U.S. Markets closed

Stocks with growing dividends have been the way to go since 1972

Equities are just about at all-time highs. Yet taking a more conservative approach in selecting stocks may turn out to be an investor’s best bet, according to one portfolio manager.

Chad Morganlander of Stifel’s Washington Crossing Advisors advocates buying companies where dividends are increasing. One reason is that with interest rates near record lows, he expects the demand for securities with yields to increase. The other is because he anticipates a continuation of the current low-growth economic environment.

“When the global economy—and particularly [that of the] United States—is growing slowly, people are looking for consistency and quality in individual companies,” said Morganlander, who manages a rising dividend-based portfolio.

Companies with growing dividends generally have solid fundamentals, he claims. “If a company is actually growing their dividend, more times than not, their revenue growth has been quite stable as well as [have their] profit margins—particularly operating margins,” Morganlander said.

He adds that investing in growing dividend stocks would have provided the highest average annual return and simultaneously the lowest average annual risk from 1972 to 2014, based on data compiled by Ned Davis Research, Inc.

S&P 500 Dividend Category Annual Return Annual Risk (Based on Monthly Return Variations)
Growers and Initiators 11.6% 15.9%
All Dividend-Paying Stocks 10.9% 16.8%
No Increase or Decrease 9.5% 18.1%
Dividend Cutters 3.4% 25.1%

Source: Ned Davis Research, Inc.

Morganlander is currently long several rising-dividend stocks:

Church & Dwight (CHD)

Morganlander has a $110 price target on the parent company of such household products as Arm & Hammer baking soda and Orajel. Shares closed at $100.52 on Friday with a dividend yield of 1.4%.

“We think the dividend growth will be between 5% and 15% over the next five years,” he said. “They have very little debt on their balance sheet… Many people complain, ‘Hey where can I find the next Procter & Gamble (PNG)?’ This is a type of company that if you own it for the next five, 10, 15 years, you’ll do quite well.”

Pfeizer (PFE)

The pharmaceutical giant, with a dividend yield of 3.4% as of Friday, was recently added to Morganlander’s portfolio. “We think that there will be an improvement within operating margins as well as within revenue growth,” he said.

Amgen (AMGN).

The biotech company is trading at around 13 times its next 12 months of expected earnings, notes Morganlander. He has a price target of $200 per share, a 15% premium to Friday’s closing price. It currently has a dividend yield of 2.3%.

“Revenue growth is going to be fairly consistent,” he predicts. “And operating growth is going to be fairly consistent as well.”

Abbott Labs (ABT)

“Abbott Labs has an operating margin that we believe is going to increase over the next three to five years at a very, very steady pace,” Morganlander said. “As well, revenue growth will be fairly consistent. It’s baby formula; we think that that’s going to be their critical product that they’re going to sell into the emerging markets, which is going to do quite well. We feel we can get a total return between 15% and 25% over the next 18 to 24 months.”

PepsiCo (PEP)

Morganlander has a $120 price target on the soft drink and snacks maker. Shares closed at $108.66 on Friday and dividends right now yield 2.8%.

“We think that the company can have an increased dividend of 5% to 10% over the course of the next five years,” he said.