I know very little about hockey, but I have always loved this quote. It can be applied to so many things in life, including investing. Just as Gretzky has a vision as to where the puck is going, investors need to have a similar vision, and not get caught up on short-sighted distractions. Investing in dividend growth stocks requires a long-term vision. It is easy to run a screen and find stocks that are paying a 15% yield today; but how long will they be able to sustain it? Instead  you may want to skate to where the future 15% yielders are going to be. To do that, here are some things you need to know…

Tracking Yield On Cost

Yield-on-cost (YOC) is simply Current Annual Dividend dividend by Original Cost Per Share. YOC not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). However, as a dividend growth investor, my primary focus is on dividend growth and since my desired holding period is forever, capital appreciation is little more than an interesting side note. YOC is much better suited for tracking dividend growth since it is individually tied to a stock and takes into account all the variations of growth rates over time, along with the timing of purchases. Also, it is useful when trying to explain to our income investor brethren why we chose the stock yielding 3% over ‘Amalgamated Risk’ at 8%.

My D4L-Data model includes projections of YOC after 5, 10, 15 and 20 years. These projections are derived by growing the current yield using the dividend growth rate. As for the dividend growth rate, I use the minimum of the 1, 3, 5, 7 or 10 year compound annual growth rates; or 15% if in every consecutive 4-year period dividends grew on average in excess of 15%.

15 Dividend Stocks With A 15% Yield In 15 Years

Sorting the stocks in my D4L-Data model by their 15 Year YOC and throwing out some bad apples, we are left with these 15 stocks that are projected to have a 15% YOC in 15 years:

T. Rowe Price Group Inc. (TROW) operates one of the largest no-load mutual fund complexes in the United States.
Yield: 1.8% | Growth: 15.0% | 15 Year YOC: 15.0%

Cardinal Health Inc. (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.
Yield: 1.8% | Growth: 15.0% | 15 Year YOC: 15.0%

Owens & Minor Inc. (OMI) is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.
Yield: 2.4% | Growth: 13.2% | 15 Year YOC: 15.6%

Praxair Inc. (PX) is the largest producer of industrial gases in North and South America, and the second largest worldwide. It also provides ceramic and metallic coatings.
Yield: 2.0% | Growth: 15.0% | 15 Year YOC: 15.9%

Aflac Incorporated (AFL) provides supplemental health and life insurance in the U.S. and Japan. Products are marketed at worksites and help fill gaps in primary insurance coverage. Approximately 80% of earnings comes from Japan and 20% from the U.S.
Yield: 2.3% | Growth: 15.0% | 15 Year YOC: 18.2%

Stryker Corp. (SYK) makes specialty surgical and medical products such as orthopedic implants, endoscopic items, and hospital beds.
Yield: 1.2% | Growth: 20.0% | 15 Year YOC: 18.6%

Casey’s General Stores Inc. (CASY) has over 1,500 convenience stores in the Midwest, selling food, beverage, health and automotive products.
Yield: 1.3% | Growth: 19.8% | 15 Year YOC: 19.4%

Weyco Group, Inc. (WEYS) distributes, wholesale & retail, men’s branded footwear in the U.S., Canada, Europe; it offers casual footwear, dress shoes and accessories under Florsheim, other brands.
Yield: 2.6% | Growth: 15.0% | 15 Year YOC: 21.0%

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: 1.7% | Growth: 18.5% | 15 Year YOC: 21.7%

Nucor Corporation (NUE) is the largest minimill steelmaker in the U.S., Nucor has one of the most diverse product lines of any steelmaker in the Americas.
Yield: 3.1% | Growth: 15.0% | 15 Year YOC: 25.5%

McDonald’s Corporation (MCD) is the largest fast-food restaurant company in the world, with about 32,500 restaurants in 117 countries.
Yield: 3.2% | Growth: 15.0% | 15 Year YOC: 26.1%

ConocoPhillips Co. (COP) is the fourth largest integrated oil company in the world, and the second largest in the U.S.
Yield: 3.3% | Growth: 15.0% | 15 Year YOC: 26.6%

People’s United Financial Inc. (PBCT) provides a full range of banking and financial service products to individuals, corporations and municipal customers in the U.S. Northeast.
Yield: 6.0% | Growth: 11.3% | 15 Year YOC: 30.0%

