3 Dividend Stocks With 5-Year Dividend Growth Averages Above 15%

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Includes: HD, IP, SYK
by: The Dividend Bro

Summary

U.S. Dividend Champions are a great place to look for dividend companies.

Home Depot, International Paper, and Stryker all have five-year dividend growth rates above 15%.

Is the current trading price of Home Depot, International Paper, or Stryker a good value for our portfolio?

If you're looking for dividend paying stocks, the first place you should check out is David Fish's list of U.S. Dividend Champions. Everything dividend related you could think of is listed in his spreadsheet. From the number of years of dividend growth to the most recent dividend increase to payment dates can be found in this list. You can find the spreadsheet here.

There are many other categories as well, but the one I am interested in for this article is the five-year average dividend growth rate. This number gives you a recent history of dividend increases. Few companies raise their dividend the same amount each year. Amount of money that a company has available for dividend payments may fluctuate from year to year, but by taking the average of the last five years, you can get an idea of what the dividend increase will most likely be.

After doing research for this article, I felt that each one of the following stocks should be added to the watch list for my wife and I's portfolio. Included with each company is S&P Capital's twelve-month target and current fair value as well as Morningstar's current fair value. The average of these is taken and compared to the current trading price of a company. A more detailed description of our purchasing criteria area located here, but to be a buy the following must occur: dividend Champions (twenty-five or more years of dividend growth) are considered Core Positions and must be trading at fair value for purchase, Contenders (ten or more years of dividend growth) are considered Supporting Positions and must be at least 5% undervalued and Challengers (five or more years of dividend growth) are considered Speculative Positions and must be 10% undervalued. Also listed is the price target we'd like to purchase shares in the company.

For the purposes of this article, only the companies who have raised their dividend an average of at least 15% each of the last five years were considered. Companies that many dividend growth investors might not consider for their portfolio were the focus of this article. Most dividend growth investors know about AT&T (NYSE:T), Johnson & Johnson (NYSE:JNJ) and Exxon Mobil (NYSE:XOM), but not everyone knows that Home Depot (NYSE:HD) and International Paper (NYSE:IP) are Dividend Challengers while Stryker (NYSE:SYK) has raised their dividend every year for the past twenty-three years. All information listed is as of 1/29/2016.

Home Depot

Sector

Current Yield

# yrs div growth

3 yrs div growth rate

Retail/Home Improvement

1.94%

6

19.40%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$130

$120

$117

$110

Click to enlarge

Home Depot, according to S&P Capital, had more than eighty billion dollars in revenues for the previous fiscal year, making the company the largest home improvement chain in the world. Professional contractors as well as do-it-yourself homeowners use the products Home Depot offers to improve their homes. For those looking to sell their home, they often update one or more areas of their current residence. When people buy a new house they may look to fix up or paint an area of the home. Looking at Home Depot's numbers for 2015, you'd assume kitchens are often one of the first areas a homeowner improves as this area accounted for 10% of the company's 2015 revenues. Other sources of revenues include indoor garden (9.1%), paint (8.8%) and building materials (7.3%). If the economy continues to improve, customers will likely continue to improve their homes, either in an effort to make it more appealing to a buyer or to update it for their own personal use.

While the current yield of under 2% might not excite those who prefer higher yielding companies, Home Depot has grown its dividend by almost 20% each of the last five years. The average of our numbers for Home Depot (S&P Capital twelve-month price target and fair value and Morningstar's fair value) is just over $122. This is very close to the current price of the company. As previously stated, Home Depot has six years of dividend growth, making it a Dividend Challenger. As such, we require the company to be trading at 10% to fair value for purchase which is just over $110.

International Paper

Sector

Current Yield

# yrs div growth

3 yrs div growth rate

Packaging/Containers

5.39%

6

33.00%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$52

$38

$44

$34

Click to enlarge

When thinking of International Paper, most people probably think of copy paper but the company is much more than that. Besides copy paper, International Paper also produces Fluff Pulp that is used in diapers. In addition, the company produces paperboard for hot and cold cup containers, paper plates and cardboard boxes. International Paper also creates the paperboard packaging for tobacco and cosmetic products. Because of this, the company is the world's largest producer of paper products. According to S&P Capital, International Paper holds 25% of the worldwide market of paper products. Companies that dominate their sector of the economy are very attractive to us.

In addition to a high yield of over 5%, International Paper has a five-year dividend growth rate of 33%. This is a company that is serious about rewarding shareholders. The average of our numbers tell us the company is currently valued at almost $45. Like Home Depot, International Paper is Dividend Challenger so to qualify for purchase the company would need to trade at a 10% discount to this value. The company is currently trading at $32.87, making International Paper undervalued by a whopping 37% according our criteria. Because of the wide range of price targets and fair value, we are looking for a 10% discount to the lowest number which is the S&P Capital fair value of $38. This is approximately $34 dollars, which is still above the current trading price. If funds were available, this would qualify International Paper for purchase at current levels.

Stryker

Sector

Current Yield

# yrs div growth

3 yrs div growth rate

Medical Devices

1.56%

23

18.10%

S&P Capital 12-month price target

S&P Capital Fair Value

Morningstar Fair Value

Our Price Target

$104

$97

$110

$98

Click to enlarge

Stryker is a surgical device company that specializes in providing the implants and equipment necessary for hip and knee replacements as well as foot and ankle surgeries. The company also has a variety of computer assisted surgical equipment, such as the Mako robotic-arm, that assists surgeons in performing surgeries. According to Stryker's website, computer assisted surgical equipment results in accurate planning of implant size and alignment as well as a higher patient satisfaction rate (92% for the Mako device). Stryker released fourth quarter results earlier in the week and had their tenth quarter in a row of greater than 5% organic growth. This shows the company's products and devices are in demand.

With twenty-three consecutive years of raising dividends, Stryker is a Dividend Contender on the cusp of becoming a Dividend Champion. The company has raised its dividend an average of more than 18% each of the past five years. For Contenders, they need to be at least five percent undervalued. Our numbers give the average fair value at almost $104, so purchase price would be around $98. This is very close to current trading prices so if funds were available, Stryker would qualify for purchase.

In conclusion, there are plenty of companies out there that can offer investors high dividend growth rates if you just know where to look. The U.S. Dividend Champions spreadsheet with its bounty of information, is a great resource for investors to get started. By thinking beyond the normal dividend growth companies everyone seems to know, investors can find quality companies offering good value and dividend growth. Feel free to post a reply discussing which dividend growth stocks you are considering adding to your portfolio.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: We are not investing professionals. Please do your own research prior to making an investment decision