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There is a cohort of dividend growth stocks that have always fallen below my minimum threshold of 2.7% yield, but which have high dividend growth rates that make them attractive to some investors. These stocks come up often in comments and portfolio holdings as among the favorite dividend growth stocks.

These high dividend growth rate (DGR) issues seem particularly attractive to younger investors, who often feel that with several decades of compounding ahead of them, high DGRs are more important than high yields. They feel that they have plenty of time to develop excellent dividend streams. Examples of names that typically come up are IBM (IBM), Wal-Mart (WMT), and Exxon-Mobil (XOM).

Because of their low initial yields, these stocks have never made it past my initial screenings for my annual Top 40 Dividend Growth Stocks. But maybe they should. Using my 10 by 10 concept, you can get to 10% yield on cost within 10 years for a low-yielding stock if you project high enough DGRs. For example, a 2.5% initial yield, if boosted by 15% per year for 10 years, will end up with a 10.1% yield on cost by the end of those 10 years.

I have been reluctant to consider such stocks in the past, because while your initial yield when you buy a stock is locked in, projections of future DGRs are forecasts that have an element of speculation. The farther out you go, and/or the higher DGR you project, the more speculative the exercise becomes.

That said, it is not unknown for a stock both to post an annual dividend increase and also to have a 10-year DGR greater than 15%. Currently, two stocks have done it: Ross Stores (ROST) and Stryker (SYK).

So I am wondering if my minimum initial yield requirement has been too restrictive. With this in mind, I decided to scour the most recent Dividend Champions and Contenders for possible candidates with lower yields but with high enough 10-year DGRs to make it to 10% yield on cost within 10 years.

Here's what I did. I took the Dividend Champions spreadsheet (All CCC tab) and re-sorted the stocks three times to create three screens

  • The first sort was by Most Recent increase. Typically, this is the 2013 increase, although it could be the 2012 increase for stocks that have not yet raised in 2013. After sorting high to low, I eliminated those whose most recent increase was less than 8.5%. That reduced the total stocks in the document from 472 to 215.
  • Second, I sorted the remaining stocks by Number of Years of consecutive increases. After sorting high to low, I eliminated those stocks with less than 10 consecutive years of increases. That eliminated all Challengers. The number of stocks remaining was 141.
  • Finally, I sorted by Yield. After sorting high to low, I eliminated all stocks with yields under 2.0%. The number of stocks remaining was 69.

After these steps, I wanted to select only the stocks that had 1-year, 3-year, 5-year, and 10-year DGRs of at least 8.5%. I could not see how to do this conveniently via the spreadsheets, so I did it by hand. This is a pretty severe test, requiring all the DGRs to be 8.5% or above. (I also eliminated one stock, United Technologies (UTX), because it has not has an increase in more than 12 months). In the end, the number of stocks was reduced to 34, or about 7% of the total stocks in the CCC document.

I am presenting them below in three tables.

  • In the first table are 19 stocks with current yields of 2.7% or greater. Frankly, I was surprised that this many companies with yields >2.7% have also managed to raise their dividends consistently at a DGR >8.5% per year for at least 10 years.
  • In the second table are 4 stocks that met all the requirements, but which display a declining DGR at each step of the way. That is, their Most Recent Increase is less than their 1-year DGR, which is less than their 3-year DGR, etc. (One such stock, Owens & Minor, would have been in the first table by dint of its 2.8% yield except for its declining DGR pattern.)
  • The third table contains the remaining 11 stocks. These stocks all have yields >2.0%, <2.7%, and consistent DGRs >8.5% per year for at least 10 years.

Table 1: High DGR Stocks with Yields > 2.7% and No Consistent Pattern of Declining DGR