Southside Bancshares Inc. (SBSI) primarily provides financial services to individuals, businesses, municipal entities, and non-profit organizations.
Yield: 3.7% | Growth: 16.6% | 15 Year YOC: 36.9%

Old Republic Intl (ORI) writes property and liability, mortgage guaranty, title and life, and disability insurance.
Yield: 5.4% | Growth: 15.0% | 15 Year YOC: 43.6%

One key component of current yield is risk. If Treasuries (risk free) were paying 7%, 8% or 9%, many income investors and a significant number of dividend growth investors would divert a portion of their portfolios to them.

You will note that most of the above stocks are yielding under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 15 year YOC. In much the same way high-yielding stocks often end up cutting their dividends, many of the above stocks will end up cutting their dividend growth rate. Put another way, there is risk associated low-yield high-dividend-growth stocks. However, for the high dividend growth stocks that perform well over the next 15 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

Full Disclosure: Long OMI, NUE, MCD, COP. See a list of all my income holdings here.

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(Photo Credit)

Linked here is a detailed quantitative analysis of Cardinal Health,Inc. (CAH). Below are some highlights from the above linked analysis:

Company Description: Cardinal Health Inc. is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.

Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CAH is trading at a discount to 1.) and 3.) above. The stock is trading at a slight premium to its calculated fair value of $38.81. CAH did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

CAH earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CAH earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 14 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $2,080 is below the $2,100 target I look for in a stock that has increased dividends as long as CAH has. If CAH grows its dividend at 15.0% per year, it will take 6 years to equal a MMA yielding an estimated 20-year average rate of 3.9%.

Memberships and Peers: CAH is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: AmerisourceBergen Corporation (ABC) with a 1.1% yield, McKesson Corporation (MCK) with a 0.9% yield and Owens & Minor Inc. (OMI) with a 2.6% yield.

Conclusion: CAH did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of three Stars. This quantitatively ranks CAH as a 3 Star-Hold.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $40.31 before CAH’s NPV MMA Differential increased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.94%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 15.0%. This dividend growth rate is equal to the 15.0% used in this analysis, thus providing no margin of safety. CAH has a risk rating of 1.50 which classifies it as a Low risk stock.

CAH offers a diversified line of products and services. It is well-situated, with relationships with two major retail pharmacy chains (CVS Caremark and Walgreen) generating over 40% of its revenues. However, intense competition in the drug distribution market and consolidation among retail pharmacies could squeeze future margins. The company generates strong cash flow, which provides flexibility for expansion, dividends and share buybacks. CAH is currently trading slightly above my fair value price of $38.81. However, its low dividend yield will keep me from giving CAH serious consideration at this time. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CAH (0.0% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:
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Linked here is a detailed quantitative analysis of Owens & Minor, Inc. (OMI). Below are some highlights from the above linked analysis:

Company Description: Owens & Minor Inc. is a leading domestic distributor of medical and surgical supplies to the acute care market, a health care supply chain management company, and a direct-to-consumer (DTC) supplier of testing and monitoring supplies for diabetes.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

OMI is trading at a discount to 1.), 2.) and 3.) above. The stock is trading at a 19.3% discount to its calculated fair value of $35.94. OMI earned a Star in this section since it is trading at a fair value.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

OMI earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. OMI earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1926 and has increased its dividend payments for 12 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

OMI earned a Star in this section for its NPV MMA Diff. of the $4,530. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as OMI has. If OMI grows its dividend at 15.1% per year, it will take 3 years to equal a MMA yielding an estimated 20-year average rate of 3.4%. OMI earned a check for the Key Metric ‘Years to >MMA’ since its 3 years is less than the 5 year target.

Memberships and Peers: OMI is a member of the Broad Dividend Achievers™ Index. The company’s peer group includes: Cardinal Health, Inc. (OMI) with a 2.2% yield, McKesson Corporation (MCK) with a 1.1% yield and Patterson Companies Inc. (PDCO) with a 1.4% yield.

