Monday, October 13, 2014

5 Stocks With Strong Dividend Growth Metrics

When evaluating a company as a potential income investment I look at its calculated fair value, ability to generate cash, debt position and the net present value of its dividend stream compared to alternative "safe" investments (NPV MMA Differential).

In addition, I look at four other metrics that individually may not be as important as the above, but collectively provide great insight into the potential success of a stock as a dividend investment. Here are the four other key metrics that I look at when evaluating a dividend stock:

I. Dividend Growth Rate:
The dividend growth rate is a key metric in many calculations. As such, I use a conservative estimate as follows: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year compound annual growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history. You can see how this is calculated in my D4L-PreScreen.xls model. This metric is True if the dividend growth rate is 12% or above.

II. Years of Div. Growth:
Years of consecutive dividend growth.  How long a company has increase its dividend is a strong indication of how committed the company is to continue doing so in the future. This metric is True for 15 or more years.

III. Rolling 4-yr Div. > 15%:
Dividends will double every 5 years if they grow by 15%. This test is True if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.


IV. Years to >MMA:
The number of years until dividend earnings exceed the earnings from a hypothetical money market account earning an average 20 year Money Market Account rate. This rate is validated by looking at a 20 year Treasury rate. This metric is True if the number of years is less than 5.

When taken together, these are tough metrics. Of the 259 stocks that I currently follow, only three had all the above metrics true. They were:

Church & Dwight Co. Inc. (CHD) is a manufacturer and marketer of a broad range of household, personal care and specialty products under various brands such as Arm & Hammer, Oxiclean, Orajel, Trojan and Spinbrush sells its products in the U.S. and certain foreign countries.
- Yield: 1.8%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 18

Target Corp. (TGT) operates nearly 1,800 Target, SuperTarget and CityTarget general merchandise stores across the U.S. and about 130 stores in Canada.
- Yield: 3.3%
- Dividend Growth Rate: 20.0%
- Years of Div. Growth: 47

Walgreen Co. (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
- Yield: 2.2%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 39

Of the remaining companies only nine had three of above metrics true. The two with yields over 2% were:

International Business Machines Corp. (IBM) global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing. See full analysis here.
- Yield: 2.3%
- Dividend Growth Rate: 13.5%
- Years of Div. Growth: 19
- Rolling 4-yr Div. > 15%: False
- Years to >MMA: 3

Helmerich & Payne, Inc. (HP) is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor.
- Yield: 3.0%
- Dividend Growth Rate: 20.0%
- Years of Div. Growth: 42
- Rolling 4-yr Div. > 15%: False
- Years to >MMA: 1

These metrics focus on compound dividend growth, which is highly important for the successful investor in dividend growth stocks. In my dividend analysis worksheet, a company will earn a Star if two of the above metrics are True.

Full Disclosure: No position in the aforementioned securities. See a list of all my dividend growth holdings here.

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