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W.W. Grainger (NYSE:GWW) traded ex-dividend on 5/10/2012 with a payout of $0.80 per share. This is an increase of 21.21% over the $0.66 paid in the same quarter last year. Nice increase over the 10 year dividend compound annual growth rate of 15.56% indicating a continued ramp up in dividend growth. GWW's current yield based on the closing price of $193.90 on 5/24/2012 is 1.65%.

W.W. Grainger's dividend growth rate has been accelerating over the last 10 years with its latest boost topping it's 3, 5, and 10 year historical dividend growth rates. The dividend growth coincides with growing earnings as the payout ratio has hovered within the range of 25-30% since 2002, with this year estimated at 30%, given current analyst EPS estimates of $10.75. The following table shows the dividend CAGR for GWW for 1, 3, 5, and 10 years, along with the annual dividends paid since 2002. An easy-to-use CAGR calculator can be found here.

Year20022003200420052006200720082009201020112012
Annual Dividend Paid0.71500.73500.78500.92001.11001.34001.55001.78002.08002.52003.0600*
CAGR Growth Rates10 YR 5 YR 3 YR 1 YR
15.56% 17.96% 19.79% 21.43%

*Indicated dividend for 2012

W.W. Grainger's current dividend growth trend is exactly what I want to see as a dividend growth investor. Another plus is GWW has increased its dividend every year over the last 10 years. Both of these characteristics tell me GWW's management is investor-friendly and intends to reward those buying into the business. Let's take a look at the kind of future cash flow we might expect from W.W. Grainger over the next 20 years. The following table shows the yield on initial investment and cumulative dividend returns at the 10, 5, and 3 year historical dividend compound annual growth rates. Green table cells indicate the year in which we can expect cumulative dividend payments received to exceed our initial investment amount at the 10, 5, and 3 year dividend CAGR.

YearYield on Initial Cost at 10 YR CAGRCumulative Dividend ReturnYield on Initial Cost at 5 YR CAGRCumulative Dividend ReturnYield on Initial Cost at 3 YR CAGRCumulative Dividend Return
11.65%1.65%1.65%1.65%1.65%1.65%
21.91%3.56%1.95%3.60%1.98%3.63%
32.20%5.76%2.30%5.89%2.37%5.99%
42.55%8.31%2.71%8.60%2.84%8.83%
52.94%11.25%3.19%11.80%3.40%12.23%
63.40%14.65%3.77%15.56%4.07%16.30%
73.93%18.58%4.45%20.01%4.88%21.17%
84.54%23.12%5.24%25.25%5.84%27.01%
95.25%28.37%6.19%31.44%7.00%34.01%
106.06%34.43%7.30%38.73%8.38%42.39%
117.01%41.44%8.61%47.34%10.04%52.43%
128.10%49.54%10.15%57.49%12.03%64.45%
139.36%58.89%11.98%69.47%14.41%78.86%
1410.81%69.71%14.13%83.60%17.26%96.12%
1512.50%82.20%16.66%100.26%20.67%116.79%
1614.44%96.65%19.66%119.92%24.76%141.55%
1716.69%113.33%23.19%143.10%29.66%171.21%
1819.28%132.62%27.35%170.45%35.53%206.75%
1922.29%154.90%32.26%202.72%42.57%249.31%
2025.75%180.66%38.06%240.77%50.99%300.30%

Taking the lowest CAGR of 15.56% for the 10 year growth rate we can expect to receive a yield on initial investment of 25.75% at year 20. If GWW can keep up the 5 year CAGR of 17.96%, we can expect an outstanding 38.06% yield at year 20. I'm not going to mention the 3 year CAGR, because while that would return an amazing yield, it's not likely GWW can continue that growth rate over the next 20 years. The 10 year rate in this case is probably the most likely growth rate we can expect over the next two decades.
I am long GWW. Given the accelerating dividend growth rate, I will be looking to add to my position if a good buying opportunity presents itself.

Source: W.W. Grainger: Dividend Growth Analysis For Long-Term Investors