Conclusion: OMI earned one Star in the Fair Value section, earned two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks OMI as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $34.79 before OMI’s NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price the stock would yield 1.87%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 12.8%. This dividend growth rate is below the 15.1% used in this analysis, thus providing a margin of safety. OMI has a risk rating of 1.75 which classifies it as a medium risk stock.

OMI should see increasing demand for its medical/surgical supplies based on our aging society. The company has been focused on developing new services and cost control. OMI expects its new third-party logistics business to achieve break-even by year-end 2010 and its ambulatory surgery center initiative should start contributing to operating earnings in 2011. Long-term health care reform should eventually lead to higher utilization of hospitals. I will continue to add to my OMI position when it is trading below my fair value price of $35.94 and as my allocation allows. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I was long in OMI (2.0% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:

- The Procter & Gamble Company (PG) Dividend Stock Analysis
- Kimberly-Clark Co. (KMB) Dividend Stock Analysis
- Abbott Laboratories (ABT) Dividend Stock Analysis
- Colgate-Palmolive Co. (CL) Dividend Stock Analysis

The Allocation Dilemma

If your entire portfolio consists of income-based dividend stocks it would be very easy to end up over allocated in certain sectors.  Of the nearly 200 companies that I track, 15% of them are in the Consumer Goods sector. Furthermore, some of most well-known and very best dividend growth stocks are in this sector, including: Colgate-Palmolive (CL), Coca-Cola Company (KO), Pepsico, Inc. (PEP), Procter & Gamble (PG) and Kimberly-Clark Co. (KMB).

The relatively high yields of the Financial Services sector also make it appealing to dividend growth investors. The Financial Services sector is well represented in the stocks that I track, accounting for nearly 17%.With most banks falling out of favor, many higher-yielding insurance companies have filled the void, including: Erie Indemnity Co. (ERIE), Harleysville Group Inc. (HGIC), Cincinnati Financial Corp. (CINF) and  Mercury General Corp. (MCY).

In addition, the Healthcare sector produces several desirable dividend growth stock. These include: Abbott Laboratories (ABT), Cardinal Health, Inc. (CAH), Johnson & Johnson (JNJ) and Medtronic Inc. (MDT).

Judge Allocation Based On Your Total Portfolio

Instead of trying to preserve my allocation at the individual portfolio level (income, 401(k), IRA, etc.), I measuring asset allocation across my entire portfolio. You can’t truly determine your overall risk, unless you consider your entire portfolio. The first time I calculated my allocation across all my holdings, I was surprised at the outcome. Some of the areas I thought would be over-allocated were not, while other areas came up short.

Needless to say, the first time you look at allocation across your portfolio, there is fair amount of set-up work.  I have made available my DFL-Calc-Asset-Allocation.xls Excel spreadsheet to those interested in short-cutting some of the effort.

Set Limits On Individual Holdings

In addition to my overall asset allocation, I have set limits on individual stocks, Exchange-Traded-Funds (ETFs) and Closed-End Funds (CEFs). In setting these limits, you have to ask yourself, ‘What is the most I would be willing to lose, if a company went belly-up over night?’ For me and my risk tolerance, 5% was the amount I was comfortable with. I doubled the amount to 10% for funds (ETFs and CEFs) since they are invested in many different stocks. I did limit exchange traded notes to 5%, since your risk is effectively in the company issuing the security.

Sector-Basted ETFs

As a result of being over-allocated in two sectors and close on others, I began to investigate how I could target specific sectors where I was significantly under-allocated. I looked at two fund companies that offered sector-based ETFs, iShares and Vanguard. Their offerings were similar, and included: Consumer, Energy, Financial, Healthcare, Industrials, Materials, Real Estate, Technology, Telecomm and Utilities. In many instances the funds tracked the same indexes. As you might suspect, the Vanguard fund expenses are about half of the iShares funds. Most of the Vanguard sector ETFs charge a 0.25% management fee.

For some time, I have looked for appropriate income investments in the Utilities and Real Estate sectors. Unfortunately, they have been hard to come by. The Vanguard Sector ETFs just may help me increase my allocation in these areas, and few others. Here are three that I am currently evaluating:

Vanguard Utilities ETF (VPU) | Expenses: 0.25% | Yield:  3.76% : The fund employs a passive management investment approach designed to track the performance of the MSCI U.S. Investable Market Utilities 25/50 index. This index consists of all capitalization companies within the utilities sector. The sector includes electric, gas, and water utility companies, as well as companies that operate as independent producers and/or distributors of power. The sector includes both nuclear and nonnuclear facilities.

