The growth of the dividend is what drives your income upward and onward. Compounding by dripping also increases it. First of all, you need to find a "safe" quality dividend, usually in a quality company that has a history of raising the dividend. This is the income portion of your investment. The rising dividend usually follows upwards earnings of the company, which in turn will also lead to capital stock price appreciation. I call that WIN-Win for income and total return. I like to strive for both, that is my plan. This article will only focus on the dividend and its growth.
The Dividend: Hopefully a "Safe" One
I would argue this is not as easy as it would seem, but let's start with a somewhat easy method of searching for the "safe" dividend payers. Simply go to the David Fish List of Dividend Champions, Contenders and Challengers. Even great companies such as (NYSE:CVX) Chevron might have to freeze the dividend. After 28 years it is now in peril (in red) on the Fish list. Next quarter will determine if it falls off the list. Dividend Aristocrats, normally about 50, can and do change, but remain great choices. If the stock you have an interest in is not on one of these lists, you must search elsewhere or use other methods. "Safe" is a constantly changing factor. Cuts in dividends can happen even to the best investor and some of the best companies. Many return to old glory, but the path can be bumpy. Robert Allan Schwartz also offers his list of dividend payers histories, which he alone maintains.
Safety Ranks by Value Line
Value Line, a premium website, maybe offered free by many hometown libraries. It gives Safety ranks to over 1700 stocks in the USA. The ranks start at #1, safest, and proceeds to #5, riskiest.
From Value Line: this is a description of the #1-3 ranks:
"Rank 1 (Highest):
These stocks, as a group, are the safest, most stable, and least risky investments relative to the Value Line universe, which accounts for about 95% of the market capitalization of all stocks in the U.S.
Rank 2 (Above Average):
These stocks, as a group, are safer and less risky than most.
Rank 3 (Average):
These stocks, as a group, are of average risk and safety"
I show VL ratings in the chart of my portfolio, which will follow later.
Note: I do not invest in anything lower than a 3 rank, and prefer not even that. However, most of the equity REITs fall into the #3 rank, which you will see in my list. Realty (NYSE:O) is ranked #2.
The next step is to look at credit ratings. The bigger companies that issue bonds will have credit ratings. Smaller companies may not pay for a credit rating, which can be expensive, thus many do not have them. They are then measured generally speaking by Debt/Cap, the lower the better.
This chart says it all. Investment grade is AAA to BBB- by S&P and Fitch.
Many if not most equity REITs reside at the BBB and BBB- level, some retail malls get A ratings, and many smaller cap companies reside @ BB+ or without ratings.
The highest BDC (Business Development Co) rating I have seen is BBB, which is held by MAIN.
It is important to know your investment type and where most of the holdings reside in the grading systems and what you will accept as a rating. Have a plan.
is another credit rater.
Many libraries offer access to the premium parts of (M*) Morningstar for credit ratings and fair value prices. I also use and subscribe to the $9.95/month version of FAST graphs, which shows the S&P credit ratings. The graphs therein include cash flows with dividend coverage, as well as Debt/Cap for non rated companies. Yahoo Finance does provide Key statistics as well, sometimes not easy to understand, but learning comes with time and it is free.
What I want to stress is this: know how long your company has paid the dividend and if its cash flows can cover it. Once you know you have a great possibly of a "safe" dividend, then look at its dividend growth, which also leads to potential earnings growth.
Note: I personally believe the ratings agencies are slow to get to changing the ratings. It is not quantifiable proof of safety for any investment as bad times come and go. The change in a rating is actually more important to know and an advisable time to look into cash flows and pay out ratios. Be alert to ratings changes.
The good news is the David Fish Lists also contain dividend growth statistics for 1-5-10-year spans along with much other information.
The chart below shows my 76 stocks, with Credit ratings (or Debt/Cap), Value Line rating and the Dividend Growth rates (DGR) from either the Fish list or FAST graphs.
Some are just my calculations and I remind you they are not perfect, no matter how hard I try. The current yields shown are from the past week and are not exact. They are there for demonstration purposes only. I am not addressing total return here, just income from the dividend and rising income. In the chart, NA means not available.
Keep in mind the S&P 500 ETF (NYSEARCA:SPY) currently is yielding 2.1% as of April 30, 2016.
The 10-year Treasury is @ about 1.8% yield.
My stocks and hopefully most of your stocks are all yielding higher than SPY and the 10 Year T bill.
The lower yielding stocks, however, do provide raises, along with capital growth, which the T bill does not provide. I am pleased with this portfolio and the YOC right now ~4.65%. It yields ~4.3% on current portfolio value, last I checked.
