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 200+ stocks that I currently follow, only three had all the above metrics true. They were:
The TJX Companies Inc. (TJX) operates several chains of off-price apparel and home fashion specialty stores in the U.S., Canada, Germany, Poland, Ireland, and the U.K.
- Yield: 1.7%
- Dividend Growth Rate: 20.0%
- Years of Div. Growth: 21
Lowe's Companies, Inc. (LOW) sells retail building materials and supplies, lumber, hardware and appliances through more than 1,850 stores in the U.S. and Canada.
- Yield: 2.1%
- Dividend Growth Rate: 17.1%
- Years of Div. Growth: 55
Microsoft (MSFT), the world's largest software company, develops PC software, including the Windows operating system and the Office application suite.
- Yield: 2.3%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 15
Hormel Foods Corp. (HRL) is a multinational manufacturer and marketer of consumer-branded food and meat products.
- Yield: 2.2%
- Dividend Growth Rate: 16.3%
- Years of Div. Growth: 51
Phillips 66 (PSX), spun off from ConocoPhillips in 2012, is one of the largest independent refiners and marketers of petroleum products in the U.S.
- Yield: 3.1%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 17
Cracker Barrel Old Country Store (CBRL) develops and operates the Cracker Barrel Old Country Store restaurant and retail concept in the United States.
- Yield: 3.3%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 15
Helmerich & Payne, Inc. (HP) is the holding company for Helmerich & Payne International Drilling Company, an international drilling contractor.
- Yield: 2.7%
- Dividend Growth Rate: 15.0%
- Years of Div. Growth: 45
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: Long MSFT, CBRL. See a list of all my Dividend Growth Portfolio holdings here.
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