Vanguard REIT Index ETF (VNQ) | Expenses: 0.13% | Yield:  3.60% : The fund employs a passive management investment approach designed to track the performance of the MSCI® US REIT index. The index is composed of stocks of publicly traded equity real estate investment trusts (known as REITs).

Vanguard Telecom Services ETF (VOX) | Expenses: 0.25% | Yield:  2.61%:  The fund employs a passive management investment approach to track the performance of the MSCI U.S. Investable Market Telecommunication Services 25/50 index. The index is made up of stocks of large, medium-size, and small U.S. companies within the telecommunication services sector. The sector includes companies that provide communication services primarily through fixed-line, cellular, wireless, high-bandwidth, and/or fiber-optic cable networks.

In the past I owned VNQ in my income portfolio. After a period of time, I determined its erratic dividends were not appropriate for my income portfolio. After a quick look at VPU and VOX, I found that their dividends were not consistent and thus also not appropriate for my income portfolio. However, I will continue to give consideration to holding these ETFs outside my income portfolio – not as income investments but for allocation purposes.

Full Disclosure: Long CL, KO, PEP, PG, KMB, HGIC, CINF, ABT, JNJ, MDT. See a list of all my income holdings here.

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(Photo Credit)

This expectation does not change even when the economy turns down and earnings decline; dividend growth investors still require annual dividend growth. The companies that are able to accomplish this are those with a operating model that generates strong free cash flows with room to pay out a higher percentage as dividends. Below are several companies with a low free cash flow payout (below 40%):

An interesting twist to the above is a 2006 study conducted by Credit Suisse that found high dividend yield stocks generally
outperformed those with lower yields. However, the best returns did not come from those with the highest yields, but those with higher yields coupled with low payout ratios. The study found that high yield, low payout stocks that produced the better returns were priced at low ratios of price-to-earnings, and as a corollary, at high ratios of earnings-to-price; i.e., earnings yield. Put another way, the stocks prices were depressed, thus creating the higher yield and a value play. Below are several dividend growth stocks with a higher yields (around 4%+) and low free cash flow payouts (50% and below):

At some point we will all want to retire, but that is not to say we want our portfolio to stop working for us. A good dividend growth stock portfolio will not only provide us income in our retirement, but provide us more income each year than the one before.

Full Disclosure: Long GD, MDT, ADP, PG, INTC, ABT, GPC, TEG, CINF, LLY, HGIC. See a list of all my income holdings here.

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Linked here is a detailed quantitative analysis of Cardinal Health, Inc. (CAH). Below are some highlights from the above linked analysis:

Company Description: Cardinal Health Inc. is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies and related products to a broad range of health care customers.

Fair Value: I consider four calculations of fair value, see page 2 of the linked PDF for a detailed description:

1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number

CAH is trading at a discount to only 1.) above. The stock is trading at a slight premium to its calculated fair value of $30.95. CAH did not earn any Stars in this section.

Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:

1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%

CAH earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. CAH earned a Star for having an acceptable score in at least two of the four Key Metrics measured. Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1983 and has increased its dividend payments for 14 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA)? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

CAH earned a Star in this section for its NPV MMA Diff. of the $4,212. This amount is in excess of the $2,100 target I look for in a stock that has increased dividends as long as CAH has. If CAH grows its dividend at 15.0% per year, it will take 4 years to equal a MMA yielding an estimated 20-year average rate of 3.71%. CAH earned a check for the Key Metric ‘Years to >MMA’ since its 4 years is less than the 5 year target.

Memberships and Peers: CAH is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. CAH’s peer group includes: McKesson Corp. (MCK) with a 1.2% yield, AmerisourceBergen Corporation (ABC) with a 1.1% yield, Emergent Group, Inc. (LZR) with a 8.0% yield and Owens & Minor Inc. (OMI) with a 2.6% yield.

Conclusion: CAH did not earn any Stars in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks CAH as a 4 Star-Buy.

Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $41.17 before CAH’s NPV MMA Differential decreased to the $2,100 minimum that I look for in a stock with 14 years of consecutive dividend increases. At that price the stock would yield 1.89%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,100 NPV MMA Differential, the calculated rate is 12.6%. This dividend growth rate is well below the 15.0% used in this analysis, thus providing a margin of safety. CAH has a risk rating of 1.50 which classifies it as a low risk stock.

CAH offers a diversified line of products and services. It is well-situated, with relationships with two major retail pharmacy
chains (CVS Caremark and Walgreen) generating over 40% of its revenues. However, intense competition in the drug distribution market and consolidation among retail pharmacies could squeeze future margins. The company generates strong cash flow, which provides flexibility for expansion, dividends and share buybacks. CAH is currently trading slightly above my fair value price of $30.95. This is an interesting company, but I am not quite ready to buy. For additional information, including the stock’s dividend history, please refer to its data page.

Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.

Full Disclosure: At the time of this writing, I held no position in CAH (0.0% of my Income Portfolio). See a list of all my income holdings here.

Related Articles:

- Coca-Cola Company (KO) Dividend Stock Analysis
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Revenue Growth

The top line drives the bottom line. You can only cut costs so far, for a business to grow and thrive it must find ways to grow sales. This can be done through acquisitions, expanding markets, developing new production or entering a new line of business. For a company to sustain a growing dividend over the long-term, it must find ways to continuously grow its business. For some companies it easier and less risky to cut costs and many will stop there.

Earnings Growth

Many companies have learned the hard way that growth for the sake of growth is not always a good thing. If growth is not managed effectively and efficiently, it will be detrimental to long-term viability of the business. Management must ensure growth projects are monitored, controlled and well-run to ensure a profit is generated. Many great ideas have failed as a result of poor execution. Sometimes competitors will watch and correct the execution problems and turn your failed growth idea into their success.

Cash Flow Growth

Revenue and earnings growth are good, but ultimately they must convert to increased cash flow to provide the means for sustained dividend growth. Having the cash on hand is not enough. There must be a commitment on management’s part to grow the dividend. Ideally, this commitment will eventually grow into a culture of dividend growth that the company takes great pride in.

Business Outlook

One of the most difficult things to judge are the future prospects of a company. Certain questions have to be answered. Is the company in a declining industry? Will it be able to reinvent itself in a way that will allow it to sustain growth? What external force could radically change the prospects of the company? These same questions are being asked by the company’s board, and they are equally hard for management to answer even with full access to insider information.

Below are ten companies with an average 10-year free cash flow growth rate exceeding their average 10-year dividend growth rate:

		Current	Average 10-yr Growth Rates
Company	Analysis	Yield	Dividend	Revenue	FCF
Abbott Labs (ABT)	Link	3.40%	9.01%	9.02%	14.38%
Becton, Dickinson (BDX)	Link	2.06%	15.22%	7.74%	31.25%
Cardinal Health (CAH)	Link	2.18%	25.90%	15.96%	138.39%
Colgate (CL)	Link	2.65%	11.42%	5.43%	15.42%
CenturyLink, Inc. (CTL)	-	7.97%	61.07%	13.92%	73.94%
J&J (JNJ)	Link	3.52%	13.52%	9.51%	14.99%
Procter & Gamble (PG)	Link	3.00%	11.16%	7.84%	20.92%
RPM International (RPM)	Link	4.40%	5.45%	7.25%	58.62%
AT&T, Inc. (T)	Link	6.33%	5.47%	12.51%	29.50%
Wal-Mart Stores (WMT)	Link	2.34%	18.93%	9.57%	33.71%

It is important to note that only three of the above stocks (ABT, RPM and T) have revenue growth in excess of dividend growth. Needless, to say before buying you must consider the future prospects for each company and determine if the growth rates are sustainable in the future. As with yield, dividend growth carries its own risk. If the rate is too high, the company will have a hard time maintaining it going forward. If the rate is too low, it will not keep up with inflation and the shareholder will lose purchasing power.

Full Disclosure: Long ABT, CL, CTL, JNJ, PG, T, WMT. See a list of all my income holdings here.

