In the current market environment, it is important for income investors to choose their dividend stocks wisely as they are putting new money to work. The markets will certainly continue to ebb and flow, but volatility will likely remain for the next 3-6 months.
One of the best ways to generate stable income in any market environment is through dividend growth investing. Thankfully, this strategy is not rocket science and it is fairly simple for anyone to implement. Ideally, you want to build a portfolio of dividend paying stocks that have a track record of increasing their dividends every year. This way, not only are you generating stable income, but you are also able to maintain the purchasing power of your dollar (as long as your dividends are at least rising at the rate of inflation).
All Dividend Stocks Are Not Created Equal
We love analyzing dividend stocks and we built our ranking system to help us find the cream of the dividend crop. Specifically, we use a combination of fundamental and technical analysis to determine which stocks to buy and when to buy them. Our ratings are derived by ranking each stock in our universe based on 30 key fundamental and technical data points across four rating categories: (1) Dividend, (2) Safety, (3) Value, and (4) Momentum.
That said, we recently scanned through our rating system and came up with our "All-Retirement" team. This team is made up of 25 dividend growth stocks that meet the criteria below.
- Consecutive Years of Dividend Increases > 25 years
- Dividend Yield > 2.0%
- 1-year Dividend Growth > 4.0%
- 5-year and 10-year Dividend CAGRs > 4.0%
- Parsimony Momentum Rating > 20 (to avoid "value traps")
We then ranked these stocks using a Dividend/Safety/Value (DSV) blend. The DSV blend is a blend of our individual Dividend, Safety, and Value ratings for each stock using equal weightings: Dividend (33.33% weight), Safety (33.33%), Value (33.33%). We used this blend so that the most well-rounded stocks would be ranked higher on the list.
We will highlight each of these stocks over the course of a 5-part series. Below is a schedule of the entire series. Please make sure to"follow" us so that you will be notified when we publish future articles.
- Part 1: Honorable Mention (stocks #21-25)
- Part 2: Fourth Team (stocks #16-20)
- Part 3: Third Team (stocks #11-15)
- Part 4: Second Team (stocks #6-10)
- Part 5: First Team (stocks #1-5)
The All-Retirement Team: Second Team
This article highlights the 5 stocks that made the Second Team (stocks #6-10). The tables below summarize some of the key data points that we analyze when ranking our dividend stocks.
#10 Illinois Tool Works (NYSE:ITW)
Founded in 1912, Illinois Tool Works Inc. manufactures and sells industrial products and equipment worldwide. It operates through seven segments: Automotive OEM; Test & Measurement and Electronics; Food Equipment; Polymers & Fluids; Welding; Construction Products; and Specialty Products. The company has increased its dividend for 40 consecutive years and generate a dividend yield of 2.4%. The company has a modest payout ratio of 40% -- despite having increased its dividend at a CAGR of 13.3% over the last 10 years.
#9 Dover Corp. (NYSE:DOV)
Founded in 1947, Dover Corporation manufactures and sells a range of equipment and components, specialty systems, and support services in the United States. The company operates in four segments: Energy, Engineered Systems, Fluids, and Refrigeration & Food Equipment. Dover has increased its dividend for 59 consecutive years, giving it one of the longest records of consecutive annual dividend increases of all listed companies. In addition, the company has a relatively low payout ratio (44%). We expect that Dover will continue increasing its annual dividend to shareholders for years to come.
#8 Target Corp. (NYSE:TGT)
Founded in 1902, Target Corporation operates as a general merchandise retailer. The company's offerings include household essentials, entertainment goods, electronics, apparel, pet supplies, food and beverages, and automotive products. TGT generates a dividend of 3.2% and has increased its dividend at a 23.5% CAGR over the last five years. The company has increased its dividend for 47 consecutive years.
#7 3M Company (NYSE:MMM)
Founded in 1902, 3M Company is a diversified technology company that sells a variety of products worldwide and boasts a tagline -- "Science. Applied to Life." The company's products include: tapes, adhesives, traffic safety products, cleaning products, healthcare products. MMM generates a yield of 2.9%, has a low payout ratio of 53% and has increased its dividend for 57 consecutive years.
#6 Emerson Electric (NYSE:EMR)
Emerson Electric Co. provides technology and engineering solutions to industrial, commercial, and consumer markets worldwide. The company is comprised of five business segments: Process Management, Industrial Automation, Network Power, Climate Technologies, and Commercial & Residential Solutions. The company generates a dividend yield of 4.1% with a payout ratio of 47%. EMR has increased its dividend for 58 consecutive years through multiple economic cycles.
If you are looking to generate stable income for a retirement portfolio, dividend growth investing is a great way to accomplish this goal and any one of these dividend machines would make a nice addition to your portfolio. Note that identifying good stocks is only the starting point of building a dividend portfolio and investors should pay close attention to valuation as well when deciding whether or not to buy a stock as many stocks right now are overvalued (i.e., good stocks can often trade at bad prices). We try to focus on good stocks that have a minimum Value Rating of 50 when making new purchases.
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Disclosure: I am/we are long TGT, EMR.
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.