The Best Stocks To Create a Legacy Dividend-Growth Portfolio

Large-cap tech stocks are all the rage when it comes dividend-growth investing. They’re all the rage for good reason.
Examine the history of Microsoft (NASDAQ: MSFT), Qualcomm (NASDAQ: QCOM), Cisco Systems (NASDAQ: CSCO), and Apple (NASDAQ: AAPL) and you’ll discover an impressive record of annual dividend growth of 10%-to-20%, or more. When annual dividend growth gallops along at a Secretariat-like pace, the dough really starts to flow in.
Consider Microsoft. Over the past 10 years, its annual dividend has grown to $1.44 per share from $0.40. That’s 13.7% average annual dividend growth. And as the dividend goes, so, too, goes the share price. Over those same 10 years, Microsoft shares have more than doubled, rising to $57 from $26.
I like all four of the aforementioned big-cap tech stocks. In fact, each is a current recommendation in at least one of the Wyatt Investment Research services to which I contribute. All four have generated a rising income stream and a rising share price for our subscribers.

Dividend Growth, Long Term

That said, is it possible to create a portfolio of large-cap dividend-growth tech stocks when you’re age 20 and expect annual dividend to persist uninterrupted until age 65? That’s 45 years of annual dividend growth.
If history can serve as a guide, the answer is “no.”
It’s fair to call International Business Machines (NYSE: IBM) the granddaddy of all tech stocks. Big Blue has been around since 1911. Back then it was saddled with the clumsy, albeit clinical, name the Computing-Tabulating-Recording Company. The more hip IBM tag didn’t come along until 1924.
There’s no denying that IBM has been a prodigious dividend payer. It has paid a dividend every year since 1916, but the dividend hasn’t grown every year for the past 100 years. There have been periods when dividend growth took a holiday. (From 1989 through 1992 and from 1993 through 1995, for instance.)
Another long-in-the-tooth big cap stock also has a long dividend history. Intel (NASDAQ: INTC) has paid a dividend since 1992. Intel also has a history of dividend growth and dividend stagnation. Most recently, from mid-2012 through 2014, the dividend failed to budge.
Your best chance of creating a legacy dividend-growth portfolio – one you can set and forget –  is to focus on the physical world. That is, focus on dividend-growth companies that create and manufacture tactile, tangible products and services. They rule the roost. The top-10 dividend aristocrats have a minimum of 55 years of dividend growth to their name. Not a tech stock is to be found in this crème de la crème of dividend growth.

Ticker Symbol
Years of Annual
Dividend Growth
American States Water AWR Utilities 61
Dover Corp. DOV Machinery 60
Northwest Natural Gas NWN Utilities 60
Procter & Gamble PG Personal Products 59
Emerson Electric EMR Electric Equipment 59
Genuine Parts GPC Retail 59
3M MMM Machinery 57
Parker Hannifin Corp. PH Industrial Equipment 56
Vectren Corp. VVC Utilities 56
Cincinnati Financial CINF Insurance 55

As for the 45-year time frame (age 20 to 65), there are still no tech stocks to be found. In fact, no tech stock is found with 30-years-or-more of dividend growth.
So, why are tech stocks unable to maintain annual dividend growth over time?

Pedaling to Stay in Place

Relentless competition is one reason. In the tech world, a lot of hard pedaling is required to simply stay in place. Microsoft spends over $10 billion a year on research and development alone.  Most other large-cap tech companies also budget billions of dollars for R&D. Yes, the returns can be high when the R&D pays off, but competitors are relentless in seeking to diminish those returns.
Ease of entry is another reason. The dividend growers with the longest dividend-growth history have large capital-intensive infrastructures. A heavy initial investment tends to limit new competition. With tech, a few precocious kids in a garage can turn the world upside down – think Apple and Facebook (NASDAQ: FB) – and knock you off your perch. 

Yes, this time it could be different. Perhaps Microsoft et. al. will maintain dividend growth through the ages. But if I were to construct a legacy portfolio of dividend growth stocks, I probably wouldn’t bet that way. History simply isn’t on big tech’s side.

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