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(Photo Credit)

Beta: A Measure of Volatility

Beta (β) is a quantitative measure of the volatility of a given security or portfolio relative to the overall market, usually the S&P 500. By definition, the market has a beta of 1.0 and securities are ranked according to how much they deviate from the market. Thus, securities with a beta above 1 are more volatile than the overall market, while those with a beta below 1 are less volatile. High-beta stocks are considered more risky, but provide a potential for higher returns. Low-beta stocks normally provide less risk and lower opportunities for capital gains.

Betas And Dividend Stocks

Dividend stocks tend to have low betas. That means during a market downturn, they tend to decline less than the total market. Hence, the term defensive stocks. It is also important to note that many defensive stocks are non-cyclical. Examples would include food, tobacco, oil, and utilities where demand is remains stable under difficult economic conditions.

Here are several dividend stocks with betas (as provided by Google Finance) less than 1.00:

Company	Analysis	Beta	% Yield
Cardinal (CAH)	Link	0.80	2.35
AT&T (T)	Link	0.68	6.83
Meridian (VIVO)	Link	0.63	3.63
Coca-Cola (KO)	Link	0.60	3.41
Becton, Dickinson (BDX)	Link	0.58	2.06
Procter & Gamble (PG)	Link	0.58	3.12
Johnson & Johnson (JNJ)	Link	0.57	3.54
Kimberly-Clark (KMB)	Link	0.48	4.29
Harleysville Group (HGIC)	Link	0.38	4.15
Wal-Mart (WMT)	Link	0.24	2.36
Abbott Laboratories (ABT)	Link	0.18	3.69

When the market turns up, low beta stocks normally won’t increase as fast as the market in total. However, as a long-term dividend investor, my goal is an ever-increase stream of dividend income, not to maximize capital appreciation.

Full Disclosure: Long ABT, HGIC, JNJ, KMB, KO, PG, T, WMT. See a list of all my income holdings here.

(Photo: Steve Woods)

With time, you can wait for blue-chip stocks to build a high yield-on-cost by growing their dividends. Below are several companies building shareholder wealth by recently increasing their cash dividends:

Franklin Electric (FELE) designs, manufactures, and distributes groundwater and fuel pumping systems. April 30th the company increased its quarterly dividend to $0.13/share. The dividend is payable on May 13 to shareholders of record on May 27. The ex-dividend date is May 26. FELE is a Dividend Achiever and has paid a higher dividend for 18 consecutive years. The yield based on the new payout is 1.54%.

Fifth Street Finance (FSC) is a specialty finance company that lends to and invests in small and mid-sized companies. May 4th the company raised its quarterly dividend 6.7% to $0.32/share. The dividend is payable June 30, 2010, to shareholders of record as of May 20, 2010. The ex-dividend date is May 18, 2010. The yield based on the new payout is 10.05%.

Textainer Group (TGH) is engaged in the purchase, management, leasing, and resale of a fleet of marine cargo containers worldwide. May 5th the company increased its quarterly dividend 4.3% to $0.24/share. The dividend is payable on May 26, 2010 to all shareholders of record as of May 17, 2010. The ex-dividend date is May 13, 2010. The yield based on the new payout is 4.01%.

TECO Energy (TE) serves the Tampa Bay region in west central Florida and has significant diversified operations related to its core business. May 5th the company increased its quarterly dividend to $0.205/share. The dividend is payable May 28 to shareholders of record as of May 14, 2010. The ex-dividend date is May 12, 2010. The yield based on the new payout is 5.18%.

Cardinal Health (CAH) is one of the leading wholesale distributors of pharmaceuticals, medical/surgical supplies, and related products to a broad range of health care customers. May 5th the company raised its quarterly dividend 11% to $0.195/share. The dividend is payable on July 15 to shareholders of record on July 1. The ex-dividend date is June 29. CAH is a Dividend Achiever and has paid a higher dividend for 14 consecutive years. The yield based on the new payout is 2.26%.

Talisman Energy (TLM) explores, develops, produces, transports, and markets crude oil, natural gas and natural gas liquids, mainly in North America, the North Sea and Southeast Asia. May 5th the company increases its semi-annual dividend 11% to C$0.125/share. The dividend will be paid on June 30, 2010 to shareholders of record at the close of business on June 4, 2010. The ex-dividend date is June 2, 2010. The yield based on the new payout is 1.5%.

