This is a guest post from Ben Reynolds, founder of Sure Dividend. Sure Dividend is dedicated to high quality dividend growth stocks suitable for long-term investing using quantitative analysis.
There are 2,315 publicly listed stocks that pay a dividend on the stock screener Finviz. That is a lot of stocks to choose from! Obviously, you don’t have the time to analyze each business individually and determine its long-term investing merits. So what is a dividend growth investor to do? This article shows how to narrow down the investible universe of dividend growth stocks to find stocks suitable for long-term holdings.
What is a Dividend Growth Stock, Anyway?
I suppose technically any stock that has increased its dividend from the previous year is a dividend growth stock. When I think of a dividend growth stock, I think of businesses that have a history of raising their dividend payments year after year. I think the minimum amount of annual dividend increases to really be certain a company is committed to raising the dividend payment year after year is 5 years.
Looking only at businesses with 5 years or more of historical dividend increases greatly reduces the number of businesses to analyze, and gives you a view of only businesses that are committed to raising their dividends year after year. David Fish has an excellent (and free) spreadsheet that details many businesses with 5 or more years of dividend increases. All in all, there are 553 businesses with 5 or more years of consecutive dividend increases.
Demand Proof of a Strong Competitive Advantage
A company that has 5 years of consecutive dividend increases may not have a lasting competitive advantage. Five years is a relatively short period of time in the business world. The forces of creative destruction will eat up the margins of businesses that do not have lasting competitive advantages. It can be very difficult to identify companies with lasting competitive advantages beforehand.
One way to find businesses with lasting competitive advantages is to look for businesses that have proven they can thrive through a variety of economic, political, and competitive environments. The Dividend Aristocrats are a group of businesses that have increased their dividend payments for 25 or more consecutive years in a row. There are currently only 54 Dividend Aristocrats stocks due to the exacting standards for inclusion.
Many Dividend Aristocrats are household name stocks; companies like Coca-Cola, Wal-Mart, and McDonald’s (if you haven’t heard of these, you must live on mars). Not surprisingly considering the durable competitive advantages these businesses possess, Dividend Aristocrats have outperformed the market by 2.29 percentage points per year over the last decade. Dividend Aristocrats make excellent DRIP candidates as well.
Invest for Quality and Value
The Dividend Aristocrats index has performed very well over the last decade. Each individual Dividend Aristocrat should be analyzed based on its own merits. Of the 54 Dividend Aristocrat stocks, only 2 have dividend yields above 5% (AT&T and HCP,Inc.). There are several Dividend Aristocrats with dividend yields above 3%; companies like McDonald’s, Target, Clorox, and Chevron.
Instead of looking solely at yield, one can also look for undervalued Dividend Aristocrats based on their P/E ratios. In this analysis AFLAC is the cheapest Dividend Aristocrat, with a P/E ratio of just 9.45. AT&T, Chubb, ExxonMobil, and Chevron all have P/E ratios under 13, which is especially cheap in today’s market where the S&P500 has a P/E ratio over 19.
Pulling It All Together
Hopefully, some of the information in this article gives you a good starting point for finding high quality dividend growth stocks. Sure Dividend uses the 8 Rules of Dividend Investing to systematically rank 132 businesses with 25 or more years of dividend payments without a reduction over several quantitative metrics including yield, volatility, and growth. Investing in high quality dividend growth stocks is an excellent way to build your passive income over time, as these businesses tend to raise their dividend payments year after year because they have strong competitive advantages.