Suppose you were a job hunter presented with two options: a position offering a flat $50,000 per year with no pay hikes or one starting at $40,000 with a guaranteed 10% raise each year.
If you were only a year away from retirement, the first option would make more sense. But for those with a bit longer to go, option number two would be the better deal. Not only will your paycheck grow each year, but it will do so by an increasing amount -- $4,000 after the first 12 months, $4,400 after the next 12, and so on.
After just five years, you would be pulling down about $64,000 per year. And if the base compensation alone didn't sway you, what if I also mentioned that the second job offer was from a prosperous growing company that also offered nice incentives such as generous 401(K) matching? I'm guessing that would only reinforce your decision.
If this simple analogy makes sense, congratulations -- you're already a step ahead of the yield-hungry crowd and that much closer to financial independence.
If you haven't guessed, this exercise is one that investors face all the time: Do you choose the juicy (but static) 7% yield or the modest (but faster-growing) 3-4% payout?
The immediate gratification of a higher current yield can be tempting, no doubt. But as we saw in the scenario above, it pays to think ahead -- sustained dividend growth of 10% or better can ultimately put far more cash in your pocket over the long haul. Plus, buying stocks based strictly on current yield is a bit like judging books by their cover – usually unwise and often deceiving.
Instead, your time would be much better spent evaluating where future distributions are headed -- based on cash flow projections, payout ratios, capital expenditures and other key factors. After all, one quarter's dividend isn't nearly as important as the cumulative income that will be thrown off over the next five years.
Let's consider an example from my High-Yield Investing premium newsletter portfolio.
I first recommended Brookfield Infrastructure Partners (NYSE: BIP) in December 2011. At the time, the stock was trading at a split-adjusted $17.33 and offered a quarterly dividend of $0.233 per share ($0.93 annually) for a yield of 5.3%.
That was a decent payout -- but not in the market's upper echelon at the time. Many skipped right past it without a second glance. But forward-looking investors saw a bright future unfolding.
Brookfield owned an eclectic mix of railways, marine terminals, electricity transmission lines and other infrastructure assets, most of which generated reliable fees under take-or-pay contracts (whereby customers paid a base rate to guarantee space, regardless of whether they used it). More important, management had budgeted $1 billion in capital for expansion projects over the next 24 months. That money was reinvested into new assets (such as South American toll roads) that drove cash flows forward. And Brookfield's stated policy was to distribute 60% to 70% of its profits back to stockholders. As you can see, distributions have marched steadily higher over the years.
Thanks to years of steady growth, my subscribers and I are now collecting an income stream on our initial investment (or Yield-to-Cost) of 11.6%. Better still, the strengthening bottom line has led to share price growth of more than 100% to the current $43 -- netting my readers a total return of 234%.
Let's Find The Market's Best Dividend Growers
With all this in mind, today's screen shines the spotlight on an elite group of stocks with the most impressive dividend growth trajectories. To make sure this growth streak remains intact, I eliminated those with weak earnings outlooks or dangerously high payout ratios.
Here are the finalists...
I think you can make an argument for all of the names on this list. I even currently hold three of these stocks in my newsletter portfolios.
But perhaps the one that stands out from all the rest is Texas Instruments (NYSE: TXN). The stock currently offers a rather ordinary yield of 2.6% -- but just wait... The quarterly distribution has already doubled to $0.68 from $0.34 and continues to rise. The latest increase was a hefty 24% bump to $0.77 per share. I'm confident this streak will continue.
TI is a premier semiconductor design and manufacturing company, primarily specializing in analog chips used in a wide variety of applications. The biggest sources of demand are the automotive and industrial fields, but the firm's products can be found in everything from smartphones to medical devices to aerospace equipment.
Thanks to manufacturing efficiencies, TI ranks in the 91st percentile in free cash flow (FCF) generation. Management typically aims to produce between 25 and 35 cents of FCF for every dollar of revenue. It met that goal and then some last year, generating $6.1 billion in free cash flow from $15.8 billion in revenues, a ratio of 38.6%. And this shareholder-friendly business returns every last penny of cash flow to shareholders. That helps explain why distributions have increased for 15 consecutive years (at an impressive 20% compounded annual growth rate). And we're still in the very early innings of the internet of things (IoT) revolution, where billions of household and industrial devices are becoming internet-connected and reliant on analog sensors to process data.
This tailwind should keep dividends moving briskly forward.
Action To Take
As always, the securities in the table above haven't been fully researched and shouldn't necessarily be considered portfolio recommendations. They simply meet certain criteria that make them worthy of closer consideration. But as screens go, this one undoubtedly removes a lot of the guesswork. We know these are proven businesses generating ample cash flows and sharing generously with stockholders. That's true of most dividend growers – but these have all doubled (or more) their payouts since 2014.
While Texas Instruments is the standout on this list, I doubt you could go wrong with any of the names in this list. It just goes to show that you can still find great income stocks -- even in this low-rate environment.
My staff and I over at High-Yield Investing are here to help... Every month, we're finding yields of 5%, 7%, 9% and higher -- without compromising safety. To learn more about our research, go here now.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.