In the most basic definition, the value of a stock is equal to the sum of all its future cash flows. Future cash flows are returned to investors in the form of dividends. Therefore, dividend growth investing would have to be one of the most logical investing strategies because dividend growth investors seek out companies with high dividend growth rates. High dividend growth rates return increasing amounts of cash to investors over time causing the underlying investment to be more valuable based on the definition of stock value.
Dividend growth investors often seek out stocks with accelerating dividend growth rates. In order to have an accelerating dividend growth rate, a company must be increasing its annual dividend payouts to shareholders year over year. Dividend challengers are stocks that have had 5-9 years of straight dividend increases. Here are 3 Dividend Challengers with accelerated dividend growth rates (CAGR) worth taking look at. These stocks have a 3-year dividend compound annual growth rate higher than their 5-year growth rate, payout ratios less than 30%, and 5-year dividend CAGR over 20%.
Cummins Inc. (CMI): Cummins Inc. designs, manufactures, distributes, and services diesel and natural gas engines, and engine-related component products worldwide. CMI is paying an annual dividend of $1.60 with a current yield of 1.58% and has increased annual dividend payments for 7 consecutive years. It has a 3-year dividend CAGR of 31.73% versus the 5-year rate of 30.06% with the most recent one year increase equaling 20.30%. The average analyst EPS estimate for 2012 is $10.65, which yields a low payout ratio of 15%.
Coca-Cola Enterprises Inc. (CCE): Coca-Cola Enterprises, Inc. produces, distributes, and markets nonalcoholic beverages. It provides still and sparkling waters, juices, sports drinks, juice drinks, coffee-based beverages, and teas. CCE is paying an annual dividend of $0.64 with a current yield of 2.29% and has increased annual dividend payments for 5 consecutive years. The 3-year dividend CAGR of 28.73% beats the 5-year CAGR of 21.67% by a good margin. The indicated dividend for 2012 is an increase of 25.49% over 2011 showing continued strength. Analyst estimates put EPS for 2012 at $2.29, which places the expected payout ratio for fiscal 2012 at 28%.
NewMarket Corp. (NEU): NewMarket Corporation, through its subsidiaries, engages in the petroleum additives and real estate development businesses. NEU is paying an indicated annual dividend of $3.00, with a current yield of 1.38% and has increased annual dividend payments for 6 consecutive years. Both the 3 and 5 year dividend CAGRs are supercharges with the 3-year beating the 5-year 40.57% to 38.91%. The $3.00 dividend expected to be paid in 2012 is a 25.52% increase over 2011. The average estimate for 2012 EPS is $17.80. This gives a low payout ratio slightly under 17%.
If these companies can continue the high rate of dividend increases, they stand to return a significant amount of cash to investors and also produce a high yield on initial investment, long term.
Disclosure: I am long CMI.