Join        Login             Stock Quote

10 Stocks With A Sustainable Dividend Growth Rate

 August 11, 2010 09:30 AM

In the past we have looked at the importance of a company's ability to sustain its dividend. However, as an investor in dividend growth stocks, it is not enough to simply sustain the dividend – I want to own companies that are capable of sustained dividend growth. Needless to say, this is a little more difficult to evaluate, but here are few important things to consider…

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

[Related -AbbVie Inc (ABBV): What To Watch In Q4 Results?]

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

[Related -Macy's, Inc. (M): The One Department Store Stock You Can Trust]

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:

CurrentAverage 10-yr Growth Rates
Abbott Labs (NYSE: ABT)Link3.40%9.01%9.02%14.38%
Becton, Dickinson (NYSE: BDX)Link2.06%15.22%7.74%31.25%
Cardinal Health (NYSE: CAH)Link2.18%25.90%15.96%138.39%
Colgate (NYSE: CL)Link2.65%11.42%5.43%15.42%
CenturyLink, Inc. (NYSE: CTL)-7.97%61.07%13.92%73.94%
J&J (NYSE: JNJ)Link3.52%13.52%9.51%14.99%
Procter & Gamble (NYSE: PG)Link3.00%11.16%7.84%20.92%
RPM International (NYSE: RPM)Link4.40%5.45%7.25%58.62%
AT&T, Inc. (NYSE: T)Link6.33%5.47%12.51%29.50%
Wal-Mart Stores (NYSE: WMT)Link2.34%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.



Comments Closed

rss feed

Latest Stories

article imageTackling China's Debt Problem: Can Debt-Equity Conversions Help?

China’s high and rising corporate debt problem and how best to address it has received much attention read on...

article imageWill Job Growth Kill The Bear-Market Signal For Stocks?

It’s all about jobs now. Actually, it’s always been about jobs. But the stakes are even higher—perhaps more read on...

article imageAutomating Ourselves To Unemployment

In this current era of central planning, malincentives abound. We raced to frack as fast we could for the read on...

article imageFed: Waiting For June… Or Godot?

The Federal Reserve left interest rates unchanged yesterday, as widely expected. But the possibility of a read on...

Popular Articles

Daily Sector Scan
Partner Center

Fundamental data is provided by Zacks Investment Research, and Commentary, news and Press Releases provided by YellowBrix and Quotemedia.
All information provided "as is" for informational purposes only, not intended for trading purposes or advice. iStockAnalyst.com is not an investment adviser and does not provide, endorse or review any information or data contained herein.
The blog articles are opinions by respective blogger. By using this site you are agreeing to terms and conditions posted on respective bloggers' website.
The postings/comments on the site may or may not be from reliable sources. Neither iStockAnalyst nor any of its independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. You are solely responsible for the investment decisions made by you and the consequences resulting therefrom. By accessing the iStockAnalyst.com site, you agree not to redistribute the information found therein.
The sector scan is based on 15-30 minutes delayed data. The Pattern scan is based on EOD data.