Wednesday, January 10, 2018

6 Companies With The Power of 5/15 Dividend Growth

As a kid I loved math. Unlike classic literature where I had to correctly interpret symbolism that I rarely ever noticed, math was one of the few subjects that had a definitive answer - it was either right or wrong. I took great comfort in that. Investing in dividend growth stocks takes advantage of certain undeniable math principles.

If you have examined one of my stock analyses, you may have noticed the metric "Rolling 4-yr Div. > 15%". This calculation determines if a company's dividends grew on average in excess of 15% for each consecutive 4-year period, within the last 10 years of history.

For example, if on average dividends grew 15% or more for the periods 2011-2014 and 2010-2013 and 2009-2012 and so on to 2003-2006, then this test is true. The reason I like this metric is it identifies companies that consistently increase dividends significantly. Another way of stating this is that if you held this company for any 4-year period over the last 10 years, you would have averaged a 15% dividend growth rate during the time you held the stock.

Contrast the above example with a company that grew its dividends at 1% per year for nine years, then sold some land in year 10 and paid a special dividend that resulted in a 140% year-over-year dividend increase. This company's average 10-year dividend growth rate is 15% [(140 + 9)/10].

Both companies would have a 15% 10-year average dividend growth rate. However, based on history the first company is more likely to raise its dividend by 15% in the future.

So why is 15% relevant? Dividends will double every 5 years if they grow by 15% per year (5/15). Taking this undeniable math principle into consideration, it often makes sense to purchase a stock with a lower yield but with a higher growth rate. Here are few companies that have the power of 5/15 working for them:

Amgen Inc. (AMGN) is one of the world's leading biotech companies with major treatments for anemia, neutropenia, rheumatoid and psoriatic arthritis, psoriasis, cancer and osteoporosis. The company has paid a cash dividend to shareholders every year since 2011 and has increased its dividend payments for 8 consecutive years. Yield:

Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States. The company has paid a cash dividend to shareholders every year since 1972 and has increased its dividend payments for 16 consecutive years. Yield:

Helmerich & Payne, Inc. (HP) is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor. The company has paid a cash dividend to shareholders every year since 1959 and has increased its dividend payments for 0 consecutive years. Yield:

Nike, Inc. (NKE) is the world's leading designer and marketer of high-quality athletic footwear, athletic apparel and accessories. The company has paid a cash dividend to shareholders every year since 1984 and has increased its dividend payments for 15 consecutive years. Yield: 1.2%

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. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 17 consecutive years. Yield: 2.7%

Union Pacific Corporation (UNP) operates the largest U.S. railroad, with more than 32,000 miles of rail serving the western two-thirds of the country. The company has paid a cash dividend to shareholders every year since 1900 and has increased its dividend payments for 11 consecutive years. Yield: 2.0%

If you have time on your side, you should investigate if certain lower yielding stocks with a dividend growth rate fits into your long-term investment strategy. When making this evaluation, it is important to note that the sustainability of the dividend growth rate must be evaluated on a go-forward basis. Like high-yield stocks, there is increasing risk as the dividend growth rises.

Full Disclosure: Long AMGN, CBRL in my High Dividend Growth Stocks Portfolio. See a list of all my Dividend Growth Portfolio holdings here.

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- Characteristics of Great Dividend Growth Stocks
- 8 Dividend Stocks With A 15% Yield In 15 Years

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Tags: AMGN, CBRL, HP, NKE, PSX, UNP,

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