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The next article of this series evaluates the dividend growth prospects of three conglomerates: 3M (NYSE:MMM), Caterpillar Inc (NYSE:CAT), and United Technologies (NYSE:UTX). Let us take a look at the dividends basics of these three companies:

  • MMM has the highest current yield at 2.8%, followed by UTX at 2.6 and CAT at 2%.
  • MMM's payout ratio is 38%, UTX is at 40%, while CAT has the lowest at 23%.
  • MMM's investor relations webpage indicates the company has paid dividends since 1977 and has been increasing dividend every year.
  • CAT has been paying dividends since 1962, while UTX has been paying since 1970.
  • The dividend history of all 3 companies have been sourced from either Yahoo Finance or the company's website or from the sources linked above. If you find some wrong data, say the year of first dividend payment, please do let us know in the comments section so it can be corrected immediately.

As in the earlier articles, let us extrapolate the dividend growth and yield on original cost for an investor who can set aside his/her money in these 3 companies. Assume you purchase 1000 shares of CAT at the recent price level of $90 for a total initial investment of $90,000. The current yield works out to 2% as shown in the table below

CAT's average dividend increase of the past 5 years has been 13%. However, let us be conservative and assume just a 10% annual increase in payouts. Notice how the dividend payments and the yield on original cost more than triple in 10 years, leading to $6000 in annual dividends

We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.

Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets. Ten years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.

A similar table (below) has been formulated below for UTX as well, with the assumed dividend growth rate being 10% again, even though its average over the past 5 years has been nearly 17%. The last table shows how MMM clearly lags behind both CAT and UTX when it comes to dividend growth. The table uses a 5% annual growth, even though the last 5 year average increase has only been 4%. Even then, MMM loses out easily to other two stocks.

Our Take: Though the three Dow 30 stocks yield almost the same right now, CAT and UTX have clearly demonstrated much better dividend growth rate in the recent past. If the same holds true for the next decade as well, then expect MMM to lag behind as an income producing stock. CAT is the most volatile of these 3 stocks, being a cyclical and that we believe will present the patient investor the chance to accumulate more shares at a better yield point and let the higher dividend growth rate do the magic.

Note: These exercises focus almost exclusively on dividend growth rates. Of course there are other metrics to evaluate stocks and see which one is the most attractive.

Caterpillar:


(Click to enlarge)

United Technologies:


(Click to enlarge)

3M:


(Click to enlarge)

Source: Dividend Growth: Battle Of 3 Conglomerates