Combining Dividend Growth Investing with Value Strategies

hundred dollar billsDue to the relatively aggressive nature of my stock selection methods, I often tend to end up with my portfolio more heavily weighted towards small-cap, high-growth stocks. While the riskiness inherent to this class of securities is more often than not offset by above average share price appreciation (if bought at good value), it’s good to also have a portion of your portfolio allocated towards stocks that will exhibit less volatility and provide steady growth over the long term.

One way to accomplish this is to select a number of Dividend Growth stocks for inclusion in your portfolio. Dividend Growth stocks are those typically of older, large-cap, well-established companies that not only pay a dividend, but have also had a history of increasing the dividend annually over the past 10+ years. These stocks attract a different sort of audience from the investment community and provide the benefits of reduced volatility and an income stream even during times when the market is in a lull. More importantly however is the idea that because the company’s dividend increases every year, your yield-on-cost goes up every year as well. This means that buying a stock that yield’s just 2% today, might yield 10% on your cost to purchase the stock in the future. For this reason, dividend growth stocks are usually considered to be very long term investments, so that this benefit is maximized.

One of the best sources of information for dividend growth stocks is David Fish, who updates his list of Dividend Champions monthly. The list consists of all those stocks that have increased their dividend payments every year for the past 25 years or more. It also includes lists of those companies that have increase dividends between 10 – 25 years and also 5 – 9 years. The spreadsheet can be found on David’s DRiP Investing Resources website.

My goal is to identify those dividend growth stocks that meet the following criteria:

  • Current dividend yield of at least 2%
  • History of increasing dividends for at least the past 10 years
  • Payout ratio less than 50%
  • Positive EPS growth rate
  • Attractive valuation
  • Market capitalization of at least $5B

With these criteria in mind, I’ve selected ten stocks to add to the Stockodo watch list.

  1. ACE Limited (ACE) – An insurance holding company currently yielding 2.2% with a track record of increasing dividends annually for the past 20 years. With a payout ratio of just 25%, positive earnings growth, and a compounded dividend growth rate of 13% over the past 5 years, it meets our criteria. Despite trading at near 10-year highs, it’s currently trading at a PE ratio of 11.
  2. Chevron (CVX) – An oil & gas company worth $230B sporting a current dividend yield of 3%. Chevron has increased dividends for each of the last 25 years, yet has a payout ratio of just 27%. The company has grown dividends at a rate of 9% over the last 5 years, and CVX trades at a PE multiple of just 8.9 today.
  3. C.H. Robinson Worldwide (CHRW) – A $10B logistics company with a current dividend yield of 2.35% and a history of dividend increases over the past 16 years. Payout ratio is currently 38% and dividend growth has been 13% over the past 5 years. CHRW is currently trading at a PE ratio of 16.
  4. Cardinal Health (CAH) – A $16B healthcare services company with a current dividend yield of 2.6%. CAH has increased dividends for each of the past 17 years and has a current payout ratio of 33%. Dividends have grown at a rate of 24% over the past five years, but has slowed down to just 10% last year. Cardinal Health currently trades at a PE of 12.
  5. Caterpillar (CAT) – A manufacturer of heavy mining/construction equipment with a market cap of $57B and dividend increases in each of the last 19 years. CAT currently yields 2.4% and has a payout ratio of 25%. Dividends have grown at 8% over the past 5 years and CAT currently trades at a PE multiple of just 10.
  6. Deere & Company (DE) – Manufacturer of John Deere farm equipment, currently valued at $33B and yielding 2.4%. Deere has increased dividends for the past 10 years and has a payout ratio of 26%. Dividends are growing at a rate of 8% per year and DE trades at a PE ratio of 15 currently.
  7. 3M (MMM) – A conglomerate currently valued at $73B and yielding 2.4%. 3M has increased dividends for the past 55 years and has a payout ratio of 40%. Dividends are growing at a rate of only 5-7% per year and 3M trades at a PE multiple of 17.
  8. Praxair (PX) – A specialty chemical company with a market capitalization of $33B and a dividend yield of 2.1%. PX has increased dividends for the past 20 years and achieves a dividend growth rate of 12% per year. Praxair’s payout and PE ratios are currently 43% and 20 respectively.
  9. Teva Pharmaceutical (TEVA) – An Israeli pharmaceutical manufacturing company with a focus on generic drugs. TEVA is currently valued at $34B, yields 2.6%, and has increased dividends for the past 13 years. Dividend growth rate has ranged between 15% and 22% over the past five years and TEVA trades at a PE multiple of 18 currently.
  10. Walgreen Company (WAG) – A retail drugstore chain with a market capitalization of $45B and a dividend yield of 2.3%. Walgreen has been growing dividends for the past 37 years and at a high rate in the recent past. Dividends have been growing at a 23% rate compounded over the last 5 years. WAG currently trades at a PE ratio of 21.
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5 thoughts on “Combining Dividend Growth Investing with Value Strategies

  1. […] I mentioned earlier this week, I am in the process of adding some long term dividend stocks to my portfolio in an effort to reduce the volatility arising from the growth stocks I own. After […]

  2. […] few months looking for a good opportunity to initiate a position. I’ve been searching for high quality dividend stocks to add to my portfolio to provide an income stream and reduce volatility. CAT has been beaten down […]

  3. […] I am going to look at how a Dividend Growth Investment strategy can turn that 2% dividend yield into a much more substantial yield on cost. For those new to these […]

  4. […] been devoting my stock research towards dividend stocks recently, or more specifically dividend growth stocks. I am focusing on companies that have a long history of increasing their dividends year after year. […]

  5. […] manage their portfolio for them. An alternative however is a passive investment strategy such as Dividend Growth Investing, which I have recently discussed here on Stockodo and have devoted a portion of my portfolio […]

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