Assuming known inputs, a model can easily be constructed that allows yield and growth to vary, but provide equal end-results (see D4L-PreScreen.xls). Unfortunately, in the real world there is no such thing as "known inputs" when projecting the future. Hence, risk is introduced to the equation.
Higher yield or growth brings with it a higher risk of sustainability. Most income investors wouldn't mind a stock that yielded 20% with no growth, or a stock with an initial yield of 0.5% growing at 100% per year. If either of these were offered to us, we would immediately know that neither are sustainable in the long-term.
Based on our individual financial makeup and appetite for risk, we select an acceptable range of target yields and dividend growth rates. As a quick-and-dirty test when evaluating the yield/growth balance, I look for yields between 2.5% and 5.0% that when added to the stock's dividend growth rate it sums to a number greater than 12%.
This relationship provides for dividends that will double in a little over 10 years. It is far from precise and is not a substitute for running a spreadsheet model, but it does provide me a quick reasonableness check.
This week week, I screened my dividend growth stocks database for companies with dividend yield between 2.5% and 5.0% and a combined yield plus compound annual dividend growth of 12% or more. Select results are presented below:
MEC Industrial Direct (MSM) is a direct marketer that offers a range of industrial products to customers throughout the U.S.; it focuses on maintenance, repair and operations (MRO) supplies.
Yield: 4.1% | Dividend Growth: 9.9%
Bank of the Ozarks (OZK) owns Bank of the Ozarks, which provides retail & commercial banking products and services mainly in the southern United States.
Yield: 3.0% | Dividend Growth: 10.7%
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: 2.6% | Dividend Growth: 12.4%
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: 3.6% | Dividend Growth: 12.5%
Franklin Resources Inc. (BEN) is one of the world's largest asset managers, serving retail, institutional and high-net-worth clients.
Yield: 3.0% | Dividend Growth: 15.0%
Texas Instruments Inc. (TXN) is one of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors.
Yield: 2.6% | Dividend Growth: 20.0%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 150+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long ITW, BEN, TXN,
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Tags: MSM, OZK, ITW, PSX, BEN, TXN,
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