Microchip (MCHP) supplies microcontrollers and analog and other semiconductor products for a wide variety of high-volume embedded control applications. May 5th the company raised its quarterly dividend to $0.342/share. The dividend is payable on June 2, 2010, to stockholders of record on May 19, 2010. The yield based on the new payout is 4.90%.

Cognex Corp. (CGNX) is a provider of machine vision products that capture and analyze visual information used to automate tasks where vision is required. May 5th the company increased its quarterly dividend 20% to $0.06/share. The dividend announced today is payable on June 18, 2010, to all shareholders of record at the close of business on June 4, 2010. The ex-dividend date is June 2, 2010. The yield based on the new payout is 4.90%.

Cablevision (CVC) is the fifth largest cable multiple system operator (MSO) in the U.S. May 6th the company raised its quarterly dividend to $0.125/share. Cablevision President and CEO James L. Dolan commented: “Given our strong performance, we have increased our dividend by 25 percent, enabling us to provide even more value to our shareholders.” The yield based on the new payout is 2.01%.

Biovail Corp. (BVF) is engaged in the formulation, clinical testing, registration and manufacture of drug products using advanced drug delivery technologies. May 6th the company increased its quarterly dividend to $0.095/share. The dividend is payable on July 5, 2010 to shareholders of record at the close of business June 2, 2010. The ex-dividend date is May 31, 2010. The yield based on the new payout is 2.39%.

Union Pacific Corp. (UNP) operates the largest U.S. railroad, with over 32,000 miles of rail serving the western two-thirds of the country. May 6th the company raised its quarterly dividend 22% to $0.33/share. The dividend is payable July 1, 2010, to stockholders of record on May 28, 2010. The ex-dividend date is May 26, 2010. The yield based on the new payout is 1.83%.

Occidental Petroleum (OXY) is one of the largest oil and gas companies in the U.S., OXY has global operations in exploration and production. Its subsidiary OxyChem is the largest U.S. merchant marketer of chlorine and caustic soda. May 6th the company increased its quarterly dividend 15% to $0.38/share. The dividend is payable on July 15, 2010, to stockholders of record as of June 10, 2010. The ex-dividend date is June 8, 2010. The yield based on the new payout is 1.89%.

RLI Corp. (RLI) provides selected property, casualty and surety insurance. May 6th the company raised its quarterly dividend to $0.29/share. The dividend is payable on July 15, 2010, to shareholders of record as of June 30, 2010. RLI is a Dividend Achiever and has paid a higher dividend for 35 consecutive years. The yield based on the new payout is 2.06%.

Public Storage (PSA) invests primarily in self-service storage facilities (mini-warehouses), but also in commercial and industrial properties. May 6th the company raised its quarterly dividend to $0.80/share. The yield based on the new payout is 2.06%.

To maximize long-term wealth we must find companies that will grow their dividends well into the future. For a list of stocks with a long string of consecutive cash dividend increases, see this list.

Full Disclosure: No position in the aforementioned securities. See a list of all my income holdings here.

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Often when I write about a stock that is yielding 2%, 3% or even 4%, I get a question that goes something like, “Why would you buy that stock when there are better options like ‘Amalgamated Risk?’ Its currently yielding 7%, 8%, 9% or more?” With this statement the reader has possibly identified themselves as an income investor, and but definitely established the fact that they are not a dividend growth investor.

Tracking Yield On Cost

Yield-on-cost (YOC) is simply Current Annual Dividend dividend by Original Cost Per Share. YOC not a substitute for calculating an internal rate of return (IRR). The IRR calculation takes into account both capital appreciation and the timing of cash flows (purchases, sells and dividends). However, as a dividend growth investor, my primary focus is on dividend growth and since my desired holding period is forever, capital appreciation is little more than an interesting side note. YOC is much better suited for tracking dividend growth since it is individually tied to a stock and takes into account all the variations of growth rates over time, along with the timing of purchases. Also, it is useful when trying to explain to our income investor brethren why we chose the stock yielding 3% over ‘Amalgamated Risk’ at 8%.

