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When it comes to dividend stocks, there are many ways to evaluate them, because there are many types of investors looking for many different things.
One investor might only care about yield. Another investor might just care about stability in the payout, even if it doesn’t throw off much income. When it comes to dividend stocks, I care about several things — and among them is dividend growth.
I like to look for dividend stocks that are growing earnings quickly. On top of that, I want companies with low payout ratios — how much the dividend is as a percentage of earnings — because that indicates that there’s room for more, and generous, dividend increases along the line. And, of course, you want to examine which dividend stocks are growing their payouts on a regular basis.
Dividend growth is a good signal that a company is either growing cash flow or has stable enough cash flow that it can increase its payout ratio. That speaks to long-term health of a company as well, so you get your security too.
The following is a list of seven dividend stocks whose payouts grow like weeds. Depending on things like your risk tolerance and how much yield you need up front, some of these stocks might be for you, and others might not. This is a place to begin your research so you can make the right decision for the investor that matters — you.
Prices and data are from the original InvestorPlace story published on March 16, 2017. Click on ticker-symbol links in each slide for current prices and more.
By Lawrence Meyers
| March 2017
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
Dividend yield: 2.9%
Genuine Parts Company operates in one of my favorite spaces; parts of every kind. Everything breaks, so everything needs parts. And while you might know it because of its Napa line of automotive parts, it actually helps replace much more than that. GPC features brands for industrial parts, electrical parts and even office supplies.
This is an incredible story stock, too.
For almost every one of the last 66 years, Genuine Parts has increased sales. It also has increased its profit in about 90% of the last 55 years.
But the growth metric we all care about most right now is the dividend. On that front, the payout has grown in each of the past 60 years, putting it in the ranks of our dependable dividend stocks. And GPC’s dividend has grown by about 7% annually over the past 10 years.
Genuine Parts has been, and remains, a classic long-term stalwart play.
Dividend yield: 1.9%
I would never have expected Hormel Foods Corp. to make this list of dividend stocks, but it does in fact have a pretty solid track record of distribution growth.
And it makes sense, when you think of it. Hormel has been around for much longer than many might realize — 125 years. People tend to make the mental connection between Hormel and its namesake brand, as well as Dinty Moore and SPAM, but Hormel’s also behind things like Skippy peanut butter, Muscle Milk and Jennie-O turkey bacon and turkey burgers.
So while a bit more than half of Hormel’s sales are in meat products, the rest are all shelf-stable goodies and poultry. Profits haven’t skipped a beat, however, with full-year earnings jumping nearly 30% to $890 million.
HRL sports a free cash flow payout ratio of about 29%, which is incredibly low and conservative. Meanwhile, Hormel has grown its dividend at an astonishing CAGR clip of 14% over the past 10 years.
And this is a great example of why this matters. Yes, investors would be sitting on a yield of slightly below 2% at current prices. But investors who bought in 10 years ago — when the company’s 3.75-cent quarterly payout represented just a 1.6% yield — are now enjoying a yield on cost of more than 7%!
Lowe’s Companies, Inc. started shelling out a dividend when it went public in 1961, and it has never looked back, even increasing it over each of the past 54 years.
One of the reasons for Lowe’s success, as far as dividend stocks go, is that, like GPC, it traffics in much-needed supplies. There are so many projects around the world that require tools and accessories, and LOW provides them, with cheap pricing and a massive footprint.
That trend isn’t going anywhere, either. Revenues have been on a gentle upward slope for years, including in 2016, when full-year revenues of $59.1 billion were up 5% on a year-over-year basis.
Also encouraging is its performance of late against rival Home Depot Inc (HD), which does have the all-time growth rate lead. Lowe’s has popped 18% for the year-to-date, versus a still-strong 11% return for HD shares.
While the sub-2% yield isn’t exactly high, Lowe’s is working on that vigorously, charging the dividend 25% higher last spring. Moreover, the dividend only represents less than 30% of free cash flow.
Dividend yield: 2.5%
As conglomerates around the world sputter and struggle, 3M Co. keeps on trucking.
As one of the premier dividend stocks that has a 50% payout ratio, MMM has managed to grow dividends at a 10-year compound rate of 9%. That includes a 6.3% payout hike this February. And if MMM ups the payout in 2018 — and there’s no reason to think it won’t — that’ll mark the 60th consecutive year of annual dividend hikes.
One of the primary reasons for this growth is that MMM has long been able to achieve very high returns on invested capital. That means it not only has a strong and durable business, but one that survives even tough times like the financial crisis. But that’s exactly what you would expect from a company that boasts an exceedingly diverse product line that includes everything from Post-It Notes to window insulation to cardiology stethoscopes.
3M also has paid close attention to its balance sheet, which is astonishingly efficient considering its size.
Dividend Yield: 2.7%
You have to know that if we’re discussing dividends stocks with strong dividend growth, we are going to land on an insurance company.
Cincinnati Financial Corporation has been around for more than 65 years, and is a full-service insurance shop. While it offers your typical array of individual insurance solutions — home, auto, life and the like — it also provides loss control and other products to businesses, including leasing services.
OK, no matter how you put it, Cincinnati Financial is boring. But its dividend growth isn’t.
CINF has been able to improve its dividend for 57 consecutive years now, including a 4% hike to 50 cents per share earlier this year. Cincinnati Financial has been able to grow its dividend because it has one of the lowest loss rates among insurers. Its size also gives it pricing advantages, and the ability to spread risk more efficiently, to generate cash flow.
Cincinnati Financial’s 10-year CAGR for dividends is 6.7%.
Dividend Yield: 2.2%
A kind of catch-all fluids company, Dover Corp. has four primary areas that it operates in: energy, engineered systems, fluid, and refrigeration/food. Essentially, anything that moves fluid around, right down to compression systems and bearings and clamps and such, Dover is the place to go.
I’m particularly interested in Dover’s refrigeration and food equipment business. A growing U.S. and global population simply means more demand for food, and that means increased demand for the various solutions Dover has to offer, from commercial freezers to can and plastic container production to food prep equipment.
Dover has always been judicious about its payout ratio, which sits at about 38% of free cash flow. That has permitted DOV to grow its dividend in a fairly healthy manner. From 2013’s payment of 37.5 cents per quarter to this year’s 44 cents per quarter, that’s 17% growth.
Dividend yield: 3.5%
On the one hand, The Coca-Cola Co. offers a lot of what you want in a dividend growth stock.
For one, KO has improved its distribution for 55 consecutive years, which includes a 5.7% bump from earlier this year. Moreover, KO is actually the highest yielder on this list at 3.5% — that’s a good enough yield for people to consider for long-term buy-and-hold purposes even without the promise of outstanding dividend growth going forward.
Still, I have a few qualms.
KO has long targeted a free cash flow payout ratio in the 55%-65% range, and it continues to deliver on that target. However, it hit almost 88% this past year.
I’m not concerned about a dividend cut because operating cash flow was down in FY16. But broadly speaking, Coke’s concentration in sugary drinks — and the lack of a snacks business like Pepsico, Inc. (PEP) — makes it increasingly vulnerable in an era of more healthy eating.
There’s no denying Coke’s amazing free cash flow and its strong balance sheet, and Coca-Cola has made strides to try to diversify its business into other areas, such as water, which surpassed soda in American consumption last year.
But KO stock still is worth a mention because it might be undervalued — if it can get its act together.
This article is by Lawrence Meyers of InvestorPlace. As of this writing, did not hold any of the aforementioned securities.
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