Ten stocks from 2011 with the most dividend growth are the subject of this post.
I added each of these stocks to my 2011 Model Portfolio during the period November 2010 through November 2011. When I picked these stocks they had a minimal yield of 3%, a D/E ratio no greater than 1 or within industry standards, earnings exceeded dividends in their most recent quarter and dividends had increased over time. The portfolio was built to deliver solid, ever increasing income in a buy and hold strategy.
I picked 52 stocks during that time, about one per week. In this post, I look at the ten stocks with the most dividend growth.
- Dividend yield and growth rate
- Revenue growth rate
- Debt to Equity ratio
- Call option opportunity
Ten Above Average Dividend Growth Stocks
The ten stocks discussed in this post are: Illinois Tool Works (NYSE:ITW), Genuine Parts Company (NYSE:GPC), Westwood Holdings Group (NYSE:WHG), Watsco (NYSE:WSO), General Mills (NYSE:GIS), Hasbro (NASDAQ:HAS), Raytheon (NYSE:RTN), Northrop Grumman Corp. (NYSE:NOC), Lockheed Martin (NYSE:LMT), The Travelers Companies (NYSE:TRV). The table below presents their five-year dividend growth rates. ITW delivered the lowest growth rate at 52.78% and TRV the highest growth rate at 139.29%. Each of these stocks delivered solid, ever increasing income so far.
Dividend Growth Stocks Are Expensive
My first impression of these stocks is that they seem expensive. One way to look at this is to evaluate P/E ratio and 52-week high prices. P/E ratio is the price of a stock dividend by the earnings.
Currently, the P/E ratio of the S&P 500 is about 24. A low P/E ratio is consistent with a cheap stock and a high P/E ratio is consistent with an expensive stock. High P/E ratios also have been linked with growth stocks. Boring old income stocks tend to carry lower P/E ratios. Look at the P/E ratio of these ten stocks in the table below.
I am not surprised that many of these boring, income stocks carry a higher P/E ratio than usual. Where else can a financial advisor or money manager go to create solid, ever increasing income for its retiree customers? Demand has driven up the price, driven up the P/E ratio, and driven down yield.
Having lived through hyperinflation in the 80s, followed by the fabulous bond bull market since then, I have been waiting for interest rates to normalize so I could build a portfolio of laddered 7% government bonds.
As I am retired, I cannot wait for that to happen, so like all retiree money managers, I have to find quality dividend stocks to fund my lifestyle. Every one of us could buy now and see the stock values retreat. Yet, as long as our income continues to go up, our budgets should be balanced.
Dividend Yield And Growth
Nine of the 10 stocks' dividend yield is less than 3%. I am not surprised since I think these stocks are a bit expensive. All stocks delivered a recent quarterly dividend increase as expected but their most recent dividend increase does not necessarily keep up with their historical dividend increases. The most recent dividend hike kept up with historical performance in only three of the ten stocks, ITW, WHG and WSO. See the table below.
If dividend growth rates are slowing, I want to pick one that is growing the dividend provided that the other fundamentals are solid. However, I place a bias on stocks that command covered call income. Covered calls are an excellent technique for sophisticated income investors to boost income from a low yielding stock.
When I sell (also known as writing a call) a call, I want a strike price that is at least 8% above my basis. If I am thinking of adding one of these stocks and looking at a strike price that meets my need, I would use the current price as my basis. I like an expiration date that is out far enough to get the next quarterly dividend, but no more than 160 days. Moreover, since the point is to increase my income, I expect a call premium of 1% of the strike price. These trading metrics provide for a minimal 10% total return should my stock be called away at the strike price.
Only one in ten of these stocks had a call I would consider and that stock is Raytheon. Frankly, the expiration date is further out (148 days from 6/23/2016) than I usually pick, but this table illustrates the income potential.
Insert Covered Call table for RTN
Nine of the 10 are solid stocks. Lockheed Martin has too much debt. I am using D/E (debt to equity ratio) and LMT has a D/E of 4.51. Anything above 1 makes me nervous unless the industry always carries high D/E ratios. General Mills has a D/E ratio above 1 (1.44) and above industry standard of .53, so I would avoid both of these stocks on that basis. ITW also carries a D/E ratio above 1, but that is within industry standard. If you have a choice, why not go for stock with a better balance sheet. All the other stocks' D/E ratios are within the margin of safety.
Recent revenue growth is the final metric I applied to these ten dividend income stocks. If you get more revenue and earn more than you pay out in dividends, it is highly likely the stock will continue to deliver solid, ever increasing income.
Revenues between 2014 and 2015 increased in five of the ten stocks; in the others, revenues were flat or down. See the final table below.
Only one stock makes me want to own it since it has no debt, the highest yield of the group, revenue growth and dividend growth and that stock is Westwood Holdings Group. Westwood is an assets manager. We do not know how the new FINRA fiduciary rule will affect their business. But on fundamentals, this is a good stock to consider for the income producing portion of your portfolio. Earnings are coming up July 27, 2016 and you may want to wait to hear the news. WHG's 52-week price range is $41 to $63, so at $55, you are buying about in the middle.
Ten over-achieving dividend growth stocks for your consideration.
Disclosure: Long GPC, WHG, WSO
June 27, 2016 Update. I wrote this article before Brexit. I have added a table below that presents the performance of these 10 stocks using Friday, June 24, 2016 closing prices.