Stock

Ticker

No. Years

Yield

%

MR %

1-year %

3-year %

5-year %

10-year %

Lowest %

YOC after 10 years

Cracker Barrel

CBRL

11

3.1

50

54

21

19

53

19

17.7

Target

TGT

46

2.7

19

20

25

21

19

19

15.4

Lockheed Martin

LMT

10

3.8

15

23

19

22

25

15

15.4

Occidental Petroleum

OXY

11

2.9

19

18

17

17

15

17

13.9

Wisconsin Energy

WEC

10

3.7

13

15

21

19

12

13

12.6

Nippon T&T

NTT

11

3.6

12

13

14

21

18

12

11.2

Harris

HRS

12

3.0

14

32

19

22

27

14

11.1

Teva Pharmaceutical

TEVA

13

2.7

15

15

22

22

28

15

10.9

Hasbro

HAS

10

3.5

11

20

20

18

28

11

9.9

Enbridge

ENB

18

3.1

12

14

20

14

12

12

9.6

Texas Instruments

TXN

10

2.9

33

27

16

19

24

16

8.8

McDonald's

MCD

36

3.3

10

13

12

14

28

10

8.6

Air Products & Chemicals

APD

31

2.8

11

12

12

11

12

11

8.0

Chevron

CVX

26

3.3

11

14

10

9

10

9

7.8

Molex

MOLX

10

3.3

9

12

11

20

24

9

7.8

General Mills

GIS

10

3.1

15

9

12

11

9

9

7.3

ExxonMobil

XOM

31

2.9

11

18

10

10

9

9

6.9

General Dynamics

GD

22

2.7

10

9

10

13

13

9

6.4

Span-America Medical

SPAN

15

2.7

12

13

9

9

15

9

6.4

Table 2: High DGR Stocks with Consistently Declining DGRs

Stock

Ticker

No. Years

Yield

%

MR %

1-year %

3-year %

5-year %

10-year %

Lowest %

YOC after 10 years

Owens & Minor

OMI

16

2.8

9

10

13

14

16

9

6.6

International Business Machines

IBM

18

2.1

12

14

15

17

19

12

6.5

Cardinal Health

CAH

17

2.4

9

10

22

25

29

9

5.7

Praxair

PX

20

2.0

9

10

11

13

19

9

4.7

Table 3: High DGR Stocks with Yields >2.0% but < 2.7%

Stock

Ticker

No. Years

Yield

%

MR %

1-year %

3-year %

5-year %

10-year %

Lowest %

YOC after 10 years

Walgreen

WAG

38

2.6

15

25

26

24

21

15

10.5

Wal-Mart

WMT

39

2.6

18

11

14

14

18

11

7.4

Computer Services

OTCQX:CSVI

25

2.1

14

13

14

13

17

13

7.1

Syngenta

SYT

12

2.6

16

10

17

22

34

10

6.7

Chesapeake Financial

OTCQB:CPKF

20

2.6

9

14

9

9

10

9

6.2

T. Rowe Price

TROW

26

2.2

12

10

11

15

16

10

5.7

Deere

DE

10

2.4

11

18

17

15

15

11

5.7

Becton Dickinsom

BDX

41

2.0

10

13

12

14

17

10

5.2

J.M. Smucker

SJM

16

2.2

12

9

13

11

12

9

5.2

Northrop Grumman

NOC

10

2.6

11

12

12

10

12

10

5.2

McCormick

MKC

27

2.0

10

11

9

9

11

9

4.7

Forecasting Yield on Cost

This is the weakest part of this exercise. In my opinion, forecasting is usually the weakest part of any analysis.

What I did was this, as shown in the last two columns of each table: For each stock, I took the lowest DGR that it displayed for any time period. That's the most conservative choice, but still it is difficult to predict that any stock will maintain a DGR of 8%-9% per year or more for 10 years. On the other hand, it has been done by the stocks in this article.

I then used the calculator at buy upside to calculate each stock's YOC after 10 years given its current yield and using the minimum DGR as described above. I hand-checked a few calculations to be sure that I was getting correct results.

Each table is sorted in order of 10-year YOC, from high to low. Again, I caution that these are forecasts based on projected DGRs in which one probably cannot have a very high degree of confidence.

Comments and Observations

1. The method used here did in fact pick up the kinds of high-DGR stocks that inspired the article. The three I had in mind before starting (IBM, TGT, and XOM) all made it through.

2. My traditional approach of requiring a higher initial yield is, I think, generally supported by the results here. The vast majority of the highest 10-year YOCs in the results appear in Table 1, where the highest yields reside. Specifically, 10 stocks hit the 10 by 10 target, and 9 of them appear in the first table with yields >2.7%. The only stock with a lower yield to reach 10% yield on cost within 10 years was Walgreen, with a current yield of 2.6%.

3. Note that the popular IBM landed in the table of declining DGRs with a 10-year YOC of 6.5%.

4. This exercise opened my eyes to the impact that a truly high DGR can have. Stocks like Walgreen and Wal-Mart can achieve high YOCs after 10 years, propelled more by their DGRs than by initial high yields. I will probably change my approach to picking my Top 40 next year to account for this. Stocks like this clearly are "top" selections for certain investors.

5. Young investors may consider the 10 by 10 framework to be too restrictive. They may want to run projections out for, say, 20 years to get a better handle on YOCs that are possible with high-DGR stocks. Obviously, a lot more stocks would reach 10% yields on cost if given 20 years to run rather than 10.

6. However, I repeat my caution that projecting high DGRs for many years becomes somewhat unrealistic. Using Robert Alan Schwartz's dividend increase page at Tessellation.com, we see the following:

  • Only one company has increased its dividend by at least 15% per year for at least 11 years. (Stryker has a yield of 1.5%.) No company has a current streak exceeding 11 years.
  • Only five companies have increased their dividends at least 15% per year for 9 years. (They are Airgas (ARG), Atrion (ATRI), Ross Stores , Stryker, and Walgreen.) Only two (Ross and Stryker) have done it for 10 years.
  • Only 14 companies have increased their dividends by at least 10% per year for 10 years. (They are Casey's General Stores (CASY), Factset Research Systems (FDS), Fastenal (FAST), Harris, Lockheed Martin, Novo-Nordisk (NVO), Owens & Minor, Rollins (ROL), Ross Stores, Stryker, TJX (TJX), Wal-Mart, Walgreen, and Wiley (JW A).)

Maintaining a really high DGR is very hard to do, and not many companies can do it. Please do your own due diligence, and project high DGRs with a great deal of caution.

Source: Considering High-DGR Dividend Growth Stocks