14 "Dividend Plus Growth" Stocks to Check Out
Alan Brochstein screens for conservative dividend stocks with growth potential
The current investment environment continues to be very challenging for investors who need income. Bond yields remain historically low, which has encouraged yield-seekers to look into alternatives, like REITS, MLPs, Utilities and lower-quality bonds. One of the areas I continue to favor for income seekers is “Dividend-Growth Stocks”, which I define as companies that pay an above-market dividend with both a historical tendency as well as a prospective capability to continue to increase that dividend.
Over longer periods of time, I'd expect these stocks to do well, with increasing dividends and potentially rising prices driving total returns that (if all these predictions prove correct) may prove to be superior to bonds. In setting up a screen to try to identify potential candidates, I chose the following parameters:
• Market Cap: > $500 million
• Dividend Yield > 2% (S&P 500 is 1.8%)
• Payout Ratio < 50%
• Dividend Increases in Past 5 Years: 5
• 5 Year Dividend Growth >8%
• Net Debt to Capital < 20%
Before we look at the results, I want to share a few thoughts about the screen design. The payout ratio measures the size of the dividend relative to earnings. If that ratio is too high, then the dividend growth can be constrained in the future by slow earnings. Sometimes companies need to reduce the dividend if earnings happen to decline. The constraint on the size of the debt offers protection too, as companies with a lot of debt often have to constrain the growth or even reduce or eliminate the dividend when unexpected weakness in the businesses materializes.
Here is the first cut of our screen's results:
Before we look at the results, I want to share a few thoughts about the screen design. The payout ratio measures the size of the dividend relative to earnings. If that ratio is too high, then the dividend growth can be constrained in the future by slow earnings. Sometimes companies need to reduce the dividend if earnings happen to decline. The constraint on the size of the debt offers protection too, as companies with a lot of debt often have to constrain the growth or even reduce or eliminate the dividend when unexpected weakness in the businesses materializes.
Here is the first cut of our screen's results:
[click on the image above to enlarge it]
As a reminder, these should not be treated as recommendations but rather suggestions for further research. Always do your own due diligence before investing.
I like that the list draws widely from across the economy, with 6 of the 10 economic sectors represented. Note that the market caps range from small to very large. Most of the P/E ratios, shown in the second column from the right, are below the market’s P/E, with the most expensive stock at 18X. The far column indicates that all of the stocks trade at or below their 10-year median. One note about the Industrials: Each of these companies is a defense contractor.
Before concluding, I want to share the math behind why I think these types of stocks could conceivably perform better than bonds over the next five years. One can buy a relatively high-quality (A-rated) 5-year Industrial bond currently yielding about 2.00%, which is about 0.5% more than a 5-year Treasury. Financial debt may yield considerably more.
Alternatively, assuming a typical dividend-paying stock yields 2.5% (the range above is 2.0% to 3.8%), you will collect the dividend, but unlike a bond the stock's price could conceivably keep rising. (Then again, it may not rise or even fall. Stocks don't offer the same certainty of getting your principal back as bonds do. You can learn more about the differences between stocks and bonds in TradeKing's Education Center, Bond Basics: A Beginner's Guide.)
The average growth on the stocks listed above has been in excess of 10% per year. Assuming 10% growth in the dividend, the yield on the investment would be 2.5% in the first year, 2.8% in the second year, 3.0% in the 3rd year, 3.3% in the 4th year and 3.7% in the final year. The total income generated would be higher, and there may be tax advantages as well. That said: remember past performance of a given stock is no guarantee of future results. That 10% growth streak may continue, but it may also grind to a halt tomorrow or flip to a loss.
The final element is that the value of the stock could presumably increase over time as well, but there is always the risk it could decline. Longer-term bonds offer higher yields but also offer considerable price risk in the event that interest rates rise. Again, I'd refer you to Bond Basics: A Beginner's Guide for more specifics.
So, hopefully I have given you a few candidates to consider if you agree that dividend-paying stocks might be a good income generator for your needs.
Remember, screening is only a first step. Before investing, you should do your own investigation to identify risks and potential opportunities.
I like that the list draws widely from across the economy, with 6 of the 10 economic sectors represented. Note that the market caps range from small to very large. Most of the P/E ratios, shown in the second column from the right, are below the market’s P/E, with the most expensive stock at 18X. The far column indicates that all of the stocks trade at or below their 10-year median. One note about the Industrials: Each of these companies is a defense contractor.
Before concluding, I want to share the math behind why I think these types of stocks could conceivably perform better than bonds over the next five years. One can buy a relatively high-quality (A-rated) 5-year Industrial bond currently yielding about 2.00%, which is about 0.5% more than a 5-year Treasury. Financial debt may yield considerably more.
Alternatively, assuming a typical dividend-paying stock yields 2.5% (the range above is 2.0% to 3.8%), you will collect the dividend, but unlike a bond the stock's price could conceivably keep rising. (Then again, it may not rise or even fall. Stocks don't offer the same certainty of getting your principal back as bonds do. You can learn more about the differences between stocks and bonds in TradeKing's Education Center, Bond Basics: A Beginner's Guide.)
The average growth on the stocks listed above has been in excess of 10% per year. Assuming 10% growth in the dividend, the yield on the investment would be 2.5% in the first year, 2.8% in the second year, 3.0% in the 3rd year, 3.3% in the 4th year and 3.7% in the final year. The total income generated would be higher, and there may be tax advantages as well. That said: remember past performance of a given stock is no guarantee of future results. That 10% growth streak may continue, but it may also grind to a halt tomorrow or flip to a loss.
The final element is that the value of the stock could presumably increase over time as well, but there is always the risk it could decline. Longer-term bonds offer higher yields but also offer considerable price risk in the event that interest rates rise. Again, I'd refer you to Bond Basics: A Beginner's Guide for more specifics.
So, hopefully I have given you a few candidates to consider if you agree that dividend-paying stocks might be a good income generator for your needs.
Remember, screening is only a first step. Before investing, you should do your own investigation to identify risks and potential opportunities.
Regards,
Alan Brochstein
Founder, Invest By Model and AB Analytical Services
TradeKing All-Star Commentator
Disclosure: Alan Brochstein is long is JNJ in Invest by Model portfolio.
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Alan Brochstein maintains a business relationship with TradeKing.
Any strategies discussed and examples using actual securities and price data are for educational and illustrative purposes only and do not imply a recommendation or solicitation to buy or sell a particular security or to engage in any particular investment strategy. In reading content in the Trader Network, you may gain ideas about when, where, and how to invest your money. Although you may discover new ideas or rationale that may be compelling, you must ultimately decide whether or not to put your own money at risk. Consider the following when making an investment decision: your financial and tax situation, your risk profile, and transaction costs.
Alan Brochstein maintains a business relationship with TradeKing.
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