Selecting Great Dividend Growth Stocks

Where To Start Your Research

When starting your research for dividend growth stocks, much of the work has already been done for us.  We just need to know where to find it!

Start out by reviewing the Dividend Aristocrats or Dividend Achievers lists to identify a broad category of stocks that have consistent dividend growth.

Once you have identified a list of stocks using the dividend achievers list, it is time to narrow it down to a few of the best dividend growth stocks.

Sector Selection

A general rule of thumb for dividend growth investors is to select one or two stocks in different sectors, such as insurance, utilities, financials, telecom, etc., with the higher than average dividend yield and a recent dividend increase.

Many dividend growth investors will require that the dividend increase be within the past year, the more recent the better. Dividend growth investors are of the philosophy that an increase in a company’s dividend means that the company is healthy and its future prospects are solid. Therefore, the amount that the dividend is increased should also be taken into consideration.

Dividend Growth Rate

The amount that a dividend is increased on a year to year basis is called the dividend growth rate. The philosophy of dividend investors is that the higher the dividend growth rate, the higher the prospect for the stock to increase in value.

For instance, Sun Life Financial (SLF) has a dividend growth rate of approximately 20% over the past 5 years. Over that same time, the stock has doubled in value from $20.00 per share to over $40.00 per share. If you had purchased Sun Life Financial 5 years ago at $20.00 per share, with the current dividend rate of $1.07, your yield on the purchase price would be 5.4%.

Not only would one be receiving these healthy dividends this year, but one could reasonably expect to get a 20% raise next year!

This is the basis of dividend growth investing; to produce consistent and inflation hedged income.

Due to the fact that the dividend growth rate can play such a significant factor in the future value and income potential of the stock, it is suggested that the investor find a middle ground when choosing stocks for a dividend growth portfolio.

The middle ground should consist of:
1.) A reasonable current yield, compared to its peers and itself historically.
2.) A recent dividend increase combined with increased earnings
3.) A high dividend growth rate compared to the industry.

Stocks selected from Mergent’s Dividend Achievers that display these factors should provide a great starting point to a dividend growth portfolio.

With the recent turmoil in the markets, now is an especially great time to search for financial services companies and banks that have strong balance sheets and are well capitalized.  Consumer staples and health care stocks are also viewed as potential safe havens and opportunity stocks in this type of market.

I’d be happy to hear any comments or questions regarding this strategy and I hope to have more detailed information up here in the near future.

22 comments

  1. Golfer,
    You can get a list of the companiy’s included in Mergent’s dividend achiever list at their website dividendachievers.com.
    There is a list of Dividend achiever indicies on the left hand side of the home page. Simply select the index and you will be able to access the companies included in that index.

  2. I must say it was well worth the wait – a great read!

    Are they planning to induce your wife soon. I know she must be miserable, and as they say ‘when mama is not happy, no ones happy.’

    Best Wishes,
    D4L

  3. Hi Tyler! I sent you an email, but I thought it would be better to post here so everyone could have the benefit of your answer.

    Anyway, I was wondering what you think about stock selection services such as Motley Fool’s Income Investor? They do all the “heavy lifting” as far as research and selecting the strongest dividend paying companies. From my understanding, unless you REALLY know what you’re looking for, it’s easy to buy a bad company – even if they do pay great dividends.

    Good luck with the pregnancy!!!

  4. One other quick question along these same lines…

    Do you have any thoughts/recommendations for buying mutual funds/ETF’s vs. individual company stocks?

    I know it is riskier buying individual companies, unless you are able to spread your purchases out over several. How many individual stocks do you typically hold?

    It would be cool to see a post showing how you are allocated (mutual funds, ETF’s, individual stocks) percentage-wise across your various accounts.

  5. @ D4L – It’s SOOO true that noone’s happy unless Mom’s happy!

    @Dave – I’ve been toying with the idea of posting my portfolio. I’m having a hard time deciding between showing it and not. I’d like my privacy, but at the same time I also need to prove that I’m following my own advice!
    What do you guys think would be a good way to show my portfolio strategy?

  6. Tyler:
    Straightforward, I like it. I for one would be interested in what stocks this translated into for you and invite discussion on it.

    RickT

  7. Pingback: Contrarian Finance
  8. Also important are:

    1) The payout ratio – this is the portion of earnings used to pay dividends. A low portion of earnings paid as dividends (no more than 40% for most companies) indicates a sustainable dividend and prospect for growth from reinvested profits.

    2) The economic moat of the company in question – this is the company’s ability to protect high returns on capital from encroaching competitors; a ROIC of 15% with a large moat to protect those returns is a combination that will build wealth for the shareholder

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