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I was an avid baseball card collector when I was a kid. It was one of the few things that would tempt me to spend my allowance. I loved the smell of a newly opened pack of cards and even the cardboard crunch gum that was in the earlier packs... well at least for the two minutes that it had flavor. Although I loved the game of baseball and reading stats about players, what I really cared most about was the value of the card. Getting a card of my favorite player (Ozzie Smith) was great, but what I most wanted was a rookie card of a potential up-and-coming star because that's where the greatest potential for increased value was.

I remember when Topps brand would release "Future Stars" cards for players they thought were going to be, well, future stars. Of course they were basing this tag on a small sample set of the player's stats. So for every Bo Jackson, there was a Tim Pyznarski. Although I have moved on from collecting baseball cards to "collecting" dividend growth stocks, I'm still in search of those future stars so I can own an earlier and more valuable version of an asset.

I feel I've done a good job investing in solid dividend-growth stocks, but outside of my technology holdings, Intel (NASDAQ:INTC) and Microsoft (NASDAQ:MSFT), my portfolio is focused on companies with a long history of paying and raising dividends. When searching for future dividend stars I want a company that is still in its infancy of rewarding its shareholders with increasing dividend payments, and also has the financial fundamentals that will allow it to raise its dividend going forward.

Recently I did a screen using the following criteria in search of future dividend stars.

  • 3-Year Annual Income Growth Rate > 15%
  • 3-Year Annual Dividend Growth Rate > 15%
  • Dividend Payout Ratio < 45%
  • Total Debt / Equity ratio < 40
  • Dividend Yield > 2%

Based on the companies that came up in the screen, I selected four potential options that are small- and mid-cap companies ($250 Million - $5 Billion market cap) and four potential large-cap companies (> $5 Billion).

Small- and Mid-Cap Options

Company Dividend Yield 3 Yr Income Growth 3 Yr Div Growth Payout Ratio Total Debt/Equity
AVX Corp (AVX) 2.4% 27.8% 23.4% 13.3% 0
Molex Inc (MOLX) 3.4% 17.8% 43.8% 41.3% 14.5
RPC Inc (RES) 2.2% 32.6% 25.5% 14% 22.5
Tower Group Inc (TWGP) 3.7% 43.3% 97.5% 14.4% 36

AVX Corporation manufactures and supplies passive electronic components and interconnect products. The company operates through three segments: Passive Components, Kyocera Electronic Devices (KED Resale), and Interconnect. AVX has paid a dividend since 1995 but only recently has been steadily increasing its payout on a yearly basis.

Molex Incorporated engages in the design, manufacture, and sale of electronic components worldwide. MOLX has paid a dividend since 1995 and began steadily increasing its dividend in 2004.

RPC, Inc. provides a range of oilfield services and equipment primarily to independent oil and gas companies engaged in the exploration, production, and development of oil and gas properties. RES has paid a dividend since 1997. Its dividend payout has been erratic, but it has increased five times since May 2010.

Tower Group, Inc. provides a range of commercial, personal, and specialty property and casualty insurance products and services to businesses in various industries and to individuals in the United States. TWGP has paid a dividend since 2004 and has been steadily increasing its payout since 2007.

Large-Cap Options

Company Dividend Yield 3 Yr Income Growth 3 Yr Div Growth Payout Ratio Total Debt/Equity
Analog Devices (ADI) 2.8% 28% 15.9% 33.7% 23.4
CME Group(CME) 2.3% 15.3% 35.1% 32.2% 12.6
TEVA Pharmaceuticals(TEVA) 2.1% 129% 48.7% 18% 31.4
Xilinx Inc (XLNX) 2.3% 31% 27.4% 26.8% 36.9

Analog Devices, Inc. engages in the design, manufacture, and marketing of analog, mixed-signal, and digital signal processing integrated circuits (ICs) used in industrial, automotive, consumer, and communication applications. ADI has been paying and steadily increasing its dividend since 2003.

CME Group Inc. operates the CME, CBOT, NYMEX, and COMEX regulatory exchanges worldwide. CME has paid a dividend since 2003. After a flat dividend payment from 2008 - 2010, CME resumed raising the payout with a 22% increase.

Teva Pharmaceutical develops, produces, and markets generic drugs as well as proprietary branded pharmaceuticals in various therapeutic categories and active pharmaceutical ingredients worldwide. TEVA has paid a dividend since 1995 and has been steadily increasing its payout since 2000.

Xilinx, Inc. designs, develops, and markets programmable platforms in North America, the Asia Pacific, Europe, and Japan. XLNX has been paying and steadily increasing its dividend since 2004.

Conclusion

I intend to do deeper analysis on these stocks, but on the surface RES, TWGP, TEVA, and CME appeal to me most as possible additions to my dividend growth portfolio. I like RES's potential growth in the oil services industry, especially if oil stays in the $100 range. TWGP's strong dividend growth and low payout ratio makes it very appealing. Although TEVA recently lowered its earnings guidance, the company has stated it still expects to increase its dividend. The fact that TEVA is an Israeli stock and subject to its foreign tax rate is a negative though. Finally, CME appears to present a value at current valuation and its most recent dividend increase is a good sign for future dividend growth. I will be watching to see if the company keeps its current divident payout flat, or if it raises it in the coming year.

Source: Future Dividend Stars