I know very little about hockey, but I have always loved this quote:
"I skate to where the puck is going to be, not where it has been."
- Wayne Gretzky
It can be applied to so many things in life, including investing in Dividend Growth Stocks. 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 10%, 15% or 20% yield today, but how long will they be able to sustain it? Instead you may want to skate to where the future high-yielders are going to be. To do that end, here are some things you need to know.
Tracking Yield On Cost
Yield-on-cost (YOC) is simply Current Annual Dividend divided 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 high-yield brethren why we chose the stock yielding 3% over "Amalgamated Risk" at 8%.
This week, I screened my dividend growth stocks database for stocks that have a dividend growth rate in excess of 5% that will be yielding between 15% to 20% in 15 years based on their current yield and dividend growth rate. The results are presented below:
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: 1.9% | Dividend Growth: 15.0% | 15 Year Yield: 15.5%
Grainger Inc. (GWW) is the largest global distributor of industrial and commercial supplies, such as hand tools, electric motors, light bulbs and janitorial items.
Yield: 1.7% | Dividend Growth: 17.3% | 15 Year Yield: 15.6%
Sunoco Logistics Partners (SXL) is a master limited partnership (MLP) that was formed by Sunoco Inc. to acquire, own and operate a group of refined product and crude oil pipelines and terminal facilities.
Yield: 3.0% | Dividend Growth: 12.4% | 15 Year Yield: 16.5%
Raytheon Company (RTN), the world's sixth largest military contractor, specializes in making high-tech missiles, advanced radar systems and sensors, defense electronics, and missile-defense systems.
Yield: 2.5% | Dividend Growth: 12.9% | 15 Year Yield: 17.5%
Hasbro Inc. (HAS) broad portfolio of toys, games and entertainment offerings includes brands such as Transformers, Playskool, Monopoly and My Little Pony.
Yield: 3.1% | Dividend Growth: 13.0% | 15 Year Yield: 17.6%
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., with significant interests in the NGL gathering and processing and petrochemicals businesses.
Yield: 1.9% | Dividend Growth: 17.5% | 15 Year Yield: 17.8%
Occidental Petroleum Corporation (OXY) is one of the largest oil and gas companies in the U.S., OXY has global exploration and production operations. Its subsidiary, OxyChem, is one of the largest U.S. merchant marketers of chlorine and caustic soda.
Yield: 3.0% | Dividend Growth: 12.5% | 15 Year Yield: 17.8%
Nike Inc. (NKE) is the world's leading designer and marketer of high-quality athletic footwear, athletic apparel and accessories
Yield: 1.3% | Dividend Growth: 20.0% | 15 Year Yield: 19.0%
As with past screens, the data presented above is in its raw form. Some of the companies would be disqualified for poor dividend fundamentals. However, some of the others may be worth additional due diligence.
My database, D4L-Data, is an Open Office spreadsheet containing more than 20 columns of information on the 230+ companies that I track. The data is sortable and has built-in buttons and macros to make it easy to use. Companies included in the list are those that have had a history of dividend growth. The D4L-Data spreadsheet is a part of D4L-Premium Services and is updated each Saturday for subscribers.
Full Disclosure: Long RTN, OXY in my Dividend Growth Portfolio. See a list of all my dividend growth holdings here.
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