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We've identified 43 companies that keep raising their dividends year in and year out. Call them dividend champs, with all due respect to the S&P 500 Dividend Aristocrats.
Most professional money managers fail to beat the performance of broad stock indices. But there is a way: Shares of companies that pay — and consistently increase — dividends tend to outperform.
That's a theme we explored a few weeks back when we compared the performance of the S&P 500 Dividend Aristocrats Index to the broader S&P 500 Index (.SPX) and concluded that this might not be a good time to dump your dividend stocks.
According to S&P Dow Jones Indices, the Dividend Aristocrats Index includes the roughly 40 components of the S&P 500 that have raised their dividends each year for a quarter century. That's the only criterion — the size of the dividend yield has no bearing.
What's somewhat stunning is the fact that the "safer" Dividend Aristocrats Index has returned 163% during the past five years through Thursday's market close, beating the S&P 500's 141% advance, assuming reinvestment of dividends. The comparison looks even better over 10 years — 103% versus 65%.
The Dividend Aristocrats Index has also been less volatile than the S&P 500, its worst performance over the past decade being a 22% decline in 2008, when the S&P 500 plunged 37%.
There are several mutual funds that enable you to track the performance of the S&P 500 Dividend Aristocrats. One of them is the ProShares S&P 500 Aristocrats ETF (NOBL).
To build a broader list of stocks with consistent dividend increases, we started with members of the S&P 500, the S&P MidCap 400 (.MID) and the S&P SmallCap 600 (.SML) 1,500 in all, or three times that of the S&P 500 alone. We then reviewed 30 years of dividend payments using data provided by FactSet, and identified companies that had raised their dividends each year for 29 years. (The first base year isn't counted.)
Of 28 dividend champs in the S&P 500, half have beaten the index over five years, and 22 have done so over 10 years.
Nine dividend champs are S&P MidCap 400 components. Five have beaten the 167% five-year return for the index, while seven have exceeded its 10-year return of 158%.
Six dividend champs are S&P SmallCap 600 members, with half surpassing the five-year return of 173% for the index, while five have beaten its 10-year return of 155%.
So over the past 10 years, 79% of the dividend champs have outperformed the 10-year total returns for their respective indices. That's about double the rate of the 1,500 stocks we started with.
The dividend champs are a diverse group across many industries. We will publish lists of those with the highest dividend yields, as well as breakdowns for a few of the represented industries, over the coming weeks.
But, for now, here are the five dividend champs with the best total returns over 10 years:
|Stepan Company (SCL)
|V.F. Corporation (VFC)
|W.W. Grainger, Inc. (GWW)
|Questar Corporation (STR)
|Nordson Corporation (NDSN)
Total return assumes dividends are reinvested; Based on closing prices on 04/24/14; Source: FactSet
As you can see, the current dividend yields aren't impressive, except for one. But these stocks aren't really income plays. The point of the data dive is to highlight the correlation between consistent dividend increases and long-term growth for investors.
Here's a quick look at the best-performing dividend champs over five years:
Stepan Co. (SCL) of Northfield, Ill., tops the list of dividend champs, with a 10-year total return of 569% and a five-year return of 253%. The company, formed in 1932, produces specialty chemicals used in manufacturing.
The stock is down 7% this year through Thursday's close, to $60.57, following a 19.5% return during 2013. The shares trade for 12.1 times the consensus 2015 earnings estimate of $5.03, among analysts polled by FactSet. The consensus 2014 EPS estimate is $3.86.
The company's earnings available to common shareholders slipped during 2013 to $72.3 million, or $3.18 a share, from a record $79.4 million, or $3.49, in 2012. Rising costs for materials and a restructuring announced during the fourth quarter contributed to the decline. Expenses are expected to remain elevated during the first half of 2014. But as you can see from the consensus estimates, sell-side analysts expect Stepan's growth investments to pay off in a major way in 2015.
V.F. Corp. (VFC) of Greensboro, N.C., is a clothing manufacturer whose major brands include The North Face, Vans, Timberland and Nautica. The company was founded in 1899.
The stock has returned 551% over the past 10 years, with a five-year return of 296%. The shares have pulled back 3% this year, following a 68% return during 2013, which was the best among the five dividend champs.
The stock closed at $60.11 Thursday and traded for 17.4 times the consensus 2015 EPS estimate of $3.47. The consensus 2014 EPS estimate is $3.06. Based on a quarterly payout of 26.25 cents, the shares have a dividend yield of 1.75%.
V.F. Corp on Friday reported a 13% increase in first-quarter operating revenue to $403 million, with EPS increasing to 67 cents from 60 cents. The operating margin improved to 14.5% from 13.7%.
W.W. Grainger Inc. (GWW) of Lake Forest, Ill., is a wholesale supply distributer founded in 1927.
The stock has returned 445% over the past 10 years, with a five-year return of 235%.
The shares closed at $252.53 Thursday, down 1% this year, following a 28% return in 2013. The stock trades for 17.7 times the consensus 2015 EPS estimate of $14.30. That estimate implies 13% growth from the 2014 EPS estimate of $12.65.
W.W. Grainger reported first-quarter sales of $2.4 billion, rising 5% from a year earlier. Earnings inched up to $217 million, or $3.07 a share, from $212 million, or $2.94.
Questar Corp. (STR) of Salt Lake City is a natural gas distributor with three main businesses: a public utility operating in Utah, Wyoming an Idaho; an affiliated gas production business; and a pipeline business. The stock has returned 398% over 10 years, with a five-year return of 169%.
Questar's shares closed at $23.44 Thursday, up 3% this year, following a 20% return in 2013. The shares trade for 17.8 times the consensus 2015 EPS estimate of $1.32. The consensus 2014 EPS estimate is $1.26. The stock has the highest dividend yield on the list, at 3.07%, based on a quarterly payout of 18 cents.
Questar earned $161.2 million, or 92 cents a share, in 2013, but that included a noncash impairment charge of $52.4 million, or 29 cents, related to its Southern Trails Pipeline. Adjusted earnings of $213 million were up 1% from the previous year.
Nordson Corp. (NDSN) of Westlake, Ohio, manufactures machinery for adhesives, coatings, polymers, sealants and biomaterials. The 60-year-old company operates in 30 countries.
The stock has returned 364% over the past 10 years, with a five-year return of 333%, the best among the five companies listed here. The shares closed at $74.54 Friday, returning 1% this year, following a 19% return during 2013. The stock trades for 17.5 times the consensus 2015 EPS estimate of $4.26. That EPS estimate implies 16% growth from the 2014 estimate of $3.68.
Nordson reported 4% growth in sales to $359 million in the first quarter, although earnings declined to $34.9 million, or 54 cents a share, from $42 million, or 65 cents, a year earlier. The profit drop sprang from higher costs attributed to the acquisition of two Kreyenborg Group subsidiaries.
The company's outlook for the second quarter includes sales growth ranging from 5% to 9%, with EPS ranging from 85 cents to 94 cents.