The Power Of Dividend Growth

5/9/2011


You’ve retired at 65. Now is the time to buy high-yield stocks, right?

Don’t be so hasty. Yes, your income needs change when you retire. But you’re probably better off focusing on dividend growth than on yield, for at least two reasons:

• You still need growth. According to the Social Security Administration, a 65-year-old man can expect to live another 17 years, a woman 20 years. Shrewd investors will take steps to ensure their portfolios last as long as they do.

• Dividend growers tend to outperform. In rolling 12-month periods since the end of 1994, the top one-fifth of the S&P 1500 Index as measured by three-year dividend growth averaged a return of 13.9%, versus 12.8% for the average stock in the index. By comparison, strategies based on current dividend yield underperformed the average S&P 1500 stock.

DIVIDEND GROWTH WORKS BEST
Among dividend-related Quadrix factors, three-year dividend growth has the most predictive power. In 184 rolling 12-month periods since the end of 1994, the top one-fifth of the S&P 1500 as measured by three-year dividend growth averaged a return of 13.9%, versus 12.8% for the average stock in the index. The dividend-growth portfolio also delivered the highest information ratio (return divided by standard deviation, a measure of volatility) and winning percentage (the percentage of periods when the top scorers outperformed the average).
------------------ Average 12-Month Return Since end of 1994 ------------------
All
S&P
1500
Stocks
----------- Top One-Fifth As Measured By . . . -----------
S&P 1500
Dividend
Payers
Div.
Yield
Div.
Payout
Ratio
Div. Yield
Vs. 3-Yr.
Median
Div. Yield
Vs. 5-Yr.
Median
3-Yr.
Div.
Growth
5-Yr.
Div.
Growth
Average
Return (%)
12.8
11.8
12.3
13.1
13.5
13.0
13.9
13.1
Standard
Deviation (%)
21.3
19.7
22.4
21.6
29.9
29.5
22.1
21.8
Information
Ratio
0.60
0.60
0.55
0.60
0.45
0.44
0.63
0.60
Winning
Percentage (%) 
NM
NM
47
51
34
32
59
50

By constructing a portfolio of consistent dividend growers, an investor can generate returns strong enough to fund a comfortable retirement.

Consider the S&P 500 Dividend Aristocrats Index, which contains all of the S&P 500 Index components that have raised their dividends for at least 25 consecutive years. Since its inception in 1990, the Dividend Aristocrats Index has delivered an annualized total return of 11.3%, versus 8.7% for the broader Index. A full list of the S&P’s Dividend Aristocrats can be found at www.standardandpoors.com.

The table below lists 16 Forecasts monitored stocks with at least 25 years of dividend growth, including the four reviewed below.

Bard ($108; BCR) boasts 40 straight years of dividend growth. In each of the last six years, Bard has announced in June a penny-per-share increase in the quarterly dividend. The annual payout equals just 12% of trailing 12-month earnings — the lowest payout ratio in the past decade — leaving ample room for growth. But Bard seems likely to maintain its slow-growth approach while it completes a $750 million accelerated share repurchase announced in December.

Repurchases have sliced nearly 8% from the share count over the past two quarters. Prior to the accelerated plan, Bard repurchased shares like it grew the dividend — very gradually. Outstanding shares declined by a rate of 1% to 4% from 2006 to 2009. The share count has declined in each of the last 14 quarters.

Bard is using debt to fund the accelerated repurchase agreement. But solid cash generation has fueled long-term growth trends for dividends and buybacks. In the past five years, cash provided by operations has grown at an annualized rate of 10%; annualized growth for free cash flow is 16%. Bard is a Buy and a Long-Term Buy.


In August, Dover ($67; DOV) raised its dividend for the 55th consecutive year. Not surprisingly, the company has been consistent in other areas as well, with sales and per-share profits rising in seven of the last eight years. The consensus projects per-share-profit growth of 27% this year on 13% sales growth, and estimates are trending higher.

Dover makes a broad range of industrial products, including machinery, food-service equipment, and fluid-management systems. Over the last two years, Dover has divested 20 low-margin businesses, along the way boosting its exposure to the energy sector. Operating profit margins rose to 14.8% in the 12 months ended March, up from 12.0% a year earlier and the highest level in more than 10 years. The company also manufactures components for products as varied as hearing aids, defense electronics, and automated-teller machines. That diverse mix of end markets allows Dover to participate in a general economic recovery even if one or more areas remain weak. Dover, trading at a 12% discount to the average industrial-machinery company as measured by price/earnings ratio, is being initiated as a Buy and a Long-Term Buy.


