Stocks of companies that boost dividends at high rates of growth tend to outperform stocks of companies that raise dividends at low rates of growth. Dividend increases usually represent favorable earnings and cash flow dynamics that enable companies to boost payouts. They also represent a greater commitment to increasing shareholder value through higher dividend payouts. A universe of stocks raising dividends is large; however, a limited number of companies raise their dividends by double digits.
Target Corporation (TGT), Caterpillar (CAT), United Technologies Corporation (UTX), and Rockwell Automation (ROK) are four high-quality, favorably priced stocks that have just hiked their quarterly dividends at rates ranging between 10.6% and 20%. These four dividend stocks boast an average dividend yield of 2.6%, above the current yields on the 10-Year Treasury bond and the S&P500 index.
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Target Corporation is the second largest retailer in the United States after Wal-Mart (WMT). It has market capitalization of $38.4 billion. The company pays a dividend yield of 2.5% on a payout ratio of 33%. The company's competitors Wal-Mart and Costco Wholesale Corporation (COST) pay dividend yields of 2.3% and 1.2%, respectively. Target has been raising dividends by an average annual rate of 20.1% a year over the past five years. Last week, the company announced another dividend hike of 20%. If the company continues to boost its dividend at this rate in the future, it could double its payout within four years.
The retailer is trading at $57.5 a share or 10.5 times its forward earnings. This puts its forward valuation below that of its peers and the company's historical metric. The company is expected to see robust earnings per share (EPS) growth in the future. Its EPS is forecast to rise by an average of nearly 12% per year for the next five years, double the average annual growth rate over the past five years. Target Corp.'s stock is up 12.6% year-to-date. Fund manager Wallace Weitz is bullish about the company.
Caterpillar is a $56 billion heavy machinery company and an industrial bellwether stock. It pays a dividend yield of 2.4% on a payout ratio of 26%. The company's peers Deere & Company (DE), Kubota (KUB), and Fastenal Company (FAST) pay dividend yields of 2.4%, 1.8%, and 1.7%, respectively. The company has raised dividends for 19 years in a row. Over the past five years, its dividend hikes averaged 8.9% per year. The company has just boosted its payout by a higher 13% rate. If the new dividend growth rate is sustained in the future, the company could double its dividend in 5.7 years.
Caterpillar grew its EPS at an average annual rate of 7.4% over the past five years. The company posted a record profit in the quarter ended March 31, which rose 29% year-over-year. According to Caterpillar, "strong global demand for most mining products and significant growth in replacement demand for products in the United States," buoyed the demand for Caterpillar's heavy duty machinery. Analysts forecast the company will expand its EPS, on average, by 17.5% per year for the next half decade. This forecast is based on an upbeat expectation of a strong rebound in global capital spending, which could be in question, given the slowdown in the global economy. In terms of the valuation, the company's stock is trading at $85.1 per share or 7.8 times forward earnings. This P/E puts the stock below its peers and the company's own historical metrics. The stock is popular with billionaire Ken Fisher.
United Technologies Corp. is a $68 billion conglomerate that produces high-technology product, ranging from aircraft engines, elevators, fire and security products, to missile systems and military helicopters. It pays a dividend yield of 2.9% on a payout ratio of 45%. Competitor General Electric (GE) pays a dividend yield of 3.4%, while rivals Boeing (BA) and Honeywell (HON) pay yields of 2.4% and 2.6%, respectively. United Technologies grew its dividend at a 12.6% annual rate over the past five years. This year, it is hiking its dividend by a slightly lower 11.5%. Its EPS is forecast to accelerate from the average annual rate of 8.2% realized over the past half decade to 12% per year for the next five years. The stock is attractive in terms of its valuation, as it boasts a forward P/E below its industry and the company's own five-year average ratio. The stock is trading at $74.8 a share, almost flat from the beginning of the year. Billionaires Ken Fisher and Dan Loeb are bullish about the stock (check out Dan Loeb's stock picks).
Rockwell Automation is a $9.5 billion company. It sells industrial automation equipment, power, control and information solutions. The company has a dividend yield of 2.7% on a payout ratio of 37%. Its peers ABB Ltd. (ABB), Emerson Electric Co. (EMR), and General Electric pay dividend yields of 4.2%, 3.4%, and 3.4%, respectively. Rockwell Automation boosted its dividend at an average rate of 9.2% per year over the past five years. Last week, the company bolstered its dividend by a somewhat higher 10.6%. Similar rate hikes could be expected in the future, as the company's EPS is forecast to grow at a robust 15.4% per year over the next five years, much faster than in the past five years. Results have been boosted by acquisitions and strong emerging markets growth. When it raised the payout, the company also approved a $1 billion in additional stock repurchases. Rockwell is currently trading at a forward P/E slightly below that of its industry and well under the company's own historical valuation. Shares are changing hands at $66.8, down 11.7% year-to-date. Fund managers Mario Gabelli and Ken Fisher own small amounts of shares in the company (see billionaire Ken Fisher's stock picks).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.