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Dividend growth investing is all about seeking dividend stocks that provide a growing stream of income over time, along with current income and long-term capital appreciation opportunities. There are several mutual funds and exchange-traded products that pursue this strategy by pooling dividend growth stocks. Vanguard Dividend Growth Fund (MUTF:VDIGX) is one such fund. According to its prospectus, the fund focuses on:

high-quality companies that have prospects for long-term total returns as a result of their ability to grow earnings and their willingness to increase dividends over time.

These stocks are typically large-cap equities that are undervalued relative to the market. They all have potential for increasing dividends.

Vanguard Dividend Growth Fund pays a dividend yield of 2.62%. Many of the fund's 49 constituent stocks pay higher dividend yields. Here is a closer look at the top seven holdings in Vanguard's selection of dividend growth stocks.

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PepsiCo Inc. (NYSE:PEP) is a global snacks and beverages company that pays a dividend yield of 3.0% on a payout ratio of 57%. Its rival, Coca-Cola Company (NYSE:KO), pays a dividend yield of 2.7%, while rival Dr Pepper Snapple Group (NYSE:DPS) also pays a dividend yield of 3.0%. PepsiCo's dividends grew at an average rate of 10.3% per year over the past five years. This year, the company bolstered its dividend by a smaller 4.0%. The company's EPS expanded at a rate of 3.8% per year over the past five years. Analysts expect that PepsiCo's EPS will grow at a faster average rate of 6.4% per year for the next five years. The company's free cash flow yield is low, at 1.4%, ROE is 27%, and return on invested capital [ROIC] is 14.4%. Its P/E of 19 compares to the industry's average of 19.4 and the company's own five-year average of 17.7. On a forward P/E basis, the stock is slightly undervalued relative to its peer group. Among fund managers, Ralph V. Whitworth (Relational Investors) holds the largest stake in the company, worth some $623 million.

Johnson & Johnson (NYSE:JNJ) is a healthcare and personal goods giant, the world's most broadly based manufacturer of healthcare products. Its dividend yields 3.6% on a payout ratio of 77%. The company's peers Pfizer (NYSE:PFE), Merck & Co. (NYSE:MRK), and Novartis AG (NYSE:NVS) pay higher dividend yields of 3.7%, 3.9%, and 4.2%, respectively. Over the past five years, J&J's EPS contracted slightly. Notwithstanding that decline, the company's dividends grew at an average rate of 8.4% per year over the same period. J&J is forecast to grow its EPS at an average rate of 6.7% per year for the next five years. The company's free cash flow yield is 3.4%, ROE is 14.3%, and ROIC is 12.1%. The stock has a P/E of 21.5, which compares to 16.3 for its industry and 15.6 as its five-year average. Billionaires Ken Fisher and Warren Buffett hold substantial positions in this healthcare giant.

Occidental Petroleum Corp. (NYSE:OXY) is an integrated oil and natural gas company with a dividend yield of 2.5% and a low payout ratio of 28%. The company's rivals Exxon Mobil Corporation (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A)(NYSE:RDS.B) pay higher dividend yields of 2.6% and 4.8%/4.7%, respectively. Over the past five years, the company's EPS and dividends grew at average rates of 10.8% and 17.8%, respectively. A continued dividend growth is expected as Occidental Petroleum's EPS is forecast to continue to grow at a rate of 10.8% per year for the next five years. The company has a ROE of 15.9% and ROIC of 13.3%. Its P/E stands at 10.9, compared to the industry's 9.1 and the company's own five-year average of 14.3. Fund managers Ralph V. Whitworth and Ric Dillon (Diamond Hill Capital) own more than $300 million of the stock.

Target Corp. (NYSE:TGT) is one of the largest discount retailers in the United States. The company pays a dividend yield of 2.3% on a payout ratio of 33%. Its competitors Wal-Mart (NYSE:WMT) and Costco Wholesale Corporation (NASDAQ:COST) pay dividend yields of 2.2% and 1.1%, respectively. Over the past five years, the retailer's EPS grew at an average annual rate of close to 6.0%, while its dividend increased at a rate of 20.3%. Analysts forecast that Target's EPS growth will accelerate to 12.6% per year for the next five years, which suggests that future dividend hikes are likely. The stock boasts a free cash flow yield of 2.8%, ROE of 18.5%, and ROIC of 9.4%. Its P/E is hovering around 14.7, compared to 16.4 for the broadline retailers industry and 13.9 as the stock's five-year average. Fund manager John A. Levin (Levin Capital Strategies-see its top holdings) and billionaire Thomas Steyer's Farallon Capital each own about $100 million in the stock.

Exxon Mobil Corp. is an integrated oil and natural gas company and the biggest dividend payer in the world. Its dividend yield is 2.6%, and its dividend payout ratio is low at 24%. Exxon Mobil's rivals Chevron Corporation (NYSE:CVX) and ConocoPhillips (NYSE:COP) pay higher dividend yields of 3.2% and 4.6%, respectively. Over the past five years, the company's EPS grew at an average rate of 5% per year, while its dividend increased at a rate of 9.2%. This year, the company hiked its dividend by a much higher 21%. The stock boasts a free cash flow yield of 3.3%, ROE of 28%, and ROIC of 23%. It has a P/E of 9.2, almost on par with the industry's P/E of 9.1, but below the stock's five-year average P/E of 12.2. The stock is popular with Phill Gross (Adage Capital) and Cliff Asness.

Automatic Data Processing Inc. (NASDAQ:ADP) is a payroll processor and outsourced services firm. It pays a dividend yield of 2.7% on a payout ratio of 56%. Its main competitor Paychex Inc. (NASDAQ:PAYX) pays a dividend yield of 3.8%, while peer Insperity, Inc. (NYSE:NSP) pays a yield of 2.8%. The company's EPS increased at an average rate of 9.0% per year over the past five years. Over the same period, its dividend grew at a rate of 12% per year. Dividend growth is likely to be sustained in the future as EPS is forecast to maintain a similar growth rate as the average over the past five years. The stock has a free cash flow yield of 2.3% as well as ROE and ROIC of 22.6%. The stock's P/E at 20.6 is below the industry average of 35, but above ADP's five-year average ratio of 18.9. Paychex's P/E is slightly higher at 22. ADP is popular with value investor Jean-Marie Eveillard (First Eagle Investment Management-check out its top picks).

Microsoft Corp. (NASDAQ:MSFT) is a technology giant with a dividend yield of 2.6% and a payout ratio of 40%. Its peers Apple Inc. (NASDAQ:AAPL) and Hewlett-Packard Company (NYSE:HPQ) pay dividend yields of 1.6% and 3.1%, respectively, while competitor Google (NASDAQ:GOOG) does not pay any dividends. Over the past five years, Microsoft's EPS and dividends grew at average rates of 7.0% and 14.9% per year, respectively. Analysts forecast that Microsoft's EPS growth will average a faster 9.0% per year for the next five years. The stock boast a high free cash flow yield of 8.9%, ROE of 25.6%, and ROIC of 22%. Its P/E is trading at 15.4, below the industry's ratio of 17 but above the stock's five-year average of 13.8. On a forward P/E basis, the stock is undervalued relative to the software industry and the technology sector. Jean-Marie Eveillard is also bullish about Microsoft. So are famous investors Ken Fisher and Jim Simons.

Source: Top 7 Stocks In Vanguard's Dividend Growth Portfolio