Five Dividend Stocks for Long-Term Dividend Growth

In Six Dividend Stocks for current income I provided a list of higher yielding dividend stocks, which investors could use for current income. With a high current yield, the stock list could provide a decent stream of dividend income for retired individuals. There lies another problem however.

Most younger investors tend to ignore dividend stocks, which typically are mature, slower growing companies with dependable cashflows a portion of which are distributed back to investors. Younger investors view these dependable income stocks as boring and too slow moving, which don’t have anything better to do with their cashflows but send them back to owners in the form of dividends. Instead these investors prefer investing in growth stocks with high price earnings ratios and high expectations for growth. While most companies that distribute a portion of their profits in the form of dividends realize that double-digit growth cannot last forever, most growth stocks sell at rich valuations, supported by analysts who have perfected the art of predicting high growth rates for decades to come. As soon as the music stops, these growths stocks stumble, dragging investors' fortunes with them.

On the other hand the dividend stocks would have kept growing, albeit at a slower pace, and would have kept sending a higher stream of dividend income to shareholders, to be used at their own discretion. Many investors do not realize that unlike capital gains, dividends are real cash that bolsters your return. Dividends have also accounted for 40% of the annual average total returns of the S&P 500 over the past century. A company, which grows its dividend year after year, could end up paying a double-digit yield on cost to long-term investors over time.

Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.
Thus dividend stocks, which consistently grow their payments, should be in every investor’s portfolio, irrespective of their age. A stock that regularly grows its distributions provides an inflation proof source of income, which is much more reliable than the Consumer Price Index, on which TIPs (TIP) rely on.

A stock could afford to consistently raise distributions by selling products, which have a strong brand image, and thus are not easily substituted by others. Examples of such companies include Procter & Gamble (PG), Clorox (CLX), Pepsi Co (PEP), Wal-Mart (WMT) and Emerson Electric (EMR).

The Clorox Company (CLX) manufactures and markets a range of consumer products such as bleaches, cleaning products, water-filtration systems and filters, auto-care products, plastic bags, wraps, and containers. Over the past decade the company has managed to boost earnings per share at a rate of 13.60% annually. Clorox has paid uninterrupted dividends increased payments to common shareholders every year for 31 years. Dividends have increased at an average rate of 8.60% annually since 1999. Check my analysis of the The Clorox Company.

Emerson Electric Co. (EMR), a diversified global technology company, engages in designing and supplying product technology and delivering engineering services to various industrial and commercial, and consumer markets worldwide. The company operates through five segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Appliance and Tools. The company has been able to increase earnings at an average rate of 8.40% annually over the past decade. Emerson Electric Co. has increased payments to stockholders for 52 consecutive years. The ten-year dividend growth rate is 7% per annum over the past decade. Check my analysis of Emerson Electric Co.

PepsiCo, Inc. (PEP) manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. The company manufactures, sells, and distributes Pepsi-cola beverages and is enhancing its distribution channels through its acquisition of key bottlers. The company has been able to increase earnings at an average rate of 9.90% annually over the past decade. PepsiCo has been consistently increasing its dividends for 36 consecutive years. Dividend payments have increased by an average rate of 13.50% annually since 1999. Check my analysis of PepsiCo, Inc.

The Procter & Gamble Company (PG), together with its subsidiaries, provides branded consumer goods products worldwide. The company operates in three global business units (GBU): Beauty, Health and Well-Being, and Household Care. The company has been able to increase earnings at an average rate of 12.20% annually over the past decade. Procter & Gamble has been increasing its dividends for the past 53 consecutive years. Dividend payments have increased by an average of 10.90% annually over the past 10 years. Check my analysis of Procter & Gamble.

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. It operates through three segments: Wal-Mart Stores, Sam's Club, and International. The company has managed to deliver an impressive 11.60% average annual increase in its EPS. Wal-Mart Stores has consistently increased dividends every year for 35 years. Dividends have increased at an average rate of 18.90 % annually since 1999. Check my analysis of Wal-Mart Stores, Inc.

