Dividend growth stocks are a time-honored tool for building wealth. Implementing a dividend growth strategy begins with identifying well-managed companies that have solid balance sheets and steadily rising earnings. After all, what company would hike dividends if they anticipated future earnings would decline?
A major advantage of dividend growth investing is the likelihood of capturing some total return even if the share price stagnates. For instance, depending on the length of time held, dividends account for anywhere between 27% and 60% of the total return of the
While any dividend growth is better than no growth, the best scenario is a stock whose payout is actually accelerating; your yield on cost will rapidly rise, eventually overtaking and exceeding the yields of stocks with high but stagnant payouts.
Here's a look at 13 "Dividend Accelerators": a group of well-known dividend stocks that have recently ramped up their payout growth.
Steris
Market value: $9.7 billion
5-year dividend CAGR: 10.2%
Dividend yield: 1.2%
Steris (STE, $113.47) provides sterilization products and related services to hospitals, pharmaceutical makers and life science labs in more than 100 countries. Rising health care spending, heightened public awareness of the risks posed by hospital infections and greater regulatory scrutiny of sterile procedures in pharmaceutical manufacturing are all trends raising demand for the company's products.
Steris has generated an 8% compound annual growth rate in sales and 11% CAGR in earnings per share over the past decade. Acquisitions have boosted the recurring component of the company's revenues from 50% to 75% and created a more predictable cash flow stream for supporting double-digit dividend growth.
Steris' free cash flow grew 15% in 2017 and is guiding for 12%-14% EPS growth and 16% free cash flow growth this year. The company recently told investors that growing the dividend is a high priority -- and that should be easy to follow through with thanks to a modest 36% current payout ratio.
Steris' annual rate of dividend growth rose from 10.2% over five years to 10.5% over three years and 11% last year. If the company hits its goal of 12%-14% EPS growth in 2018 and maintains that payout ratio, dividends could increase at an even faster clip this year.
Group 1 Automotive
Market value: $1.3 billion
5-year dividend CAGR: 11.0%
Dividend yield: 1.6%
In the last five years, Group One has grown sales 5.7% a year and EPS 11% annually by expanding its global footprint via acquisition, launching its proprietary Val-U-Line brand of pre-owned cars, and ramping up its higher-margins parts and services operations.
During the first six months of 2018, revenue growth accelerated to 12% and EPS increased 29% year-over-year. In addition, the company amplified investor returns by repurchasing 5.5% of its share float. Faster EPS growth and a heighted focus on shareholders bode well for future dividend gains.
The annual growth rate for dividends has risen from 11% in the past five years to 11.5% in the past three. In addition, Group One has increased its dividend three times in the last eight quarters. Dividend payout is miniscule at just 9% of earnings and presents major opportunities for faster dividend growth.
Marine Products Corporation
Market value: $796.7 million
5-year dividend CAGR: 28.0%
Dividend yield: 1.7%
Powerboat sales have been rising steadily since 2011 and demographic trends are favorable as retiring baby boomers devote more time to hobbies like boating and fishing. Marine Product's peers are mostly smaller companies with too limited a geographic footprint to pose a competitive threat.
Products has produced 4.4% CAGR in sales and 5.2% CAGR in net income over the past two decades, but growth has recently accelerated. Revenues and profits improved by 10.8% and 25.3%, respectively, in 2017, and 15.4% and 45.9%, respectively, during the first six months of 2018.
The pace of annual dividend growth has increased, too, from 28% over five years to 32.6% in the most recent three years, including a 31% hike last year. Heightened EPS gains and a conservative payout (49% of earnings) set the stage for more payout expansion.
Hormel Foods
Market value: $20.8 billion
5-year dividend CAGR: 18.4%
Dividend yield: 1.9%
Jefferies analyst
Lear
Market value: $9.6 billion
5-year dividend CAGR: 26.7%
Dividend yield: 1.9%
Lear (LEA, $146.73) is a Tier 1 automotive supplier. The company manufactures automotive seating, electrical distribution systems and related sub-systems, components and software for automakers worldwide. Lear operates 257 production facilities in 39 countries and has invested more than $7 billion in its manufacturing capabilities over the past decade.
Lear has generated 7% annual growth in sales and 25% CAGR in profits over the past six years. And its return on capital (ROC) has improved from 14% to 19% in that time, ranking among the highest in the automotive sector. Growth reflects Lear's leadership position in the fast-growing crossover and SUV segments and its ability to offer the most complete capabilities of any seat or electrical systems provider.
Lear is ideally positioned to benefit from rising vehicle demand in emerging markets, which are expected to account for 90% of the industry's growth over the next five years. The company holds the top market share for automotive seating in
Lear has been able to convert 94% of its earnings to free cash flow, which has been invested in manufacturing facility expansion, acquisitions, share repurchases and the dividend. The company returns approximately 42% of cash to shareholders through dividends and is committed to doubling free cash flow over the next five years, boding well for the payout.
Lear's annual rate of dividend growth has accelerated from 26.7% in the past five years to 35.7% in the past three years and 50% last year.
