Dividend Growth Stock Investing: Five Dividend-Paying Investments to Consider
by Dr. Mark Skousen, Chairman, Investment U
Wednesday, November 01, 2006: Issue #600
What do beer, cigarettes and drugs have in common?
If you said “vices,” you’re wrong.
Blue chip companies have all adopted a superior shareholder benefit program that investors seem to love. It’s called “Dividend Growth” – a policy of increasing their dividend over time.
And, for investors, the idea of Dividend Growth Stock Investing is spreading like wildfire
The following mature companies all raise their dividend every year, or almost every year:
| Beverage Companies | Anheuser-Busch Companies Inc.(NYSE: BUD) |
| Coca-Cola Bottling (Nasdaq: COKE) | |
| Cigarette Manufacturers | Altria Group, Inc. (NYSE: MO) |
| Reynolds American, Inc. (NYSE: RAI) | |
| Pharmaceuticals | Johnson & Johnson (NYSE: JNJ) |
| Merck (NYSE: MRK) | |
| Bristol-Myers Squibb (NYSE: BMY) | |
| Financials | SunTrust (NYSE: STI) |
| Citigroup (NYSE: C) | |
| Wachovia (NYSE: WB) | |
| Bank of America (NYSE: BAC) | |
| Giant Retailers | Wal-Mart Stores (NYSE: WMT) |
| Target (NYSE: TGT) | |
| Costco (Nasdaq: COST) | |
| Best Buy (NYSE: BBY) | |
| Big Oil | Exxon Mobil (NYSE: XOM) |
| Chevron (NYSE: CVX) |
Since dividend paying stocks have to come out of earnings, companies that adopt this strategy tend to start out conservatively. The payout ratio is typically 25% or less. But some large-cap blue chip stocks are paying out more than 50% of earnings in dividends.
The yield in dividend growth companies varies dramatically – from a low of 1% or less, such asAIG (NYSE: AIG), to more than 10%, such as Thornburg Mortgage (NYSE: TMA).
Some companies have been increasing their annual dividend for 40 years or more:
- 3M Company (NYSE: MMM) in St. Paul, Minnesota
- Coca-Cola in Atlanta, Georgia
- Colgate Palmolive (NYSE: CL) of New York, New York.
But here’s the question:
Can the Dividend Growth Stocks Strategy Help Investors Beat the Market?
Some investment advisors swear by dividend growth as the technique for conservative investors.
Lowell Miller, who heads up the money management firm of Miller/Howard Investments, is so taken with the idea that he’s written an entire book on it called The Single Best Investment: Consistently Creating Wealth with Dividend Growth.
He states, “Dividend growth is real. Neither dividends nor dividend growth are some propaganda from the company, nor some hype from a brokerage firm or newsletter writer, nor some error of judgment by a finance magazine.” He calls dividend growth investing “sensible, easy, and profitable,” offering solid returns with the lowest possible risk.
Why? Because companies that increase their dividend are constantly under pressure to perform well and earn a profit every year. If they start losing money, the board of directors will be forced to do something they hate to d decrease or suspend the dividend. Most avoid it like the plague, in part because it would mean a sharp selloff in the stock. And because most executives are paid today in stock options, the worst thing that could happen would be a bear market.
Most dividend growth companies have done well over the year. But there’s no guarantee it will keep a company out of trouble. Ford had an income growth plan, reaching 30 cents a share per quarter by 2001- and then suddenly had to cut its dividend in half. It’s now down to 5 cents a share.
How Investors Can Profit from Rising Dividends
You can either buy dividend growth stocks, such as in the above listing, or buy a rising dividend fund or ETF. Rising dividend stocks have become so popular that new “rising dividend” mutual funds and ETFs are coming out every year.
The oldest fund is the $1.8 billion Franklin Rising Dividend Fund (FRDPX), begun in 1987. New ones include the Ave Maria Rising Dividend Fund (AVEDX) and the Dividend Growth Rising Fund (ICRDX). And Vanguard recently began an ETF: Vanguard Dividend Appreciation (AMEX: VIG).
Franklin’s fund is ranked three stars by Morningstar, and has a low yield of only 0.95%. Even Ave Maria and Dividend Growth funds yield only 1%. It’s too early to tell how well Vanguard’s VIG is doing.
My favorite ETF is Morningstar’s Dividend Leaders Fund (AMEX: FDL). It’s weighted toward mega-cap companies that pay hefty dividends with above average growth potential. I noticed that its top 10 holdings are all rising dividend stocks. FDL has low volume, but is attracting interest. Its yield is 3.6%, and so far, the fund is beating the market with less volatility.
Take a look in the following chart…
Good investing, AEIOU
Mark
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