You will find the yearly dividend I garned from information that I know or expect but not always confirmed in the ? 2016 column.
|STOCK||CR||VL||? 2016||DGR||1yr||Current Yield|
|(NASDAQ:AAPL) Apple||AA+||2||2.28||3 yr 117||9.6||2.4|
|(NYSE:ABBV) AbbVie||A-||3||2.28||3 yr 9.7||11.8||3.7|
|(NASDAQ:ADP) Automatic Data||AA||1||2.16||5 yr 7.6||4||2.4|
|(NASDAQ:AMGN) Amgen||A||1||4||4 yr 62||30||2.4|
|(NYSE:BA) Boeing||A||1||4.36||5 yr 18.2||25||3.3|
|(NYSE:BDX) Bectin Dickinson||BBB+||1||2.64||5 yr 10.2||10||1.7|
|(NYSE:CAT) Caterpillar||A||2||3.08||5 yr 11.6||11||3.9|
|(NYSE:CL) Colgate-Palmolive||AA||1||1.56||5 yr 8.2||6||2.3|
|(NYSE:CLDT) Chatham||45%D/C||na||1.38||5 yr 31.8||29||6.6|
|(NYSE:CLX) Clorox||BBB+||2||3.12||5 yr 7.8||4||2.5|
|(NYSE:CMI) Cummins||A+||3||4.04||5 yr 32.4||25||3.4|
|(NYSE:CNP) Centerpoint||A-||3||1.03||5 yr 4.8||4||4.9|
|(NASDAQ:CSCO) Cisco||AA-||2||1.04||4 yr 70.2||11||3.7|
|(NYSE:CVS) CVS Pharmacy||BBB+||1||1.7||5 yr 32||27||1.7|
|Chevron||AA||1||4.28||5 yr 8.8||2||4.2|
|(NYSE:D) Dominion||BBB+||2||2.8||5 yr 7.4||8||4|
|(NYSE:DEO) Diageo||A-||1||3.5||5 yr 9.6||0||3.2|
|(NYSE:DLR) Digital Realty||BBB||3||3.52||5 yr 11.4||2||4.1|
|(NYSE:GIS) Gen'l Mills||BBB+||1||1.84||5 yr 11.8||8||3|
|(NYSE:GPC) Genuine Parts||6% D/C||1||2.63||5 yr 8.6||7||2.7|
|(NYSE:GWW) WW Grainger||AA-||1||5.2||5 yr 17||10||2|
|(NASDAQ:HAS) Hasbro||BBB||3||2.04||5 yr 13||7||2.3|
|(HCN) Welltower||BBB||3||3.44||5 yr 4||4||5|
|(NYSE:HCP) Inc.||BBB+||3||2.3||5 yr 4||4||6.8|
|(NYSE:HSY) Hershey||A||2||2.42||5 yr 12||10||2.6|
|(NASDAQ:HTGC) Hercules Tech||BBB-||na||1.24||5 yr 9||0||10.2|
|(NYSE:IBM) Intn'l Business M||AA-||1||5.2||5 yr 15||18||3.5|
|Johnson &||AAA||1||3.21||5 yr 7.2||7||2.6|
|(NYSE:KMB) Kimberley-Clk||A||1||3.64||5 yr 6||5||2.9|
|(NYSE:KO) Coca-Cola||AA-||1||1.4||5 yr 8.6||8||3|
|(NYSE:LMT) Lockheed Martin||BBB+||1||6.76||5 yr 18.6||12||2.9|
|(NYSE:LNT) Alliant||A-||2||2.35||5 yr 7||8||3|
|(NYSE:LXP) Lexington||BB+||na||0.69||5 yr 10.6||1||7.8|
|(NYSE:MA) MasterCard||A||2||0.76||5 yr 69.6||37||0.8|
|(NYSE:MAIN) Main Street||BBB||na||2.71||5 yr 7||5||8|
|(NASDAQ:MAT) Mattel||BBB||2||1.52||5 yr 13.6||0||4.7|
|(NYSE:MCD) McDonald's||BBB+||1||3.56||5 yr 8.8||5||2.8|
|(NYSE:MMM) 3M||AA-||1||4.44||5 yr 15||20||2.6|
|(NYSE:NHI) Nat Health||44%D/C||na||3.6||5 yr 7.6||10||5.4|
|(NYSE:NKE) Nike||AA-||1||0.64||5 yr 15.4||16||0.9|
|(NYSE:NSC) Norfolk Southern||BBB+||2||2.4||5 yr 11.2||6||2.6|
|Realty O||BBB+||2||2.39||5 yr 6||4||4|
|(NYSE:OHI) Omega||BBB-||na||2.28||5 yr 9.4||8||6.6|
|(NYSE:OXY) Occidental Petrol||A||2||3||5 yr 15.2||3||4|
|(NYSE:PG) Procter & Gamble||AA-||1||2.71||5 yr 7.6||6||3.3|
|(NASDAQ:PNNT) Pennant Park||BBB-||na||1.12||5 yr 1.8||0||17.3|
|(NASDAQ:SBUX) Starbucks||A-||1||0.8||5 yr 31.4||24||1.4|
|(NYSE:SO) Southern Co||A-||2||2.23||5 yr 3.6||3||4.5|
|(NYSE:STAG) Stag Industrial||BBB||na||1.39||4 yr 18.2||6||7|
|(NYSE:T) AT&T||BBB+||1||1.92||5 yr 2||2||5|
