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A week ago, I published an article, "Considering High-DGR Dividend Growth Stocks," in which I analyzed the Dividend Champions (CCC) for lower yielding stocks than I usually analyze. I looked for stocks with minimum yields of 2.0% compared to my usual 2.7%. To compensate for the lower yields, I demanded higher dividend growth rates (DGR) than I usually use: I set my DGR cutoff at 8.5%.

That exercise went well, but from the comment stream it became clear that another minimum I required was not popular: A 10-year record of increasing dividends. That eliminated a whole category from the CCC document, namely Dividend Challengers, which are stocks that have delivered 5-9 consecutive years of dividend increases.

So in this article, I will examine the 158 Challengers in the most recent CCC document. My process of weeding through the Challengers is similar to last time:

  • Sort by Yield. I eliminated all stocks with yields under 2.0%. The number of stocks remaining was 107.
  • Sort 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. I eliminated those whose most recent increase was less than 8.5%. That left 45 stocks.
  • Sort by 1-year, 3-year and 5-year DGRs. I eliminated all stocks that did not show all three DGRs to be 8.5% or more. The total passing this test was 28 stocks.
  • Eliminate stocks whose most recent increase was more than 12 months ago (there were 3 such stocks), one that is being acquired, and one whose price is less than $5.

That left 23 stocks. As in the earlier article, I'm presenting them in three tables.

  • Table 1: Stocks with current yields of 2.7% or greater.
  • Table 2: Stocks which display a declining DGR each step of the way. That is, they display this sequence: Most Recent Increase < 1-year DGR &lt; 3-year DGR &lt; 5-year DGR.
  • Table 3: The remaining stocks with yields between 2.0% and 2.7%.

The final column of each table shows a projected yield on cost after 5 years. I will discuss this calculation after the tables.

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

Stock

Ticker

No.

Years

Yield %

MR %

1-year %

3-year %

5-year %

Lowest %

YOC after 5 years

%

High Country Bancorp

OTCPK:HCBC

5

4.75

27

25

28

20

20

11.8

Darden Restaurants

DRI

9

4.76

10

24

27

26

10

7.7

Safeway

SWY

9

3.09

14

21

21

20

14

5.9

Lazard

LAZ

6

2.82

25

26

19

16

16

5.9

Raytheon

RTN

9

2.92

10

16

17

14

10

4.7

United Financial Bancorp

UBNK

8

2.81

10

12

11

10

10

4.5

Baxter International

BAX

7

2.82

9

17

12

16

9

4.3

Table 2: High DGR Stocks with Consistently Declining DGRs

Stock

Ticker

No.

Years

Yield %

MR %

1-year %

3-year %

5-year %

Lowest %

YOC after 5 years

Rogers Communications

RCI

9

4.25

10

10

18

38

10

6.8

Equity LifeStyle Properties

ELS

9

2.88

14

18

19

26

14

5.5

Steris

STE

9

2.05

11

13

21

27

11

3.5

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

Stock

Ticker

No.

Years

Yield %

MR %

1-year %

3-year %

5-year %

Lowest %

YOC after 5 years

G&K Services

GK

8

2.10

38

59

35

32

32

8.4

Cummins

CMI

8

2.03

25

36

37

33

25

6.2

Coca-Cola Enterprises

CCE

6

2.14

25

26

29

22

22

5.8

Accenture

ACN

8

2.24

20

32

26

29

20

5.6

Ameriprise Financial

AMP

9

2.41

16

64

28

21

16

5.1

Bob Evans Farms

BOBE

8

2.53

13

17

17

13

13

4.7

Brinker International

EAT

9

2.40

20

20

18

14

14

4.6

BOK Financial

BOKF

8

2.37

15

30

16

14

14

4.6

Williams-Sonoma

WSM

8

2.20

41

33

22

15

15

4.4

Smith & Nephew

SNN

8

2.28

29

26

15

13

13

4.2

Union Pacific

UNP

7

2.06

14

29

32

30

14

4.0

Travelers

TRV

9

2.50

9

13

13

10

9

3.8

Hanover Insurance

THG

8

2.48

10

9

18

25

9

3.8

Forecasting Yield on Cost (or Future Dividend Payouts)

As in the earlier article, forecasting is the weakest part of the exercise. I reduced the forecast period to 5 years here, because none of these stocks has reached the 10-year-increase mark yet.

To make the calculation for each stock, I took the lowest DGR that it displayed for any time period. That's the most conservative choice. I then added that lowest DGR rate to each stock's yield for 5 years to arrive at the YOC number shown in the last column.

Each table is sorted in order of 5-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

In the last article, I required 10-year increase streaks instead of 5 years, which eliminated the Challengers from consideration. I think that was a mistake, as the Challengers meet all other requirements that I usually use for selecting dividend growth stocks. So thanks to those who pointed out that this was a poorly chosen cutoff. Several worthy candidates showed up here. So this article fills that gap which the first article had.

Once again, the impact that a high DGR can have is striking. I have now definitely decided to change my approach to picking my Top 40 next year to account for this by allowing lower-yielding stocks to pass my initial screens. I will revamp my scoring system to give credit to low-yielding stocks with high DGRs, thus allowing them to at least compete with higher-yielding stocks. Whether any will make it all the way through the complete stock analysis remains to be seen.

That said, I repeat my caution that projecting high DGRs for very many years is pretty speculative. Using a 5-year projection period rather than 10 years makes it somewhat more realistic, but nevertheless, projecting 20% DGRs for even 5 years forward is a stretch presumption and by no means assured for any company.

Please do your own due diligence, project high DGRs with a great deal of caution, and monitor your stocks carefully.

Source: High DGR Dividend Growth Challengers