By Serkan Unal
Finding securities that can provide 22 years of consecutive dividend increases, with a 10-year average annual dividend growth of 20.5%, may seem like a difficult task. However, that is exactly what Goldman Sachs Rising Dividend Growth Fund's (GSRAX) portfolio has accomplished. The Fund's proprietary stock selection criteria of 10% annualized dividend growth for at least 10 consecutive years has produced a diversified portfolio that includes some of the best dividend growth stocks of at least the past decade. Investors seeking high-growth dividend stocks should take a glance at the fund's present holdings to identify dividend growers that have the potential to continue boosting their dividends at the minimum 10% rate in the future.
In addition to robust dividend growth, some of the Fund's holdings boast above-average dividend yields, which makes these stocks primed for strong total returns. We focus on the Fund's four dividend growers with dividend yields of at least 3.0%. The Fund's constituent Nucor Corporation (NUE), a former dividend aristocrat that currently yields 3.4%, is excluded from the list because this year it raised its quarterly payout by only 0.7%. With strong EPS growth, free cash flow generation capacity, and the expected management's commitment to sustain high dividend growth in the future, the featured four picks represent strong candidates for a winning dividend growth portfolio.
Automatic Data Processing Inc. (ADP), a payrolls processing and business outsourcing company, is a dividend aristocrat that has raised dividends for the past 38 consecutive years. The company's dividends grew, on average, by 16.5% annually over the past decade. ADP is currently yielding 3.0% on a payout ratio of 61% of trailing earnings and 52% of free cash flow. Analysts forecast its long-term EPS growth at 9.2%, about the same as over the past five years. The expected improvement in the U.S. job growth bodes well for this company. The company's EPS expansion has been driven by a rebounding pay-per-control growth and product innovation. Interestingly, despite the dismal employment picture over the past five years, this payrolls processor was able to post positive average EPS growth over that timeframe. However, this stock is not inexpensive, as it trades at 20.9x its trailing earnings and 19.4x its forward earnings. Jean-Marie Eveillard's First Eagle Investment Management is bullish about this stock.
Harris Corporation (HRS), a communications and IT company heavily dependent on the government sales, has raised dividends for the past 11 consecutive years. Its dividends grew, on average, by 26.6% per year over the past 10 years. This year, the company boosted its payout twice. Harris Corporation's dividend currently yields 3.0% on a payout ratio of 28% of free cash flow. The company consistently generates large free cash flows, providing for the robust dividend increases, which are likely to be sustained. Analysts forecast the company's long-term EPS growth at about 3.0%, given the adverse effect on EPS growth from the planned defense budget cuts. Still, despite the adversity, Harris Communication has recently won several successive orders for its tactical radio equipment from both domestic and international clients. The stock has a high free cash flow yield of 9.8% and an ROE of 27.5%. It is valued below industry based on the price-to-sales and price-to-cash flow ratios. The stock's trailing and forward P/Es are 9.6x each. Last quarter, Citadel Investment's Ken Griffin held a $41 million stake in the company.
McDonald's Corporation (MCD), the world's largest chain of fast-food restaurants, is a dividend aristocrat that has raised dividends for the past 36 years. Its dividends grew, on average, by 27.4% annually over the past decade. This year, its payout was hiked by exactly 10%. McDonald's is currently yielding 3.4% on a payout ratio of 58% of trailing earnings and 73% of free cash flow. Despite its elevated payout ratio, the company is capable of raising dividends at or above the 10% rate in the future. The payout ratio will be supported by solid long-term EPS growth, forecasted at 9.0% per year for the next five years. While McDonald's has experienced weaker sales due to slowdowns in Europe and China, its long-term prospects are optimistic. The company's expansion in the robustly growing emerging markets and its product innovation bode well for future growth. The stock is priced at 16.8x its trailing earnings and 15.9x its forward earnings, below its industry and historical averages. McDonald's is a new holding in the Bill and Melinda Gates Foundation Trust (check out the Trust's other holdings).
Norfolk Southern Corp. (NSC), a rail transportation company, has raised its dividend for the past 11 years. Over the past decade, its dividends grew, on average, by 21.3% annually. This year, the company hiked its dividend twice, and its current quarterly payout is 16.3% higher than a year ago. Norfolk Southern presently pays a dividend yield of 3.2% on a payout ratio of 36%. Analysts forecast a robust long-term EPS growth, which will average 12.7% per year for the next half decade. The EPS growth will be driven by improving coal shipments, rising intermodal traffic, and rebounding merchandize traffic that is dependent on the rebound in the automotive, chemicals, and farm industries. The company's share buyback program is also reinforcing its EPS growth. Norfolk Southern's stock is priced below industry and its own historical metrics based on the price-to-book, price-to-sales, and price-to-cash flow ratios. It is trading at 11.5x trailing and 11.7x forward earnings. Fund manager Bill Miller (Legg Mason Capital) holds 1.2 million shares of this stock.