A ten year streak of annual dividend increases is a good filter to weed out most cyclical stocks and those that have simply gotten lucky by riding a short-term trend of economic prosperity. On average, a ten year period covers a full economic cycle or two on average. While the current economic cycle is over ten years old, I still find the ten year minimum streak of annual dividend increases to be a good initial filter. After all, it weeds out companies that may have fallen on hard times even during this period of economic prosperity. As an investor, I am looking for the business model that can deliver sustainable profits over several periods of economic contraction and expansion. I am not looking to get rich quick overnight - I want a company that can compound earnings, dividends and net worth for decades into the future. That't the type of company to put in my portfolio, and just let the power of compounding do the heavy lifting for me.
That initial filter needs to be evaluated further by observing trends in dividend payout ratios, and understanding the phase of dividend growth that the company is in.
The twelve companies raising dividends over the past week include:
This is not an automatic buy however. It is a list for further research I generated, as part of my monitoring process.
In general, I look for several quantitative factors when evaluating a company:
1) A ten year track record of annual dividend increases
2) A dividend payout ratio below 60% ( adjusted for MLPs, REITs and Utilities, Telecom and Tobacco, known for high payout ratios, but dependable earnings streams) I also want the dividend payout to be flat or stuck in a range over time, rather than increasing
3) Dividend Growth above the rate of inflation (I will consider a smaller growth if yield is high and sustainable)
4) A P/E ratio below 20 ( however I may bend my guideline if I like everything else)
5) Rising earnings per share over time, which I believe to be the fuel behind future dividend increases
I have had this list of screening criteria codified since at least 2010. It is fascinating to see others borrow the ideas and use it over the past decade.
This list is not a list of rules, but a list of guidelines. As I gain more experience, and as the investment environment changes, I will add/correct/modify each guideline. There is logic behind each step, which is helpful for me in deciding when I should stick to the criteria religiously or whether I should ignore some aspects of it. This is where having your own process gives you an advantage in investing. If you blindly copy someone else's method without understanding it, you may be in for a rude awakening.
For an example of how I analyze companies, please check my analysis of T.Rowe Price Group (TROW)
I find United Parcel Service (UPS) to be attractively valued today, although the business does face some challenges from different directions. Check my analysis of UPS for more information about the company.
The most fascinating company on this list is Nu Skin Enterprises (NUS), which I last analyzed 7 years ago. I did not like the company in 2013, and I do not like the business model today either. The stock has generated zero in returns since then. Stock investing is tough, because the company was the best performing stock on the S&P 500 in 2013, more than tripling, before giving all gains back in 2014 and then slowly drifting lower.
Update: Once I created the table and calculated the data, I realized that I missed out on two dividend increases from last week. Those include PepsiCo (PEP) and Nexterra (NEE). PepsiCo (PEP) raised its quarterly dividend by 7.06% to $1.0225/share. This was the 48th consecutive annual dividend increase for this dividend champion. The company has a ten year annualized dividend growth rate of 7.89%. The stock yields 2.78% and sells at a forward P/E of 24.87. Nexterra (NEE) raised its quarterly dividend by 12% to $1.40/share. This marked the 25th consecutive annual dividend increase for this newly minted dividend champion. The forward yield is 2%, and the stock sells for a forward P/E of 30.72. The company has a ten year dividend growth rate of 10.22% annualized.
Thank you for reading!
Relevant Articles:
- My Entry Criteria for Dividend Stocks
- Let dividends do the heavy lifting for your retirement
- Give your investments time to compound
- Dividend Investing – Science versus Intuition
