3 Dividend Growth Buys For The Income Portfolio

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Includes: BBY, FL, SWY
by: Hedgefund Manager

Here are 3 good dividend growth stocks. Each company is profitable, with good balance sheets and a low value multiple. Each security pays a good dividend in the 2.5%-3% range, and, more importantly, has the ability to grow earnings 10%-12% annually.

Earnings growth is important, even for value investors. We are not discussing the 20% growth of a higher flyer; for the income investor, high single digit growth will suffice. Remember, earnings growth fuels dividend growth. As companies generate free cash that is not needed to maintain or grow operations, the company's board returns the capital to the shareholder in the form of dividends or buybacks. The 3 companies we highlight today are Foot Locker (FL), Best Buy (BBY), and Safeway (NYSE:SWY).

Company

Yield

PE (ttm)

LTG

Foot Locker, Inc.

2.7

14.5

12%

Best Buy Co., Inc.

2.6

9.1

9%

Safeway Inc.

2.5

13.5

9%

Foot Locker is a retailer of athletic footwear and apparel. The company operates both brick-and-mortar stores and online. Foot Locker is a strong, well-known brand in the industry, with key supplier relationships with the major brands. Customers come to the stores for its wide selection and variety. Despite concerns about the slowdown of consumer spending, sales and earnings grew 9% and 27% year-over-year in the most recent quarter, respectively. Analysts expect earnings to grow 12% over the next 5 years. At a P/E of 14.5 and dividend yield of 2.7%, Foot Locker is a stable dividend grower.

Best Buy is a retailer of consumer electronics, entertainment products, and appliances. The company offers a variety of electronics products in retail stores and online. While the store faces stiff competition from competitors Amazon.com (NASDAQ:AMZN) and Wal-Mart (NYSE:WMT), Best Buy differentiates itself with knowledgeable customers and product repair services. While sales grew 2% over the most recent quarter, earnings declined 29% on margin compression due to increased discounting. Discounting is expected in periods of economic uncertainty, as consumers search for bargains. Best Buy shares have declined 33% over the year and 15% over the last four weeks, creating an attractive entry in this strong consumer brand. At a P/E of 9 and with a long-term growth rate at 9%, Best Buy shares trade below the P/E of the S&P, which is currently 13. While Best Buy is more economically sensitive than Foot Locker or Safeway, it has a lower valuation for the income investor willing to bear additional macro-economic risk.

Safeway is a national grocery chain and ethical drug retailer, an ordinary business with stable economics. Sales and earnings grew 6% and 7% in the most recent quarters, respectively. Analyst expect a 9% growth rate over the next 5 years, primarily from same-store sales increases and new store openings. Shares declined 7% over the last year and 33% over the last 5 years. At a P/E of 13, this is a good buy point for Safeway shares, a reasonably priced dividend-payer.

* Financial data from Yahoo Finance


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: These stock ideas should be used to identify potential candidates for your portfolio. Remember to perform your own due diligence before purchasing or selling any security for your portfolio.