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