Recently, I modified my D4L-Data model to include projections of YOC after 5, 10, 15 and 20 years. These projections are derived by growing the current yield using the dividend growth rate. As for the dividend growth rate, I use the minimum of the 1, 3, 5, 7 or 10 year compound annual growth rates; or 15% if in every consecutive 4-year period dividends grew on average in excess of 15%.

20 Dividend Stocks With A 20% Yield In 20 Years

Sorting the stocks in my D4L-Data model by their 20 Year YOC and throwing out some bad apples, we are left with these 20 stocks that are projected to have a 20% YOC in 20 years:

Lowe’s Companies (LOW) | Analysis
- Current Yield: 1.29%
- Dividend Growth: 15.0%
- 20 Year YOC: 21.12%

McGrath RentCorp (MGRC) | Analysis
- Current Yield: 3.32%
- Dividend Growth: 10.26%
- 20 Year YOC: 23.40%

Fastenal Company (FAST)
- Current Yield: 1.46%
- Dividend Growth: 15.00%
- 20 Year YOC: 23.94%

Colgate-Palmolive (CL) | Analysis
- Current Yield: 2.41%
- Dividend Growth: 12.48%
- 20 Year YOC: 25.34%

C.H. Robinson (CHRW)
- Current Yield: 1.61%
- Dividend Growth: 15.00%
- 20 Year YOC: 26.32%

Canadian National (CNI)
- Current Yield: 1.75%
- Dividend Growth: 15.00%
- 20 Year YOC: 28.69%

Walgreen Company (WAG) | Analysis
– Current Yield: 1.57%
- Dividend Growth: 15.72%
- 20 Year YOC: 29.14%

Raven Industries (RAVN) | Analysis
- Current Yield: 1.81%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.65%

Eaton Vance (EV)
- Current Yield: 1.82%
- Dividend Growth: 15.00%
- 20 Year YOC: 29.72%

HCC Insurance (HCC)
- Current Yield: 1.91%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.30%

Becton, Dickinson (BDX) | Analysis
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

IBM (IBM)
- Current Yield: 1.94%
- Dividend Growth: 15.00%
- 20 Year YOC: 31.72%

United Technologies Corp. (UTX) | Analysis
- Current Yield: 2.05%
- Dividend Growth: 15.00%
- 20 Year YOC: 33.63%

Praxair, Inc. (PX)
- Current Yield: 2.15%
- Dividend Growth: 15.00%
- 20 Year YOC: 35.17%

Owens & Minor (OMI)
- Current Yield: 2.25%
- Dividend Growth: 15.12%
- 20 Year YOC: 37.55%

Linear Technology (LLTC)
- Current Yield: 2.93%
- Dividend Growth: 15.00%
- 20 Year YOC: 47.94%

McDonald’s Corp. (MCD) | Analysis
- Current Yield: 3.12%
- Dividend Growth: 15.00%
- 20 Year YOC: 51.01%

Nucor Corporation (NUE) | Analysis
- Current Yield: 3.18%
- Dividend Growth: 15.00%
- 20 Year YOC: 52.00%

Cardinal Health, Inc. (CAH) | Analysis
- Current Yield: 2.02%
- Dividend Growth: 17.65%
- 20 Year YOC: 52.06%

Meridian Bioscien (VIVO) | Analysis
- Current Yield: 3.40%
- Dividend Growth: 15.00%
- 20 Year YOC: 55.67%

One key component of current yield is risk. If Treasuries (risk free) were paying 7%, 8% or 9%, many income investors and a significant number of dividend growth investors would divert a portion of their portfolios to them.

You will note that all the above stocks are yielding well under 4%. It is also important to note that I do not believe that all the above stocks will achieve their 20 year YOC. In much the same way high-yielding stocks often end up cutting their dividends, many of the above stocks will end up cutting their dividend growth rate. Put another way, there is risk associated low-yield high-dividend-growth stocks. However, for the high dividend growth stocks that perform well over the next 20 years, the rewards are potentially much higher than those of a high-yield, low growth stock.

Full Disclosure: Long CNI, UTX, MCD, NUE. See a list of all my income holdings here.

(Photo Credit)