Performance and sustainability - that's what investors in Dividend Growth Stocks are looking for. It's very easy to find stocks with a yields greater than 10%, but how many of those will be able to sustain or grow their dividend over 10, five or even three years? Also, it doesn't take much effort to find a company that can sustain and grow its dividend because it is only paying a nominal amount (low yield and low payout).
When picking stocks there is no such thing as a 'sure thing.' All stocks carry risk and uncertainties. However, there are metrics we can look at that help us to reduce our portfolio's risk by selecting high-quality stocks. In search for 5-Star stocks, here are the metrics I look at:
I look at five measures of fair value: 1.) Avg. High Yield Price, 2.) 20-Year DCF Price, 3.) Avg. P/E Price, 4.) Graham Number and 5.) NPV MMA Price. Of the first four, the highest and lowest fair values are excluded and the remaining two calculations are averaged to calculate the Mid-2 price. Then I weight it with the NPV MMA Price to determine the calculated fair value. (More Info) A Star is awarded if the stock is trading at a fair value.
2. Free Cash Flow Payout
Dividends are paid in cash, not earnings, EBIT, EBITDA or EPS. To pay a meaningful dividend a company must generate sufficient free cash flow. A Star is awarded if the Free Cash Flow Payout is less than 60% and there were no negative free cash flows during the last 10 years.
3. Debt To Total Capital
If a company generates significant cash, it may still be hampered to pay a meaningful dividend if the cash must be used to pay down debt. Having less debt provides a company more financial flexibility. A Star is awarded if the Debt To Total Capital is less than 45%.
4. NPV MMA Diff
The value calculated is the net present value (NPV) of the difference between the dividend earnings of this investment and the interest income from the MMA over 20 years. We must always consider if there are better/safer options. A Star is added for amounts in excess of the target amount.
5. Key Metrics
"Dividend Growth Rate", "Years of Div. Growth", "Rolling 4-yr Div. > 15%" and "Years to >MMA" are considered Key Metrics. I have found that great dividend growth companies have scored well in each of these metrics. A Star is awarded if 2 of the 4 Key Metrics are true.
A 5-Star Dividend Stock scores well in each of these metrics. This week, I screened my dividend growth stocks database for select 5-Star stocks with a yield of 2.25% or more. The results are presented below:
Becton, Dickinson and Co. (BDX) provides a wide range of medical devices and diagnostic products used in hospitals, doctors' offices, research labs and other settings. The company has paid a cash dividend to shareholders every year since 1987 and has increased its dividend payments for 25 consecutive years. Yield: 2.3%
Medtronic Inc. (MDT) is a global medical device manufacturer with leadership positions in the pacemaker, defibrillator, orthopedic, diabetes management, and other medical markets. The company has paid a cash dividend to shareholders every year since 1977 and has increased its dividend payments for 34 consecutive years. Yield: 2.4%
Wal-Mart Stores, Inc. (WMT) is the largest retailer in North America,Wal-Mart operates a chain of discount department stores, wholesale clubs, and combination discount stores and supermarkets. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 37 consecutive years. Yield: 2.6%
Walgreen Co. (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico. The company has paid a cash dividend to shareholders every year since 1933 and has increased its dividend payments for 37 consecutive years. Yield: 2.6%
Aflac Incorporated (AFL) provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at work sites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 29 consecutive years. Yield: 2.8%
Norfolk Southern Corp. (NSC) operates 20,000 route miles serving 22 eastern states, the District of Columbia, and Ontario, Canada. The company has paid a cash dividend to shareholders every year since 1973 and has increased its dividend payments for 11 consecutive years. Yield: 2.7%
Harris Corporation (HRS) focuses on communications equipment for voice, data and video applications for commercial and governmental customers. The company has paid a cash dividend to shareholders every year since 1941 and has increased its dividend payments for 11 consecutive years. Yield: 3.0%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor business fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 210+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long WMT, MDT, AFL, NSC in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.