A Top 10 Dividend Growth List

by: Clay King

Most yield oriented investors maintain some sort of watch list for possible purchase candidates to add to their portfolio. I maintain one but also screen larger databases in search of new ideas or perhaps a security I missed. I decided to run a screen searching for top dividend growers. I screened by using the following criteria:

  • Current yield in excess of 2.5%.
  • Payout ratio less than 60%.
  • Five year dividend growth rate over 10%.
  • Excluding utilities, MLP's, REIT's, and foreign securities.

The securities that survived the screen were:

  • Abbott Labs (NYSE:ABT)
  • Automatic Data (NASDAQ:ADP)
  • Colgate-Palmolive (NYSE:CL)
  • Clorox (NYSE:CLX)
  • Flowers Foods (NYSE:FLO)
  • General Dynamics (NYSE:GD)
  • McDonald's (NYSE:MCD)
  • Northrop Grumman (NYSE:NOC)
  • Pepsico (NYSE:PEP)
  • Procter & Gamble (NYSE:PG)
  • Target (NYSE:TGT)
  • Wal-Mart (NYSE:WMT)

I was surprised when the screen run was completed due to the absence of several securities. There was no Coca-Cola (NYSE:KO) or Johnson & Johnson (NYSE:JNJ), as both failed to achieve the five year dividend growth of 10%. I was equally surprised to see both General Dynamics and Northrop Grumman made the screen. So much so, I pulled up the dividend record of each to verify the dividend increases.

The previous five years proved to only tell part of the story as Northrop had held its dividend steady from 1993 to 2003, which to me was unacceptable. So I tossed them from the list, remembering a screen is just a screen and the human factor must be considered. General Dynamics did better, but they also had a long period from 1983 to 1992 where the dividend was not raised. I kicked out GD also, as I wanted to backtest the performance and they would not have made the list five years earlier.

The dividend payout ratio is, in my opinion, very important and must be considered in the selection of income securities. I selected 60% or lower as the target, though 50% would be better. The range for the payout ratio was from a low of 26% for Target and General Dynamics to a high of 58% for Clorox and Automatic Data. The slow economy has pushed companies like Automatic Data to the higher end of their historical payout ratio.

The following table lists the remaining ten stocks with their respective scores on each screened item.

Company Yield 5 yr. Dividend

Growth Rate

Payout Ratio
Abbott Labs 3.7% 10% 43%
Automatic Data 2.8% 13% 58%
Colgate-Palmolive 2.6% 12% 45%
Clorox 3.6% 14% 58%
Flowers Foods 2.8% 21% 53%
McDonald's 3% 19% 50%
Pepsico 3% 11% 48%
Procter & Gamble 3.2% 11% 52%
Target 2.6% 18% 25%
Wal-Mart 2.8% 14% 35%

What we know so far is these 10 companies have great dividend growth rates, a good payout ratio and an average current yield of over 3%. How they perform in the market is also important so I decided to back test over several periods.

The five years ending May an equal weighted portfolio of the "top 10" returned 73.4% vs. the S&P 500 return of 12.9%. During the bear market of 2007 to 2009 the portfolio was down 7.5% compared to the S&P 500 decline of 45.9%. During the bull run from 9/2002 to 9/2007 the portfolio was up 86.6% compared to the S&P 500 rise of 66.7%. Results were calculated at low-risk-investing.com.

By screening for stocks by using only a few premium requirements a few well regarded stocks are selected that have provided stellar results. If one wanted a concentrated portfolio of 10 stocks, I think it would be tough to beat these for an excellent dividend growth portfolio. Not only have these top 10 given one a good income, but have provided results well in excess of index market returns. Clearly, a win win investment portfolio.

Disclosure: I am long ABT, MCD, ADP.