While these companies are poised to deliver strong long-term dividend growth, don’t throw caution away. These stocks should be a part of a diversified dividend portfolio with at least 30 components in it.

Disclosure: Long CLX, EMR, PEP, PG and WMT

Comments

[mbkelly75:]

Nice article and well written. I have all of these stocks in my Core Portfolio and am receiving the double-digit returns you spoke of in all of them. Time is a VERY useful tool when it comes to dividend stocks.

Oct 27 03:46 PM

[Peter Mycro...:]

Having great dividends is great, but it is also desirable to also have some growth (Capital Appreciation) to add to those nice dividend payments. I have analyzed your list and have some comments regarding how those companies are doing on Main Street. My key ratios for analysis are price to free cash flow (PFCF) and Free Cash Flow Return on Invested Capital (FROIC) as well as debt to equity.

When investing I look for PFCF below 15 times and FROIC above 20%+. When you are lucky enough to find a combination of the two you find a perfect balance of growth + value and you get capital appreciation through capital preservation.

For those who don't know;

PFCF =Market Price/ (Cash flow per share-Capital Spending per share)

FROIC = FCF per share/ (long term debt per share + shareholders equity per share)

FROIC basically tells you how much return in free cash flow a company generate for every dollar of Total Capital they employ.

I consider FROIC the primary determining factor in identifying growth companies as you can compare every company (except financials) on an equal basis. The question I ask every company I analyze is = how much return (in percent) in FCF are you going to give me for every dollar of total capital you invest.

As you will see I have analyzed your list from a FROIC point of view below;

CLOROX (CLX)

FCF PS = $4.25
TCAP PS = $13.35
FROIC = 32.61%
PRICE TO FCF = 13.64

The company has great FROIC and Price to Free Cash Flow numbers but it has a debt to equity ratio of 40 to 1 and if we go to Total Debt then we are looking at 70 to 1. What that simply means is for every $1 of Equity, they have $70 in total debt. With the Free Cash Flow numbers above they can probably have little problem servicing that debt, but God forbid if they ever have a bad year and their Free Cash Flow drops. The company is way overleveraged and since about half their debt is short term in nature, if interest rates rise, you are going to see reduced earnings as the interest payments that they owe go up.

EMERSON ELECTRIC (EMR)

FCF PS = $2.05
TCAP PS = $16.85
FROIC = 12.1%
PRICE TO FCF = 19.14

Average PFCF and FROIC. I would suggest looking at Lorillard (LO) instead, which has a much better dividend and tremendous FCF numbers. It’s got a 5% dividend and the following numbers

FCF PS = $6.35
TCAP PS = $9.84
FROIC = 64.53%
PRICE TO FCF = 12.28


PEPSICO (PEP)

The company has great numbers but I am concerned that in the future those numbers will go down as PEP is buying back their bottlers (one by one) that they successfully split off years ago. I have no idea why they are doing such a thing as bottlers are extremely capital intensive and will reduce Pepsi’s free cash flow and its rate of growth significantly and thus reduce their FROIC and their potential future capital appreciation.

FCF PS = $3.70
TCAP PS = $17.22
FROIC = 21.48%
PRICE TO FCF = 16.47

WAL-MART (WMT)
Though the Goliath in the retail arena the company have very average FCF and FROIC numbers and that is why the stock has done nothing over the last decade.

finance.yahoo.com/echa...;range=19991027,200910...

FCF PS = $2.90
TCAP PS = $29.37
FROIC = 9.8%
PRICE TO FCF = 17.30

PROCTER & GAMBLE (PG)

The best of the five is selling at almost my buy indicator of 15 on a price to free cash flow basis but is lacking on its FROIC and is only above average there.

