In addition, I look at four other metrics that individually may not be as important as the above, but collectively provide great insight into the potential success of a stock as a dividend investment. Here are the four other key metrics that I look at when evaluating a dividend stock:
I. Dividend Growth Rate:
The dividend growth rate is a key metric in many calculations. As such, I use a conservative estimate as follows: The minimum dividend growth rate of the 1, 3, 5, 7, 10 year compound annual growth rate or 15%, if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history. You can see how this is calculated in my D4L-PreScreen.xls model. This metric is True if the dividend growth rate is 12% or above.
II. Years of Div. Growth:
Years of consecutive dividend growth. How long a company has increase its dividend is a strong indication of how committed the company is to continue doing so in the future. This metric is True for 15 or more years.
III. Rolling 4-yr Div. > 15%:
Dividends will double every 5 years if they grow by 15%. This test is True if dividends grew on average in excess of 15% for each consecutive 4 year periods, within the last 10 years of history.
IV. Years to >MMA:
The number of years until dividend earnings exceed the earnings from a hypothetical money market account earning an average 20 year Money Market Account rate. This rate is validated by looking at a 20 year Treasury rate. This metric is True if the number of years is less than 5.
When taken together, these are tough metrics. Of the 259 stocks that I currently follow, only three had all the above metrics true. They were:
Church & Dwight Co. Inc. (CHD) is a manufacturer and marketer of a broad range of household, personal care and specialty products under various brands such as Arm & Hammer, Oxiclean, Orajel, Trojan and Spinbrush sells its products in the U.S. and certain foreign countries.
- Yield: 1.8%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 18
Target Corp. (TGT) operates nearly 1,800 Target, SuperTarget and CityTarget general merchandise stores across the U.S. and about 130 stores in Canada.
- Yield: 3.3%
- Dividend Growth Rate: 20.0%
- Years of Div. Growth: 47
Walgreen Co. (WAG) is the largest U.S. retail drug chain in terms of revenues, this company operates more than 8,000 drug stores throughout the U.S. and Puerto Rico.
- Yield: 2.2%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 39
Of the remaining companies only nine had three of above metrics true. The two with yields over 2% were:
International Business Machines Corp. (IBM) global offerings include information technology services, software, computer hardware equipment, fundamental research, and related financing. See full analysis here.
- Yield: 2.3%
- Dividend Growth Rate: 13.5%
- Years of Div. Growth: 19
- Rolling 4-yr Div. > 15%: False
- Years to >MMA: 3
Helmerich & Payne, Inc. (HP) is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor.
- Yield: 3.0%
- Dividend Growth Rate: 20.0%
- Years of Div. Growth: 42
- Rolling 4-yr Div. > 15%: False
- Years to >MMA: 1
These metrics focus on compound dividend growth, which is highly important for the successful investor in dividend growth stocks. In my dividend analysis worksheet, a company will earn a Star if two of the above metrics are True.
Full Disclosure: No position in the aforementioned securities. See a list of all my dividend growth holdings here.
Related Articles
- 13 Dividend Growth Stocks With A Good Yield/Growth Mix
- High Yield, High Risk Dividend Stocks
- Dividend Stocks vs. Dividend ETFs
- If Only I Had Known About These Dividend Stocks...
- 10 Dividend Stocks Delivering The Secret To Success
(Photo Credit)
This article was written by Dividends4Life. If you enjoyed this article, please subscribe to my feed [RSS] or have future articles emailed to you [Email].
