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:
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 +10% every year. If you
held 1,000 shares trading at a $10 share price, here is the income
stream each would produce over a year:
5% Yield + 10% Dividend Growth
In just five years, that 5%
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, 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
. And consistent dividend growth is like jet fuel for the
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
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
created by Standard & Poor's, called the "Dividend
Aristocrats." Every company on this list must that 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. 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 Dividend Aristocrats are exclusive
-- only 42 of the 500 companies in the S&P made the list this
year (about 8% of the index). I used this list of 42 companies as
my starting point and then looked at nine companies that were
raising payments the fastest:
Annual Dividend Growth Since 2000
|Pitney Bowers (
|Eli Lilly (
|Cincinnati Fin. Corp.
|Leggett & Platt (
|Johnson & Johnson
|Abbott Labs (
|Automatic Data Processing (
|PPG Industries (
Pitney Bowes (
Pitney Bowes yields 7.0% and has recorded 28 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 +10% a year since Pitney Bowes began
paying investors in 1982. The 2010 increase of about +1.5% was a
below average, but it did raise the annual payment to $1.46 per
Eli Lilly (
Healthcare is less impacted by recession than other sectors, so
it's no surprise to find multiple healthcare companies on the list
of dividend growers. Eli Lilly is a leading global drug maker and
has an uninterrupted record of roughly 40 years of dividend growth.
In the last decade, Lilly has grown its dividend +8% a year. The
company last increased the dividend by +3% to a $1.96 annual
payment in 2009, meaning a dividend increase is likely in the next
quarter if Eli Lilly wants to maintain its track record.
Cincinnati Financial Corp (Nasdaq: CINF)
The only financial company that made the list above is
property/casualty insurance provider, Cincinnati Financial. This
company has raised dividends 49 years in a row, setting the stage
for 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 (
Fixture and furniture manufacturer Leggett & Platt is seeing a
rebound in its markets and signaled confidence in its future
prospects in August by hiking the dividend +4% to a $1.08 per share
annual rate. The company now boasts an impressive track record of
39 years of dividend growth.
Johnson & Johnson (
Johnson & Johnson's 3.7% yield isn't likely to "wow" you -- but
remember the example above when it comes to growing dividend
payments. The company has increased dividends 48 years in a row.
The last increase, announced in April, boosted the dividend by +10%
to a $2.16 annual rate. [
Read my colleague Tom Hutchinson's take on JNJ
Abbott Labs (
Drug manufacturer Abbott Labs has grown dividends for 38 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, announced in February, was a +10% increase. Abbot
now pays a $1.76 annual dividend, up from just $0.74 in 2000.
Automatic Data Processing (Nasdaq: ADP)
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
35 years straight. The last increase raised the payment by +3% to a
$1.36 annual rate. In the past decade, annual dividend growth has
been an impressive +15%.
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 37 straight
years of dividend growth. In the last decade, dividends have grown
+7% a year. This includes the last dividend hike, announced in
January, to a $0.94 annual rate.
PPG Industries (
PPG Industries is a new member to the list, with "only" 25 years of
dividend increases -- but it has paid 448 consecutive dividends.
This maker of sealants and window coatings also stands out as the
only Dividend Aristocrat to raise dividends twice in the past year.
The last hike in July was by a penny per quarter to a $2.20 annual
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
-- Carla Pasternak
Carla Pasternak has nearly 30 years of income investing
experience, including serving as the Director of Research for
High-Yield Investing and High-Yield International. Read More...
Disclosure: Neither Carla Pasternak nor StreetAuthority, LLC
hold positions in any securities mentioned in this article.