Finding Dividend Stocks With High Expected Dividend Growth

I previously wrote an article where I looked at different dividend rates combined with a dividend growth rate that would achieve a yield-on-cost (YOC) of 10% after 10 years. This article can be found here.

I tend to spend at least an hour per day working with spreadsheets. I'm either creating or modifying them for work or as a screening process before doing more research.

I will go through a screening method that I've used before that will involve David Fish's Champion, Challenger and Contender spreadsheets that are updated monthly, referred to as the CCC sheets.

The purpose of this screening process will be to identify unfamiliar companies that have a high expected dividend growth rate and may be good candidates for further research.

Let's say you purchased a stock at $10/share in 2013 that paid a 4% dividend or $0.40/share. In order to achieve a 10-year YOC of 10% that stock would need to pay out at least $1.00/share by 2023.

I decided to take the latest CCC sheets and add some new columns to calculate a 10-year YOC using each stock's 1,3, 5 and 10 year dividend growth rates (DGR's). I will call these new metrics 10YOC1, 10YOC3, 10YOC5, and 10YOC10 for simplicity.

I looked for any companies that had a 10YOC1, 10YOC3, 10YOC5 or 10YOC10 of 10% or higher. I applied this to the list of Champions, Contenders and Challengers. After applying this rule the lists dropped to 15, 88, and 117 companies respectively.

Next, I wanted to look to see if the DGR was increasing or decreasing. I highlighted in red the 10-year YOC's of companies that were both reducing their rate of increases and still under 10%. This is what the Champions list looked like at this point:

Companies got credit for increasing their dividends at faster rates. For example: The 10YOC5 for AWR was 4.97 and did not get highlighted in red because its 10YOC5 was higher than its 10YOC10 of 4.09.

Next, I decided to remove any company that had a 10YOC1 in the red for Champions and a 10YOC1 or 10YOC3 in red for Contenders and Challengers.

For the Champions list above this removed LEG, MDT, NUE and WMT.

This second step dropped the list sizes for the Champions, Contenders and Challengers to 11, 43 and 87 respectively.

My third step was to eliminate any stock not paying at least a 2.0% yield. My minimum yield criteria is 2.0% so I removed any Champion, Contender and Challenger that did not meet this initial yield of 2.0%. I realize I should have done this sooner so I'll tweak my method if I do this process again. This dropped the CCC lists to 9, 30 and 51.

For my final screen, I removed all companies with a TTM P/E over 18. This brought my final list of Champions, Contenders and Challengers to a more manageable 8, 16, and 23 respectively.

Here are the 47 candidates sorted by the 10YOC5 column that may be worthy to do further research on.

Champions

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Contenders

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Challengers

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Immediately I notice several companies that I'm already invested in including Walgreen Company (WAG), Altria Group (MO), McDonald's (MCD), Chevron (CVX), Lockheed Martin (LMT), Teva Pharmaceutical (TEVA), Phillip Morris (PM), Lorillard (LO) and Intel (INTC) just to name a few.

I also notice several companies all in different industries that look interesting at first glance based on metrics such as P/E, PEG, payout, yield and dividend growth. Some of these companies are: ACE Limited (ACE), VF Corp. (VFC), Span-America Medical (SPAN) and Occidental Petroleum (OXY).

ACE is a global insurance and reinsurance organization with customers in more than 170 countries. They have paid increasing dividends for 20 straight years and have been averaging at least two increases per year for the last several years. Their yield is currently 2.3%. They have a TTM P/E of 10.86, a PEG of 2.48 and payout ratio of 25% so there is a lot of room left for dividend growth.

VFC is a global apparel company based in the U.S. They are a diversified apparel company across brands and geographies. They own brands such as Timberland, Wrangler, Reef, 7 For All Mankind and The North Face to just name a few. VFC has 40 straight years of dividend increases. They have a yield of 2.3%, TTM P/E of 16.3, PEG of 1.56 and a payout ratio of 38%.

SPAN manufactures and distributes a variety of therapeutic support surfaces including foam products for the medical, consumer and industrial markets. Span has increased dividends for 14 straight years. They have a current yield of 2.6%, TTM P/E of 10.7 and payout of only 28%.

OXY is an integrated oil & gas company. They operate in three main segments: oil & gas, chemicals and midstream. OXY has increased its dividend for 10 straight years. They have a current yield of 2.45%. They have a TTM P/E of 12.1, PEG of 1.8 and payout ratio of 30%.

Keep in mind that this is just a starting point but I feel these companies deserve further research before making an investment.

If anyone thinks this process may be helpful then I may post results again next month to see how many changes or new companies there are.