4 Companies with Solid Dividend Growth Metrics

When evaluating a company as a potential income investment you look at its calculated fair value, ability to generate cash, debt position and the net present value of its dividend stream compared alternative “safe” investments.

In earlier articles, we have looked at each of these in depth. In addition, I look at four other metrics that individually are not as important as the above, but collectively provide great insight into the potential success of a stock as a dividend investment. Here are the four other key metrics that I look at when evaluating a dividend stock:

I. Dividend Growth Rate: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year dividend growth rate or 15%, if “Rolling 4-yr Div. > 15%”. This metric is True, if the dividend growth rate is 15% or greater. You can see how this is calculated in my D4L-PreScreen.xls model.

II. Years of Div. Growth: Years of consecutive dividend growth. This metric is True for 15 or more years.

III. Rolling 4-yr Div. > 15%: Dividends will double every 5 years if they grow by 15%. This test is True if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.

IV. Years to >MMA: The number of years until dividend earnings exceed the earnings from a hypothetical money market account earning the MMA rate above, considering the other assumptions listed in “NPV MMA Diff.” above. This metric is True if the number of years is less than 5.

Taken in the whole, these are tough metrics. Of the 87 stocks that I currently follow, only four had all the above metrics true. They were:

1) AFLAC Inc. (AFL) - Analysis
Aflac Incorporated engages in the marketing and sale of supplemental health and life insurance plans in the United States and Japan.
- Dividend Growth Rate: 16.7%
- Years of Div. Growth: 27
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 1

2) Nucor Corp. (NUE) – Analysis
Nucor Corporation is engaged in the manufacture and sale of steel and steel products. As the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 36
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 3

3) Paychex Inc. (PAYX) – Analysis
Paychex, Inc. provides payroll and integrated human resource and employee benefits outsourcing solutions for small- to medium-sized businesses in the United States.
- Dividend Growth Rate: 17.8%
- Years of Div. Growth: 17
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 0

4) McDonald’s Corp. (MCD) – Analysis
McDonald’s Corporation is the largest fast-food restaurant company in the world. Its restaurants serve a varied, yet limited, value-priced menu in more than 100 countries around the world.
- Dividend Growth Rate: 15.5%
- Years of Div. Growth: 32
- Rolling 4-yr Div. > 15%: True
- Years to >MMA: 2

These metrics focus on compound dividend growth, which is highly important for the successful dividend investor. In my new dividend analysis worksheet, a company will earn a Star for its other metrics if two of the above metrics are True.

Full Disclosure: Long AFL, NUE, PAYX, MCD. See a list of all my income holdings here.

Comments

[Graham Jervis:]

I am a PAYX fan. Top class company and management.

Jul 01 04:16 PM

[optionsgirl:]

Nue is part of my core portfolio. I routinely sell options on it to whether the ups and downs.

Jul 02 10:34 AM

[Old Rick:]

Good set of stocks, but note that if "crap and trade" becomes reality, domestic steel companies are probably toast as has been discussed in these pages recently.

Jul 02 10:39 AM

[whpinvest.com:]

PAYX currently has a dividend payout ratio of 80%, which is more than 20% higher than its average ratio for the past 5 years. The PAYX dividend has been great for a long time, but with the payout ratio that high I question the sustainability of the dividend.

Jul 02 11:49 AM

[H Nguyen:]

These analyses and metric have worked well in the past. However, if the macro econ does not pick up soon, earnings are threaten and cash dividend is likely to follow.

Jul 02 01:08 PM

[svosavvy:]

I don't want to poo poo my man Tom Golisano's company payx. After all he did save my beloved Buffalo Sabres. But, damn near all their EPS is going toward that dividend. They raised it an incrementally large amount in mid 2007 when the future looked rosy. I wouldn't be surprised to see it halved unless the future starts looking real rosy real fast. 2010 eps estimate is 1.32, current dividend 1.24. Not much left over to conduct business with.

Jul 02 02:11 PM

[Walt17:]

Your methodology is a good starting point. But I believe that selected stocks need to be examined a little further. For example, MCD shows a dividend growth rate of 15%. But this is largely because they have had some nice increases recently. Recent increases have been 50%, 50%, and 33%. I doubt that they will continue with dividend increases of those magnitudes.

MCD may be a good investment. But don't expect the recent past to be repeated.

Jul 02 02:35 PM

[optionsgirl:]

Have you heard the flip side of that argument? When Cap and Trade increases the costs of carbon fuels, this will make shipping too costly and we will have to rely on more domestic production?


On Jul 02 10:39 AM Old Rick wrote:

> Good set of stocks, but note that if "crap and trade" becomes reality,
> domestic steel companies are probably toast as has been discussed
> in these pages recently.

Jul 02 03:16 PM