FCF PS = $3.80
TCAP PS = $29.93
FROIC = 12.69%
PRICE TO FCF = 15.08

I would look at Eli Lilly (LLY) instead as it has been beaten down and pays about a 6% dividend. It also has tremendous numbers from a FCF side of the equation.

FCF PS = $4.50
TCAP PS = $16.26
FROIC = 27.67%
PRICE TO FCF = 7.61


FROIC gives me a real return on Main Street and if I can get a 20%+ return on Main Street and at the same time buy a stock that is selling for less than 15 times its FCF then there is a very high probability that it should be very successful investment.

By choosing 20%+ as my minimum FROIC I have built a portfolio of 29 holdings for my clients that has a combined portfolio FROIC of 32% and sells as a group for 12.35 PFCF.

As for PFCF I came up with the 15 or less number as being Ideal after performing a 58 year backtest. To view the backtest just click the link below.

mycroftresearch.com/up...


Disclosure Long LO, LLY No Position in the others

The Fine Print: As Registered Investment Advisors, we see it as our responsibility to advise the following: We do not know your personal financial situation, so the information contained in this communiqué represents the opinions of Peter "Mycroft" Psaras, and should not be construed as personalized investment advice.

It should not be assumed that investing in any securities we are investing in will always be profitable. We take our research seriously, we do our best to get it right, and we “eat our own cooking,” but we could be wrong, hence our full disclosure as to whether we own or are buying the investments we write about.

Oct 27 04:01 PM

[mbkelly75:]

Another fine job of analysis and some good suggestions, Peter. Since I have had some of these for decades and my cost-basis is VERY low - I do not care about growth as much as I care about a steadily rising dividend record. As long as the dividend rises and their record remains unbroken, the stocks are good for me. For someone just getting into them, your suggestions are well taken. The author is also worth listening to - his website has some great ideas and useful tools on it. I have learned quite a bit from his work in the past year and read him regularly.

Oct 27 07:36 PM

[rennert:]

Dividends are so nice helps an investor in the long run.But here is the latest: People in the Malls are carrying shopping bags again. Not 3and 4 bags but 1-3bags.Everyone on my street here in Florida is working. No houses for sale on my street either. Milk going for $8.50 a gallon. Fed needs to raise at least 1%. That will not derail the economy. I can not find a handyman or tree trimmer they are all too busy, they have work stacked up for weeks. Fed needs to raise Now. Silent Inflation is upon us.

Oct 28 04:36 PM

[User 458794:]

Looking for suggestions on a Core Mutual Fund for my Roth IRA which is based on high dividend yield to re-invest, (Dividend Aristocrats?), no-load, low cost, (like Vanguard). Or is it better to build a portfolio of individual high dividend companies? Would need the income in 10+ years. thanks.

Oct 29 08:29 AM

[Dollar Pimp:]

They only offer average yields but I like both of Matthews Asia dividend-oriented funds MACSX and MAPIX. Great risk-adjusted returns + dividends + currency appreciation.


On Oct 29 08:29 AM User 458794 wrote:

> Looking for suggestions on a Core Mutual Fund for my Roth IRA which
> is based on high dividend yield to re-invest, (Dividend Aristocrats?),
> no-load, low cost, (like Vanguard). Or is it better to build a portfolio
> of individual high dividend companies? Would need the income in 10+
> years. thanks.

Oct 29 06:28 PM

[sspears:]

A new book on Amazon, called Dividend Growth Investing, seems to reflect exactly what you are trying to do with your service. However, it is oriented to helping us to do dividend growth investing ourselves, if we have the time and patience to do the necessary research. You may want to review this book, as I found it very helpful.

Nov 13 08:11 PM

[sspears:]

A new book on Amazon, called Dividend Growth Investing, seems to reflect exactly what you are trying to do with your service. However, it is oriented to helping us to do dividend growth investing ourselves, if we have the time and patience to do the necessary research. You may want to review this book, as I found it very helpful.

Nov 13 08:12 PM