Wednesday, September 27, 2017

7 Stocks With Strong Dividend Growth Metrics

When evaluating a company as a potential income investment I look at its calculated fair value, ability to generate cash, debt position and the net present value of its dividend stream compared to alternative "safe" investments (NPV MMA Differential).

In addition, I look at four other metrics that individually may not be as important as the above, but collectively provide great insight into the potential success of a stock as a dividend investment. Here are the four other key metrics that I look at when evaluating a dividend stock:

I. Dividend Growth Rate:
The dividend growth rate is a key metric in many calculations. As such, I use a conservative estimate as follows: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year compound annual growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history. You can see how this is calculated in my D4L-PreScreen.xls model. This metric is True if the dividend growth rate is 12% or above.

II. Years of Div. Growth:
Years of consecutive dividend growth.  How long a company has increase its dividend is a strong indication of how committed the company is to continue doing so in the future. This metric is True for 15 or more years.

III. Rolling 4-yr Div. > 15%:
Dividends will double every 5 years if they grow by 15%. This test is True if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.


IV. Years to >MMA:
The number of years until dividend earnings exceed the earnings from a hypothetical money market account earning an average 20 year Money Market Account rate. This rate is validated by looking at a 20 year Treasury rate. This metric is True if the number of years is less than 5.

When taken together, these are tough metrics. Of the 200+ stocks that I currently follow, only three had all the above metrics true. They were:

The TJX Companies Inc. (TJX) operates several chains of off-price apparel and home fashion specialty stores in the U.S., Canada, Germany, Poland, Ireland, and the U.K.
- Yield: 1.7%
- Dividend Growth Rate: 20.0%
- Years of Div. Growth: 21

Lowe's Companies, Inc. (LOW) sells retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada.
- Yield: 2.1%
- Dividend Growth Rate: 17.1%
- Years of Div. Growth: 55

Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
- Yield: 2.3%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 15

Hormel Foods Corp. (HRL) is a multinational manufacturer and marketer of consumer-branded food and meat products.
- Yield: 2.2%
- Dividend Growth Rate: 16.3%
- Years of Div. Growth: 51

Phillips 66 (PSX), spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S.
- Yield: 3.1%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 17

Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States.
- Yield: 3.3%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 15

Helmerich & Payne, Inc. (HP) is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor.
- Yield: 2.7%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 45

These metrics focus on compound dividend growth, which is highly important for the successful investor in dividend growth stocks. In my dividend analysis worksheet, a company will earn a Star if two of the above metrics are True.

Full Disclosure: Long MSFT, CBRL. See a list of all my Dividend Growth Portfolio holdings here.

Related Articles
- 6 Stocks Currently Trading Below their Fair Value
- The Wit and Wisdom of Warren Buffett
- The Perfect Dividend Stock
- Charlie Munger's 10 Rules for Investment Success
- Early Warning Signs of a Dividend Cut

(Photo Credit)


Tags: TJX, LOW, MSFT, HRL, PSX, CBRL, HP,

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