Dividend investing continues to be an investor favorite in the current low-rate environment. But do you know how to spot the best dividend stocks?
Dividends are all around us; 84% of the stocks in the S&P 500 are now paying a dividend.
In this case, more choice isn’t necessarily a good thing. It means that it is getting harder and harder or investors to wade through all the possible dividend stocks to find the very best.
And not all dividends are created equal.
It’s not just about the size of the yield that counts (think about what happened to SeaDrill a couple of weeks ago), but it’s also about stability and dividend growth.
Investors should be doing more due diligence than ever and thinking about dividends in a new light. This includes considering dividends that might not be offering that 5% juicy dividend.
Rather, there are a few companies that might not be on your dividend radar, but should be. These companies are committed to rewarding shareholders with dividend increases. Each of the five has the capacity to be one fastest growing dividends over the next five years.
Dividend Growth Stock No. 1: The Walt Disney Co. (NYSE: DIS)
Disney has grown into much more than theme parks and movies business that it has long been known for. It runs media networks, film studios, hotels and sells consumer products. One of its prized assets is ESPN, the sports broadcasting network.
The Steve Jobs family is Disney’s largest shareholder; Jobs bought Pixar in the 80s and then Disney bought Pixar in 2006, giving Jobs a sizable stake in Disney. Before his passing, Jobs put his Disney stock in a trust for his children. The family is sticking around for the long term and for good reason.
Disney has paid a dividend for 14 years and increased its dividend in each of the last three years by an annualized 29%. It is worth noting that Disney pays out its dividend annually in December.
While the company pays just a 1.2% dividend yield, earlier this month it upped its dividend by over 30% to $1.15 a share. This will be a record high dividend payment for they company. It also has a strong balance sheet and it pays out just 25% of its earnings in dividends, meaning there could be more increases on the horizon. It trades ex-dividend Dec. 11.
Dividend Growth Stock No. 2: Harley-Davidson Inc. (NYSE: HOG)
Harley-Davidson is the manufacturer of some of the most popular motorcycles on the road. Shares are up just 3% year-to-date after the company cut its sales outlook earlier this year. But it’s still an interesting company with plans to offer electric bikes and bikes that appeal to baby boomers (i.e. three-wheeled bikes that are easier to control).
Harley-Davidson has one of the higher dividend yields of our five stocks, coming in at 1.6%. Its payout ratio is just 29%. Digging deeper, Harley-Davidson has upped its dividend for three straight years, growing it by an annualized 28% in those years. And it’s actually been paying a dividend for 21 years.
Dividend Growth Stock No. 3: The Kroger Co. (NYSE: KR)
Kroger, the U.S.’s largest grocery chain, has been on a tear so far this year. Shares are up over 55% year-to-date. The grocer has been succeeding with its organic food offerings. There looks to be plenty of room for more market share gains as everyday consumers continue to buy into the natural foods craze.
As far as its dividend goes, Kroger’s dividend is 1.1%. Kroger has upped its dividend for five straight years, increasing it by an annualized 11%.
The grocery chain is paying out less than 20% of its earnings via dividends, in contrast with the grocery store industry as a whole, which pays out nearly 50% of earnings.
Dividend Growth Stock No. 4: The TJX Companies (NYSE: TJX)
Although TJX has been a great stock to own over the last half decade, it has been underperforming major peer Ross Stores (NASDAQ: ROST) so far this year. Shares of TJX are up just 4% year-to-date, while Ross Stores’shares are up 21%.
However, with low gas prices and employment at multi-year highs, this holiday season could be just what TJX needs to close the gap. It runs the T.J. Maxx, Marshalls and HomeGoods stores in the U.S., with a strong presence in Europe —operating the T.K. Maxx and HomeSense brands there.
TJX’s dividend yield is 1.1%, compared to Ross Stores’0.9%. TJX has quietly upped its annual dividend payment every year for the last 17 years. And over the last five years, the off-price retailer has increased its dividend by an average 21% annually.
Part of the reason its dividend yield appears so low is strong stock price performance. Shares of TJX are up 260% over the last five years. And with a strong balance sheet and only paying out 22% of its earnings, I’d look for more robust dividend increases over the next five years.
Dividend Growth Stock No. 5: Wyndham Worldwide Corp. (NYSE: WYN)
Wyndham is a major player in the hotel and vacation business. Its brands include Wyndham, Days Inn, Super 8 and WorldMark. With the economy strengthening, increased travel should be a solid growth driver for Wyndham going forward.
Wyndham’s 1.7% dividend yield is the highest of the five stocks we have listed. Wyndham has managed to grow its dividend payment by an annual rate of 49% over the last five years.
It also has a modest streak of four years of consecutive dividend increases. Its 31% payout is fairly low. And while its 1.7% doesn’t seem like much, it towers over other hotel peers. The lodging industry average dividend yield is 0.9%.
I’ll leave you with this —AT&T (NYSE: T) offers a mouthwatering 5.4% dividend yield, which dwarfs Disney’s yield. But over the last five years, AT&T has only increased its dividend payment by an annualized 2.2%.
And even when you factor in AT&T’s robust dividend, it has managed to underperform Disney by over 150 percentage points on a total return (stock appreciation and dividends) basis for the last five years.
The key takeaway here is — don’t just consider yield when investing. Make sure your companies are consistently rewarding you and have the ability to continue doing so.
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