Exxon Mobil ($86; XOM) has grown its dividend every year since 1983 — at an annualized rate of 6%, about twice the pace of inflation. The latest dividend hike, announced April 27, increased the quarterly payout 7% to $0.47 per share, in line with the dividend growth of the past decade.

Dividend growth is supported by Exxon’s ability to produce ample cash from operations. Operating cash flow has risen in seven of the last eight years and in each of the past five quarters, including a 30% jump to $16.90 billion in the March quarter.

March-quarter earnings per share soared 61% to $2.14, topping the consensus by $0.08. Upstream operations reported profits of $8.68 billion, up 49%, while chemical profits rose 21% to $1.52 billion. The rebound was most apparent at Exxon’s downstream unit, which earned $1.10 billion, compared to just $37 million in the year-earlier period. Revenue climbed 26% and total production increased 10%, driven by a 24% jump in natural gas following the acquisition of XTO Energy. Yielding 2.2%, Exxon Mobil is a Focus List Buy and a Long-Term Buy.


With rising prices for gasoline and fresh food, Wal-Mart Stores ($55; WMT) says U.S. consumers face more pressure than they did last year. But the retail giant says it is encouraged about efforts to increase traffic in domestic stores by adding thousands of items to its shelves. Wal-Mart is trying to turn around its U.S. operations, which have reported lower same-store sales for seven straight quarters. The retail giant is also optimistic about growth opportunities in China and Africa. In coming weeks, Wal-Mart expects the conclusion of a government review of its proposed $2.4 billion bid to purchase a majority stake in South Africa’s Massmart.

Wal-Mart returned $19.2 billion to shareholders through dividends and stock repurchases in 2011 ended January — more than what 78% of companies in the S&P 500 generated in revenue last year. The quarterly dividend has grown every year since its inception in 1974. The latest increase, a 21% hike announced in March, exceeded the three-year annualized growth rate of 15%. The stock’s yield, currently 2.6%, has steadily risen in the past decade. Meanwhile, buybacks have gradually reduced Wal-Mart’s share count, down 18% since fiscal 2001. With a Value score of 88, Wal-Mart is a Long-Term Buy.

DIVIDEND-GROWTH LEADERS
All 16 of the stocks below have delivered at least 25 consecutive annual dividend increases. All earn A (above average) or B (average) ratings, and stocks recommended for purchase are presented in bold.
Dividend
Growth
(Annualized)
No. of
Consecutive
Years With
Higher Div.
Company (Price; Ticker)
Div.
($)
Yield
(%)
3
Yrs.
(%)
25
Yrs.
(%)
Sector
Rating
3M ($97; MMM)
2.20
2.3
3.2
6.6
53
Industrials
B
Abbott Labs
($53; ABT)
1.92
3.6
11.0
12.5
39
Health Care
A
Aflac ($56; AFL)
1.20
2.1
7.7
16.3
28
Financials
A
Bard ($108; BCR)
0.72
0.7
5.1
8.9
40
Health Care
A
Coca-Cola
($68; KO)
1.88
2.8
7.3
11.3
49
Cons. Staples
B
Dover ($67; DOV)
1.10
1.6
6.9
9.5
55
Industrials
A
Emerson
($57; EMR)
1.38
2.4
4.8
7.4
54
Industrials
B
Energen
($63; EGN)
0.54
0.9
4.0
4.6
29
Utilities
A
Exxon Mobil
($86; XOM)
1.88
2.2
6.6
5.9
29
Energy
A
Johnson & Johnson
($66; JNJ)
2.28
3.4
8.3
14.0
49
Health Care
B
Lowe’s Companies
($26; LOW)
0.44
1.7
9.5
15.3
49
Cons. Discret.
B
McDonald’s
($79; MCD)
2.44
3.1
14.5
16.5
34
Cons. Discret.
A
PepsiCo
($70; PEP)
2.06
3.0
7.7
12.7
39
Cons. Staples
B
Target ($49; TGT)
1.00
2.0
18.5
11.2
39
Cons. Discret.
B
Walgreen
($43; WAG)
0.70
1.6
20.7
13.2
35
Cons. Staples
A
Wal-Mart Stores
($55; WMT)
1.46
2.6
15.4
21.7
37
Cons. Staples
A


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com