If I could hardwire one thing into every dividend investor's brain, it would be this: Chase dividend growth, not yield. Why? Because high-yield stocks often cut their dividends at a much higher frequency. They also tend to underperform.
In comparison, high-dividend growth stocks deliver on both fronts - providing more capital appreciation and income over time. Want proof, along with a few timely dividend growth ideas? Ask and ye shall receive …
It's All About Growth
Since 1986, stocks with the highest dividend growth rates in the S&P 500 Index returned far more than the highest yielders - 20.5% versus 13%.
(Check out the three charts I shared before if you want even more undeniable proof that dividend growth stocks outperform.)
Naturally, I'm not the only one who recognizes the tendency for dividend growers to perform so strongly. The higher-ups at investment bank, UBS AG (UBS), noticed the trend, too. And it prompted them to assemble an entire research team to ferret out the market's most compelling opportunities.
Their mission? To regularly screen the market for dividend growth stocks exhibiting the following characteristics, among others:
- Dividend yield greater than the S&P 500, which currently rests at 2.1%.
- 10-year compound annual dividend growth rate of more than 4%.
- Fundamental strength, as evidenced by being included on the firm's Sector Outperform list.
The end result of their work is a list that UBS affectionately dubs the "Dividend Ruler" stocks.
For those of you with limited time to research new opportunities, you can use the list as a shortcut to finding the market's most attractive dividend growth stocks.
Heck, it's so easy, a caveman could do it.
The current list includes chip giant, Intel (INTC), which yields 3.9%; home products juggernaut, Clorox (CLX), which yields 3.4%; and the world's largest and most diverse healthcare company, Johnson & Johnson (JNJ), which yields 3%.
All are attractive choices. And I say that because they meet most of our seven guiding principles of dividend investing - including manageable debt, strong free cash flow, a history of increasing dividends and, of course, an ability to easily keep increasing those dividends, thanks to low dividend payout ratios.
However, there's one company on the most recent list that's more interesting than the rest - Occidental Petroleum Corp. (OXY).
A Dividend Increase Coming Up
By no means is it the highest-yielding stock of the bunch. At current prices, its dividend yield checks in at a respectable 2.7%.
However, it's a perennial dividend grower, increasing its dividend every year since 2002. And the next dividend payment of $0.64 per share, which will be paid on January 15, 2014 to shareholders of record on December 10, represents the fourth payment at that level.
In other words, a dividend increase is likely right around the corner. What's more, earnings estimates are on the rise ahead of the company's October 29 report.
Higher earnings translate to higher share prices. And there's certainly room for share prices to run. The stock currently trades at a 14% discount to the S&P 500 on a forward price-to-earnings ratio basis.
Most compelling of all, though, is the fact that a spinoff of its California operations might be coming soon.
As Barron's Jack Hough notes, Occidental "controls more than two million acres in California and is one of the state's largest oil and gas producers. Its California operation is lucrative and steady, but slow growing - just the sort of asset that would appeal to income seekers, like master limited partnerships."
In a July call with Bloomberg, CEO Stephen Chazen mentioned a "potential spinoff of California ops is one of a few options the board is considering." Such a decision could be announced before the end of the year.
What's the big whoop? As I shared with Wall Street Daily readers at the beginning of the month, spin-offs routinely outperform the market by an average of 13 full percentage points each, according to Credit Suisse (CS).
So any such announcement promises to lift shares, too, as other investors (who are keenly aware of the historical performance for spinoffs) line up for a piece of the action.
Forget about chasing yield. Chase dividend growth, instead. And as Occidental proves, sometimes the chase for dividend growth can yield even more benefits, too.