As income investors, we can get caught up in yields... almost to
a fault. But there is something else you should be studying that
could make just as big a difference to your long-term returns:
dividend
growth.
That's because dividend growth can make even lower-yielding stocks
into big income producers over time. Take a look below at the
income streams from a stock yielding 7% but not growing dividends,
versus a 5% yielder that hikes payments an average of 10% a year in
seven years. If you held 1,000
shares
trading at a $10 share price, then here is the income stream each
would produce during one year:
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In just five years, that 5%
yield
would actually be worth more than the 7% yield. And just two years
later, your income stream would grow to be 27% more than the stock
yielding 7%. Keep in mind, this doesn't take into account rising
share prices. If both yields stayed the same, then the share price
of the 5% yielder would have to grow to $17.72 -- a 77% gain.
Buying stocks that increase dividends allows you to take advantage
of one of the most powerful tools in the investors' arsenal -- the
wealth-building effect of
compounding
. And consistent dividend growth is like jet fuel for the
compounding engine.
But there are more advantages to companies able to consistently
grow dividend payments. One often overlooked "plus" is that they
tend to be safer investments. Dividends are a litmus test of a
company's true financial strength. Only companies able to grow
earnings
through good times and bad will commit to consistently raising
dividends. And these are the types of business that tend to see
more stability in their shares.
The best measure of their value is how dividend growers perform
over time. And the best proof lies in a special
index
created by Standard & Poor's, called the "
Dividend Aristocrats
." Every company on this list must have posted increased dividends
in each of the past 25 years.
According to S&P data, the Dividend Aristocrats have
consistently outperformed the broader S&P 500. The Dividend
Aristocrats fell only -22% during the 2008
market
crash, much less than the -37% decline for the S&P 500.
Moreover, the group rebounded 27% the following year, slightly
better than the 26% gain on the S&P 500.
As you would guess, the ranks of the Dividend Aristocrats are
exclusive -- only 42 of the 500 companies in the S&P made the
list this year (about 8% of the index). To hone in on the top
contenders for my
Dividend Opportunities
readers, I used this list of 42 companies as my starting point and
then looked at the eight companies that tend to raise payments the
fastest:
Pitney Bowes (
PBI
) | Yield: 7.6%
Pitney Bowes yields 7.6% and has recorded 29 consecutive years of
dividend growth. Its business is boring -- it makes postage meters
and mail processing equipment, but its dividend growth is anything
but. Dividends have grown an average of 10% a year since Pitney
Bowes began paying investors in 1982. The 2011 increase of about
1.4% was below average, but it did raise the annual payment to
$1.48 per share.
Cincinnati Financial Corp. (Nasdaq: CINF) | Yield:
6.1%
The only financial company that made this list is property/casualty
insurance provider, Cincinnati Financial. This company has raised
dividends 50 years in a row -- a wonderful half-century of
increasing payments. Dividend increases of late have slowed in line
with the overall economic outlook, but consider that in 1999 the
company paid just about $0.60 a share, compared to today's $1.60
annual rate.
Leggett & Platt (
LEG
) | Yield: 5.4%
Fixture and furniture manufacturer Leggett & Platt saw a
rebound in its markets and signaled confidence in its future
prospects in August 2010 by hiking the dividend 4% to a $1.08 per
share annual rate. Last month, the company reaffirmed its stance by
raising the dividend again to $1.12. The company boasts an
impressive track record of 40 years of dividend growth.
Johnson & Johnson (
JNJ
) | Yield: 3.6%
Johnson & Johnson's 3.6% yield isn't likely to "wow" you -- but
remember the example above when it comes to growing dividend
payments. The company has increased dividends 49 years in a row.
The last increase, announced in April, boosted the dividend by 6%
to a $2.28 annual rate.
Abbott Labs (
ABT
) | Yield: 3.7%
Drug manufacturer Abbott Labs has grown dividends for 39 years
running. Like Johnson & Johnson, it's another medical company
that doesn't pay a high "headline" yield, but it can grow payments.
In the past decade, dividend growth has averaged nearly 9% a year.
The last hike, in April, was a 9% increase. Abbot now pays a $1.92
annual dividend per share, up from just $0.74 in 2000.
Automatic Data Processing (Nasdaq: ADP) | Yield:
3.0%
Automatic Data Processing provides payroll processing services to
thousands of businesses nationwide. Even with unemployment now at a
high, this company has been able to hike dividends every year for
36 years straight. The last increase raised the payment by 6% to a
$1.44 annual rate. In the past decade, annual dividend growth has
averaged an impressive 12%.
McGraw-Hill (
MHP
) | Yield: 2.4%
You might not know it, but McGraw-Hill actually owns Standard &
Poor's, so it is only fitting this company makes S&P's Dividend
Aristocrats list. McGraw-Hill's ranking comes thanks to 38 straight
years of dividend growth. In the last decade, dividends have grown
an average 8% a year. The last dividend hike, in February, lifted
the annual rate to $1.00 per share.
PPG Industries (PPG) | Yield: 3.1%
PPG Industries is a relatively new member to the list, with "only"
26 years of dividend increases -- but it has paid 452 consecutive
dividends. This maker of sealants and window coatings last raised
dividends in May by two pennies per quarter to a $2.28 annual rate.
Action to Take -->
Before investing in any of the ideas above, I would want to examine
each in more detail, considering factors like business outlook and
financial strength. Still, the combination of dividend increases
and a solid yield makes this list an interesting starting point for
further research.
-- Carla Pasternak
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.