It's Time To Play Ball (Part 3): Dividend Growth Prospects (And Suspects)

by: Mike Nadel

Look at a typical Triple-A roster and you'll see several kinds of ballplayers: top prospects waiting for a call-up to the majors; guys who excel at one thing (usually fielding) but fall woefully short at another (usually hitting the curveball); a few past-their-prime players hoping to catch a break; maybe an injured big-leaguer on a rehabilitation assignment.

That kind of reminds me of the prospects (and suspects) on the Dividend Growth Investing "team" I've been building.

In Part 1 of this series, I named my starting nine DGI superstars, elite companies that average 38 consecutive years of dividend growth: Chevron (NYSE:CVX), Coca-Cola (NYSE:KO), Exxon Mobil (NYSE:XOM), General Mills (NYSE:GIS), Johnson & Johnson (NYSE:JNJ), McDonald's (NYSE:MCD), Philip Morris (NYSE:PM), Procter & Gamble (NYSE:PG) and Walgreen (WAG). I talked about how I foolishly spent more than a year finding reasons not to invest in the highest-quality companies -- and how that was about to change.

In Part 2, I profiled the rest of my roster, solid companies I call "role players": 3M (NYSE:MMM), Aflac (NYSE:AFL), Altria (NYSE:MO), ConocoPhillips (NYSE:COP), Kimberly-Clark (NYSE:KMB), Kinder Morgan Inc. (NYSE:KMI) and Kinder Morgan Management (NYSE:KMR), Realty Income (NYSE:O), Royal Dutch Shell (NYSE:RDS.A), Southern Company (NYSE:SO) and Wal-Mart (NYSE:WMT). These positions -- and watch-list names such as Target (NYSE:TGT), Dominion Resources (NYSE:D) and American States Water (NYSE:AWR) -- will provide depth and diversification. (And, of course, the third D: dividend growth.)

Parts 1 & 2 were the most-read, most-commented-upon articles I have authored for Seeking Alpha, so my journey -- from bush-league investor to architect of what I hope will be a DGI dynasty -- must have struck a chord with folks in various phases of portfolio construction. My goal is similar to that of many who peruse this area of Seeking Alpha: to create a reliable, growing dividend stream that will supplement Social Security and/or pensions upon retirement.

The journey continues as I evaluate the prospects and suspects inhabiting my roster. Some eventually could grow into role-player status. Some are former big shots now in danger of getting sent to the showers permanently. And, I admit, I don't quite know how to categorize a few others.

BCE (NYSE:BCE): The telcom behemoth has had a rough time lately, falling about 10% since Verizon (NYSE:VZ) expressed interest in expanding into Canada. The pullback has made BCE more attractively priced and has lifted its yield to 5.6%, but how attractive will the company really be if Verizon invades its market? Sadly, I bought BCE before Verizon started making waves, and now I must decide if I want to roll the dice that BCE and other large Canadian telcoms can beat back the interloper's challenge or if I should slink away before the bleeding gets even worse.

General Electric (NYSE:GE): Some consider GE a cautionary tale: Even blue-chip companies with long histories of dividend growth can break investors' hearts. During the 2008-09 recession, GE certainly did just that; its shares tanked nearly 90% and it cut its dividend by 68%. I'm still not quite back to even on the position I bought more than five years ago, but I'm loathe to sell now that the company is thriving again. GE is aggressively raising its divvy again, too, and now has a 3.1% yield. Still, when I need to rely on income from GE, will it be there for me? Do I really want my third-largest holding to be a company that only four years ago practically eliminated its dividend? It's not an easy call.

Health Care REIT (NYSE:HCN): One of three healthcare REITs I own, as I aim to take advantage of America's aging population. The good: HCN has a 4.8% dividend yield and a 5-year estimated earnings growth of 18.5%. The bad: Like other REITs, its share price has been battered since May, when the Fed hinted it could soon start scaling back its bond-buying program. While many sectors could be hurt by Fed easing, REITs so far have been especially vulnerable to even speculation about rising interest rates.

Intel (NASDAQ:INTC): Intel's inability to gain traction in tablets and cellphones and its dependence on the flagging PC industry have soured Wall Street. Indeed, it has been my biggest loser ever since I bought my first stake. So when Intel failed to raise its dividend last week, I officially lost my patience. I have submitted a stop-loss order, meaning I might be an ex-INTC shareholder by the time you read this. It would take a remarkable (and remarkably fast) string of events involving earnings appreciation, dividend growth and product innovation to keep the company on my roster. Intel is one strike away from being told, "Yer out!"

Main Street Capital (NYSE:MAIN): I bought this business development company shortly before I renewed my DGI commitment. Since then, I have considered selling it. But my position is small, and it's interesting to keep tabs on an out-of-the-box investment, so I'm holding for now as a speculative play. Like all BDCs, MAIN invests in and lends money to small businesses, often those that can't qualify for prime loans from banks. It yields 6% and, according to SA contributor BDC Buzz, MAIN is one of the "safer," better-managed BDCs.

National Health Investors (NYSE:NHI): Another healthcare REIT with nice yield (4.8%) and reliable dividend growth (5.7% over 10 years, 5.8% over 5 years, 6% over 3 years, 6.9% over 1 year).

National Retail Properties (NYSE:NNN): A retail REIT that is similar to but smaller than Realty Income. It invests in quality properties and has a 4.7% yield. I wish it had more robust annual dividend growth, however, and I'm starting to wonder if it's prudent to have both it and Realty Income on my roster.

Omega Healthcare Investors (NYSE:OHI): My third healthcare REIT, OHI has an outstanding yield (6.3%) but arguably has a lower-quality portfolio of properties that makes it fairly risky. Two SA contributors who specialize in REITs, Dane Bowler and Brad Thomas, are bullish. They say its price decline, caused by overreaction to possible Fed tapering, has created a buying opportunity.

Vodafone (NASDAQ:VOD): I bought Vodafone for its 5.2% dividend yield, the international exposure it provides and its 45% stake in Verizon Wireless -- kind of a three-birds-with-one-stone deal. Now I ask myself: Do I really want a European company with a spotty history of dividend growth? For now, I'm content to hold it, collect the divvies and wait for the price spike that will come when Verizon buys out Vodafone's stake in its wireless operations, as has been widely rumored. Nevertheless, I do have a sell point in mind and won't hesitate to let some or all of it go if I need funds to buy something that fits my mission better.

Waste Management (NYSE:WM): As I explained in Part 1 of this series: "Waste Management's dividend growth has slowed to a crawl, from 12.5% in 2008 to 8.6% in 2010 to 4.4% in 2012 to 2.8% in 2013. If it doesn't have a meaningful hike this year, it's gone. My new, improved lineup has no room for laggards." So while I like its "moat" -- we never will run out of waste that needs managing -- and appreciate its 3.4% yield, I would have no problem taking a profit and using that money to invest in DGI stocks more committed to the "G."

Over the course of the next few months, I will decide if these prospects and suspects should be part of the Dividend Growth Investing juggernaut I'm building. A few will get promoted to the big leagues; others will be sent packing.

The final part of this series should run later this month. In it, I will detail my portfolio weightings and expound upon the thought process I used in constructing what I hope will be a lineup of champions.

Disclosure: I am long BCE, GE, HCN, INTC, MAIN, NHI, OHI, VOD, WM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: In the next 72 hours, I could buy or sell shares in any of the companies mentioned in this article.