My colleague Amy Calistri loves stocks that grow their dividends quickly.
One need only look at her track record to see why. Last month, her portfolio of Fast Dividend Growers in hernewsletter posted average total returns of 55% while yielding 4.8%.
Amy will tell you that dividend growth is more important than a stock's initial yield for long-term investing. That's because rising payouts lead to a larger yield on the initial investment over time, thanks to the effects of compounding, while ensuring the company has plenty of cash to grow and remain stable.
For example, consider Coca-Cola (KO), which is growing its dividend by roughly 10% a year. Coke's shares currently yield a mediocre 2.8%, but if dividends continue to grow 10% a year, an investment made today would climb to 4% by year 5 and to 5.4%, or nearly double the initial yield, by year 8.
With this in mind, let's look at four of the top dividend growers this year and see whether they make sense for investors.
|Wells Fargo |
Dividend hike: 36%
|With a $798 billion loan portfolio and roughly 25% market share, Wells Fargo (WFC) is the dominant mortgage originator in the United States. A key strength for Wells Fargo is its cross-selling platform, which allows it to sell additional products and services to existing customers. This is the envy of other large banks and a driver of fee income. In this year's first quarter, Wells Fargo's cross-selling ratios were 6.1 products per household for its retail banking operations and 10.3 products per customer for its wealth management services. |
This month, Wells Fargo reported record first-quarter results that included 23% year-over-year growth in net income to $5.2 billion, or 92 cents a share. The company has been a consistent leader in profitability within the banking sector, posting a return on assets (ROA) of 1.5% and a return on equity (ROE) of 13.1% in the past 12 months.
Wells Fargo has already raised its dividend twice this year for a total increase of 36%. At the new annualized forward dividend of $1.20, shares yield 3.1%. The payout ratio is modest at 26%, and there is a high likelihood of continued dividend growth based on analyst forecasts of 8% earnings growth in each of the next five years.
|Herman Miller Inc. |
Dividend hike: 39%
|The inventor of the cubicle, Herman Miller (MLHR) is a leading designer and manufacturer of high-end office furniture and equipment. Weakened demand from U.S. government customers has hurt Herman Miller's earnings in recent years, but with rising sales in China and double-digit growth in its specialty and consumer segments, the company appears poised for a turnaround. |
After four consecutive quarters of year-over-year sales declines, Herman Miller posted 6% sales growth and 9.4% growth in backlog during its fiscal third quarter, which ended in March. Earnings per share (EPS) jumped 23.1% to 32 cents. Analysts are predicting EPS growth of 21% in the fourth quarter and 27% for next year.
This month, management indicated its confidence in a turnaround by hiking the dividend 39% to an annualized rate of 50 cents, double last year's dividend of 25 cents. Herman Miller shares yield 1.9% and have a 34% payout ratio, which leaves plenty of cushion for growth.
Dividend hike: 40%
|A world leader in wireless technologies, Qualcomm (QCOM) is a dominant player in chipsets for the smartphone market, with a 48% market share. The company shipped a record 182 million chipsets in the first quarter, up 17% from a year ago. |
Qualcomm also posted record revenue and EPS for the quarter. Revenue climbed 29%, to $6 billion, and EPS jumped 30% to $1.26, handily beating the consensus analysts' estimate of $1.13. With no slowdown in sight for smartphone demand, analysts forecast Qualcomm will deliver annual EPS growth of at least 15% for the next five years.
A note of caution: Qualcomm is likely to face increased competition in the smartphone market from Intel (INTC), which plans to launch new cutting-edge products this year.In March, Qualcomm approved a 40% hike in the dividend, to an annualized rate of $1.40, and a new $5 billion share repurchase program. The payout ratio is 31%, and shares yield 2.1%.
|Ford Motor Co. |
Dividend hike: 100%
|Ford (NYSE: F) is off to a great start this year. Its Ford Focus ranks as the world's top-selling car, and its Fusion is gaining on Toyota's (TM) Camry. Ford is also growing by leaps and bounds in China, where first-quarter sales this year were up 54% from the same period a year ago. |
Ford's fourth-quarter revenue was $36.5 billion, up $1.9 billion from the same quarter a year ago, and profits were $1.7 billion before taxes. That's an increase of $577 million and the highest in more than a decade. The period marked Ford's 14th consecutive profitable quarter. EPS rose to 31 cents from 20 cents, beating Wall Street forecasts of 25 to 28 cents.
Additional profit gains are likely to come from lower manufacturing costs, the result of a common platform approach. Ford expects 80% of its global production (roughly 6 million vehicles) to come from just five platforms by 2016, down from 27 platforms five years ago.
Ford has doubled its annual dividend this year to 40 cents, a 3% yield. In addition to its modest 14% payout ratio, Ford has enormous cash ($24.4 billion) and cash flow ($9 billion in the past 12 months) to support research and development, share buybacks and dividends.
Risks to Consider: Shares of both Herman Miller and Ford are highly cyclical and suffer during downturns in the U.S. economy. Qualcomm may soon face renewed competition in the smartphone market.
Action to take --> My top pick overall is Qualcomm for its dominant position in the fast-growing smartphone market. Investors who want a higher yield may prefer Ford or Wells Fargo. Herman Miller is a good choice as a turnaround play.
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