perfect world, income investors would want both from their investments and are not interested in investments that offer neither. This is where the common ground ends, and the debate begins. Without the benefit of a perfect world, we are left with the middle ground which is a balancing act between growth and yield. How much yield are you willing to give up for growth at a certain level, and how much growth will you sacrifice for a higher yield?
Assuming known inputs, a model can easily be constructed that allows yield and growth to vary, but provide equal end-results (see D4L-PreScreen.xls). Unfortunately, in the real world there is no such thing as "known inputs" when projecting the future. Hence, risk is introduced to the equation.
Higher yield or growth brings with it a higher risk of sustainability. Most income investors wouldn't mind a stock that yielded 20% with no growth, or a stock with an initial yield of 0.5% growing at 100% per year. If either of these were offered to us, we would immediately know that neither are sustainable in the long-term.
Based on our individual financial makeup and appetite for risk, we select an acceptable range of target yields and dividend growth rates. As a quick-and-dirty test when evaluating the yield/growth balance, I look for yields between 2.5% and 5.0% that when added to the stock's dividend growth rate it sums to a number greater than 12%.
This relationship provides for dividends that will double in a little over 10 years. It is far from precise and is not a substitute for running a spreadsheet model, but it does provide me a quick reasonableness check.
This week week, I screened my dividend growth stocks database for companies with dividend yield between 2.5% and 5.0% and a combined yield plus 5-year compound annual dividend growth of 12% or more. Select results are presented below:
Texas Instruments Inc. (TXN) is one of the world's largest manufacturers of semiconductors, this company also produces scientific calculator products and DLP products for TVs and video projectors.
Yield: 2.5% | Dividend Growth: 22.7%
Johnson Controls Inc. (JCI) supplies building controls and energy management systems, automotive seating, and batteries.
Yield: 2.6% | Dividend Growth: 14.9%
Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States.
Yield: 2.8% | Dividend Growth: 35.4%
Lockheed Martin Corp. (LMT), the world's largest military weapons manufacturer, is also a significant supplier to NASA and other non-defense government agencies. LMT receives about 93% of its revenues from global defense sales.
Yield: 2.8% | Dividend Growth: 18.4%
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
Yield: 2.9% | Dividend Growth: 19.0%
Phillips 66 (PSX), spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S.
Yield: 3.2% | Dividend Growth: 27.9%
Cummins Inc. (CMI) is a leading manufacturer of truck engines also makes stand-by power equipment and industrial filters.
Yield: 3.4% | Dividend Growth: 31.9%
As with past screens, the data presented above is in its raw form. Some of the the companies would be disqualified for poor dividend fundamentals. However some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 250+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long TXN, LMT, MSFT in my Dividend Growth Portfolio, and long CBRL, CMI un my High-Growth Portfolio. See a list of all my Dividend Growth Portfolio holdings here.
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