen my portfolio. For example, a company like Visa (V) could deliver mind-boggling yields on cost and total returns over the next 20 - 30 years. However, it will take time for the yield to grow, and there is always the risk that this future growth doesn't materialize. On the other hand, a company like AT&T (T) will not grow a lot each year, but it could provide respectable and dependable dividend payments that match the rate of inflation over time. If I were starting from scratch, I would be considering essentially building a basket of those companies, and investing 30 – 40 – 50 companies at a time.

Relevant Articles:

The Tradeoff between Dividend Yield and Dividend Growth
The importance of yield on cost
24 Dividend Champions for Further Research
A Dividend Portfolio for Early Retirees
Why Investors Should Look Beyond Typical Dividend Growth Screens

12 comments:

  1. I have been following your articles for a while, thanks for all you do and the enlightenment you have brought to my portfolio.

    ReplyDelete
  2. DGI,

    I can't wait until my portfolio gets to the point where I can grab more companies that are under 2.5% yield. At this time though, I'm not yet at my 4% yield that I need to average so I have to spend more time loading it up with the base points of the rocket ship (everything over 4%). It's too bad because I've totally missed a great buy in point for DIS. Sad day!

    -Dividend Reaper

    ReplyDelete
    Replies
    1. I have found it best to have different types of dividend investments. Average portfolio yields for me have been around 3% - 3.25%

      Delete
  3. When looking at the growth and yield trade-off, keep in mind that none of the developed nations has replacement rate, population growth anymore. So, there will be fewer workers to fund gov't spending, particularly entitlements. This lack of population growth also includes China.
    There are two major factors in economic growth: population growth and productivity growth. Those two, result in the credit expansion that leads to economic growth.
    Companies that have grown the past 10 years may have more trouble the next 10. Still, DGI looks like our best shot at becoming financially independent. Just don't believe any politician that say they are going to create jobs. That is not really a job skill they possess.

    ReplyDelete
    Replies
    1. The world population is expected to grow through 2050.. US should be fine, since we get a lot of immigrants and I believe the organic growth of population is still happening..

      If we believe the media, all robots will be doing all jobs by then anyways, so all we will do is enjoy leisure. Perhaps a robot can write my articles for me too...

      Delete
  4. DGI

    How do you use events, such as the $2 special dividend from TROW last year, when analyzing a company?

    Thanks for sharing your experiences

    ReplyDelete
    Replies
    1. If we can get special dividends every so often, that would be neat.

      I usually ignore them in comparing 1,3,5,10 year DG rates however

      Delete
  5. Would you explain your DG figures - in each column, is it the average per year for the 1 yr, 3 yr, 5 yr, 10 yr period? Or are you saying in 10 yr, the dividend grew this amount (so to get avg yearly div growth you divide by 10)...

    ReplyDelete
    Replies
    1. These columns show the annualized change in dividends over 1, 3, 5, 10 years. This means that the dividend has compounded at this rate of the corresponding period of time

      Delete
  6. Thanks, you are a excellent communicator, and I believe the book by Miller: The Single Best Investment support you - to never lose sight of dividend Growth.

    ReplyDelete
  7. Hey DGI,

    Thanks for writing this up. You bring up something interesting in every single article you write and it's great to be here reading. I've been guilty of this but most recently I've been looking at both initial yield and future dividend growth; aiming for companies with decently high yields but also with dividend growth in the double digits.
    I'm starting to run out of new stock picks as I'm focused on the TSX and DGI stocks which is a narrow list. Top picks following the criteria here would be CNR and MRU for me - thinking of going there next, actually, as there aren't as many screaming deals out there on my list.

    ReplyDelete

Questions or comments? You can reach out to me at my website address name at gmail dot com.

Popular Posts