|(NYSE:TGT) Target||A||1||2.24||5 yr 23.6||20||2.7|
|(NASDAQ:TROW) T Rowe Price||0% D/C||2||2.16||5 yr 14.2||18||2.8|
|(NYSE:UBA) Urstadt Biddle||30%D/C||1.04||5 yr 1||1||5.1|
|(NYSE:UL) Unilever||A+||1||1.44||5 yr 7||6||2.9|
|(NYSE:UNP) Union Pacific||A||1||2.3||5 yr 27.8||15||2.5|
|(NYSE:V) Visa||A+||1||0.56||5 yr 31.2||19||0.7|
|(NYSE:VFC) VF Corp||A||2||1.48||5 yr 17||20||2.3|
|(NYSE:VLO) Valero||BBB||3||2.4||5 yr 56.8||62||4|
|(NYSE:VTR) Ventas||BBB+||3||2.97||5 yr 7.2||3||4.9|
|(NYSE:VZ) Verizon||BBB+||1||2.26||5 yr 3||3||4.5|
|(NYSE:WEC) WEC Energy||A-||1||1.98||5 yr 17.2||12||3.5|
|(NYSE:WFC) Wells Fargo||A||2||1.56||5 yr 53.6||9||3|
|(NYSE:WPC) WP Carey||BBB||3||3.9||5 yr 14.4||4||6.4|
|(NYSE:WPG) WP Glimcher||BBB-||na||1||1Yr 100||0||9.9|
|Exxon Mobil||AA-||1||2.92||5 yr 10.8||7||3.3|
|(NYSE:PM) Philip Morris||A||2||4.08||5 yr 10.6||4||4.2|
|(NYSE:DNP) Duff N Phelps||medium||0.78||0||0||7.8|
|(NYSE:MO) Altria||A-||2||2.39||5 yr 8.2||8||3.7|
|(NYSE:XEL) Xcel||A-||1||1.36||5 yr 7||7||3.5|
|(NASDAQ:MGEE)Madison G&E||A-vl||1||1.18||5 yr 3.2||4||2.4|
|(NYSE:PEP) Pepsico||A||1||2.81||5 yr 7.8||9||2.8|
|(NASDAQ:KHC) Kraft Heinz||BBB-||2||2.3||na||2.9|
|(NASDAQ:MDLZ) Mondelez||BBB||2||0.68||2 yr 8.5||10||1.6|
|(NYSE:FE) First Energy||BBB-||1.44||5 yr -7||0||4.2|
|(NYSE:MET) Metropolitan Life||A-||3||1.5||5 yr 15.6||11||3.2|
The high quality of "safe" dividends with safety ratings of 1-2 by VL along with investment grade credit ratings gives me Peace of Mind. In my portfolio, as you can see, I do allow some VL 3 rankings. Many are for REITs and they also have a lower BBB- credit ratings, but also low debt/capital %s. TROW has no debt.
If something would get a lower VL change, or a credit downgrade, it would have my full attention.
CHOWDER RULE #
The 5-year DGR is the metric used in the Chowder rule #. This is one of his first blogs about the rule written here in October 2013. I also wrote an article in August 2015 (one of my first) about the rule. Here is a free pdf download of the book, written by Lowell Miller, "The Single Best Investment"; it is referred to by Chowder and me, and it should be in your library.
I just want to mention in passing, if you didn't read about or know about the Chowder rule, it is the number obtained by adding the 5-year DGR and the stock's current yield.
In using these charts remember the Chowder number is 8 for utilities and telecom stocks. I include equity REITs in this category as well, but many do outperform that number.
12 is generally used for most other stocks and 15 for growth stocks with low dividends.
I hope this article gives you a sense of direction for upward rising "safe" dividends in quality stocks.
I offer below a 12-year FAST graph chart of JNJ. AAA credit and Value Line #1 stock.
See the upward and steady climb. I hope you own some.
Disclosure: I am/we are long ALL STOCKS SHOWN IN THE CHART.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.