By Eli Inkrot
The difference between a “dividend champion” and a “dividend contender” is a bit arbitrary, but it still makes for an interesting screen criteria. A “dividend champion” represents a company that has not only paid, but also increased, its dividend payout for at least 25 straight years. A “dividend contender” is a company that has increased its payout for at least 10 years, but not more than 24 years. In the upcoming year we have 5 stocks on the cusp of becoming champions. While there might be debate as to the growth prospects of “dividend champions” or the sustainability of “dividend contenders,” it is widely accepted that a slashed dividend creates a negative signal. Add in the fact that these companies are bidding for the coveted “champion” status and you have a strong move toward another increased payout this year.
It appears Donaldson Company (DCI) won’t have much trouble reaching the “champion” stage with its 21% payout ratio; although income investors might not be too excited about the 0.8% current yield. Still, this industrial equipment manufacture has grown its dividend by an average of 12% over each of the last 5 years and after all it has been consistent for the last 2 ½ decades. Those looking for growth rather than income can focus on the 1.23 beta. The timing on the increase announcement has been somewhat erratic, but look for DCI to become a champion late this year.
Harleysville Group (HGIC) is more in line with an income investor’s wants, as it currently yields 4.3%. In February this Pennsylvania based Insurance company announced its 99th consecutive quarterly dividend, an uninterrupted payout since its IPO in 1986. Add in a special dividend of $1.80 last November versus its quarterly regular of $.36 and heads are starting to turn. The extra money in float that insurance companies generate provides extra value, as Warren Buffett gladly notes. The 60% payout ratio and 15% average 5 year dividend growth rate make HGIC a likely candidate to become “champion” this September.
Mercury General Corp (MCY) is a Los Angeles based insurance company that specializes in private passenger and commercial automobile insurance. The 6% current yield tops this list by nearly 2% points. The 5 year dividend growth rate is just under 7% and the year-to-year dividend growth rate is unimpressive coming in just under 2%. Still, with such a high current yield investors don’t need too much capital appreciation on top of the payouts to make reasonable advances. The 86% payout ratio is approaching worrisome, but MCY has been consistent and the lure towards “champion” status looks to hold strong this December.
T. Row Price Group (TROW) is an asset management holding company looking to move from “contender” to “champion”. The 1.8% current yield isn’t exactly appetizing, but the average 5 year dividend growth rate nearing 19% is; although it has slowed as of late. The payout ratio of 49% looks promising and it has been even lower in the past. The quarterly payouts have been nothing if not consistent, even with the 1.69 beta. Look for TROW to turn “champion” in March of 2012.
Tompkins Financial Corp (TMP) rounds out the list with a solid 3.2% current yield. This banking trust company has weathered the financial crisis well and looks to cement itself as a “dividend champion”. TMP’s 5 year dividend growth rate of 6 ½ % isn’t a spectacle but the 44% payout ratio suggest sustainability. Factor in that TMP paid out a 10% stock dividend in February 2010 and you’re looking at a company that has consistently kept an eye out for shareholder value. Look for TMP to become the newest member of the “dividend champions” this May.
True, the difference between increasing payouts for 24 years versus increasing them for 25 years is essentially arbitrary. But the fact that these companies have made it this far is a testament to both their consistent performance and eagerness to return value to their shareholders. Once crowned champion, these consistent dividend payers usually don’t stop and enjoy the view, rather they continue on with their profitable ways. Look now or they might be a missed opportunity of the past