## Tuesday, October 12, 2021

### 5 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 2018-2021 and 2017-2020 and 2016-2019 and so on to 2010-2013, 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. Yield: 3.4%

Illinois Tool Works Inc. (ITW) is a diversified manufacturer that operates a portfolio of 60 business units that serve industrial and consumer markets globally. Yield: 2.3%

Abbvie Inc. (ABBV) is a global research-based pharmaceuticals business that emerged as a separate entity following its spin-off from Abbott Laboratories at the start of 2013. AbbVie's key drug is Humira for rheumatoid arthritis. Yield: 4.7%

Lowe's Companies, Inc. (LOW) retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada. Yield: 1.6%

Texas Instruments Inc. (TXN) of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors. Yield: 2.4%

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 ITW, ABBV, TXN,

Related Articles