Lear shares have a consensus analyst rating of "Overweight." In July, Morgan Stanley analyst
Cabot
Market value: $3.9 billion
5-year dividend CAGR: 9.7%
Dividend yield: 2.1%
Cabot (CBT, $63.40) is a specialty chemicals company with a 50-year track record of dividends. The company holds the top or No. 2 market share in rubber black (used in tire manufacturing), specialty carbons and cesium chemicals for drilling fluids.
In recent years, Cabot has moved manufacturing assets to
Cabot has expanded EPS 18% annually in the past three years and is committed to maintaining earnings growth above 10%, expanding free cash flow by 20% to 60% and returning half of its free cash flow to investors.
Accelerated EPS growth has caused Cabot's annual dividend growth rate to expand from 9.7% over five years to 13.9% in the past three years and 38% in 2017.
Cabot shares have a consensus analyst rating of "Overweight." Baird analyst
Assurant
Market value: $6.7 billion
5-year dividend CAGR: 23.5%
Dividend yield: 2.1%
Assurant (AIZ, $106.29) is a leading provider of specialized insurance products in
Last quarter, Assurant closed the acquisition of
Income (excluding catastrophic losses) rose 22% last year, and the company returned more than $510 million to shareholders through share repurchases and dividends. Over the past two years, Assurant has returned more than †$1.5 billion to shareholders. The company's income improved 34% year-over-year during Q2 2018, and the company is guiding for full-year earnings 20%-25% higher, fueled by contributions from the TWG acquisitions, a lower effective tax rate and $10 million of synergies.
Assurant's annual dividend growth rate has improved from 16.6% over 10 years to 23.5% over five years and 26.6% in the past three years. A low payout ratio of 29% supports any expectations of continued dividend growth.
Three analyst firms (
Northern Trust
Market value: $22.9 billion
5-year dividend CAGR: 6.4%
Dividend yield: 2.1%
The bank grew EPS 14% last year and 48% during the first six months of 2018. RoE, a key bank profitability measure, has been rising steadily from 9.3% in 2012 to 12.6% last year and 16% in the first half of 2018.
Goldman Sachs analyst
Manpower Group
Market value: $5.6 billion
5-year dividend CAGR: 19.5%
Dividend yield: 2.4%
Manpower generated 28% EPS growth last year on a 7% improvement in revenues. During the first six months of 2018, sales grew 13% year-over-year and EPS climbed 29%.
Argus analyst
Intel
Market value: $210.5 billion
5-year dividend CAGR: 4.6%
Dividend yield: 2.6%
Already the dominant player in microchips, Intel (INTC, $45.88) is successfully making the transition from a PC-centric business to one focused on big data and AI applications. The benefits of this shift are evident in Intel's financial performance. The company's data-centric segments, which include data centers, Internet of Things and programmable solutions, are expanding faster than all its other businesses combined. New products like its Nervana neural network processor for AI applications and Xeon scalable processors for data centers position Intel to capitalize on explosive growth in big data and offset a slowing PC market.
Contributions from Intel's data-centric businesses accelerated growth in sales (6%) and EPS (28%) last year, and 12% and 66%, respectively, in the first six months of 2018. The company is guiding for 11% revenue growth and 20% EPS growth this year. Free cash flow is forecast to rise 46% year-over-year and provide better than 3x dividend coverage.
Intel's re-energized performance has supported acceleration in the dividend growth rate from 4.6% over five years to 6.2% over three years and 10% this year.
In September,
Broadcom
Market value: $100.9 billion
5-year dividend CAGR: 44.6%
Dividend yield: 2.8%
Broadcom (AVGO, $246.45) has grown through acquisitions to a global leader in semiconductor connectivity solutions for the wired infrastructure, wireless communications and enterprise storage markets. The company recently acquired industry competitor
Broadcom has delivered 37% CAGR in revenues and 33% CAGR in EPS over the past five years as well as major margin improvements. These gains have amplified growth in free cash flow, which rose to $2.1 billion and 42% of revenues in the June quarter. Broadcom's policy of returning 50% of free cash flow to investors has supported annual dividend growth averaging 44.6% in the past five years and 53.4% in the past three years. The company is guiding for 72% dividend growth this year.
Leggett & Platt
Market value: $5.7 billion
5-year dividend CAGR: 4.4%
Dividend yield: 3.5%
Over the next three years,
Stifel Nicholas analyst
TransCanada
Market value: $36.7 billion
5-year dividend CAGR: 7.3%
Dividend yield: 5.3%
TransCanada (TRP, $40.27) owns one of
TransCanada has $28 billion of natural gas pipeline expansion projects underway in
While TransCanada has encountered many delays on its Keystone XL pipeline, the
TransCanada has an impressive dividend growth streak of 18 years. Meanwhile, the payout's expansion recently increased from 7.3% a year in the last five years to 9.2% a year in the past three years and 10.5% this year. With new pipeline expansion projects coming online, TransCanada expects dividend growth to accelerate to an 8%-10% annual range. The safety of the dividend is ensured by distributable cash flow that currently provides better than 2x coverage.
TransCanada has buy-equivalent ratings from 16 analysts and just three holds.