Sharpen Your Dividend Edge

Though I've never understood technical analysis, I get its appeal. What investor in his or her right mind would want to buy into a stock that immediately heads south? None, of course.

A simpler way?
Yet there's no crystal ball when it comes to stocks. (And, yes, that's true for even the most magical chartists and traders.) Fortunately, capital preservation doesn't have to be a guessing game. Decades of study by Jeremy Siegel and others demonstrate that companies that increase dividends over time tend to outperform the market, and sometimes remarkably so.

Consider Sysco (NYSE: SYY  ) , one of the nation's largest food distributors and a Motley Fool Income Investor selection. It has hiked its dividend by more than 19% annually over the past decade. Accordingly, the stock is up more than 300% in that time versus about 85% for the S&P 500.

The dividend edge
Spotting companies like Sysco early is an investor's dream. So I screened for firms in noncyclical industries trading on a major U.S. exchange that could be about to supply heady dividend growth. Here's a complete list of criteria:

  • A participant in the consumer staples industry
  • A market capitalization of $1 billion or more
  • Five-year revenue growth of at least 5%
  • Five-year net income growth of at least 7%
  • Return on equity (ROE) of 15% or more
  • A payout ratio of less than 40%

Big names, big opportunities?
My screen returned 15 candidates. Here are the six I consider to be most interesting, ranked by trailing price-to-earnings (P/E) ratio:

Company

Sales Growth

Income Growth

ROE

Payout Ratio

P/E

Liz Claiborne (NYSE: LIZ  )

9.0%

9.8%

15%

8%

13.5

General Mills (NYSE: GIS  )

10.6%

16.2%

25%

36%

14.8

Johnson & Johnson (NYSE: JNJ  )

10.9%

16.0%

29%

36%

16.9

Wal-Mart (NYSE: WMT  )

10.3%

12.4%

23%

23%

17.4

Hormel Foods (NYSE: HRL  )

8.4%

9.6%

17%

27%

17.9

Procter & Gamble (NYSE: PG  )

10.5%

17.8%

20%

40%

19.7

*Data provided by Capital IQ, a division of Standard & Poor's.

Any one of these companies could disappoint, of course. All stocks are risky. But there's something these firms have that many others don't: a history of consistently impressive ROE. Businesses that boast high ROE tend to be efficient. And efficient businesses are always more likely to deliver sustained growth, thereby increasing their attractiveness as investments.

No need to get technical
Surely there's an argument to be made for technical analysis just as there are arguments for palm reading, tarot, and astrology. I'm no expert on any of them, so instead I'll simply stick with what I know: Companies that consistently hike their dividends tend to produce market-beating returns. My guess is that won't change anytime soon.

So seek stocks that pay (and pay, and pay) you to own them. Where to look? How about grabbing a free all-access pass to Income Investor.

Chief analyst Mathew Emmert invests in great stocks with sustainable yields. That's why, even with the recent downturn, his picks are up an average of 10% versus just 6% for the market, and that's before an average yield in excess of 4%. Want to find out more? Click here. There's no obligation to buy.

Fool contributorTim Beyersis always seeking an edge in his investing. He'd get a palm reading if he thought it would help. Tim didn't own shares in any of the companies mentioned in this story at the time of publication. You can find out what is in his portfolio by checking Tim's Foolprofile. Johnson & Johnson and Sysco are Income Investor recommendations. Wal-Mart is an Inside Value pick. The Motley Fool has an ironcladdisclosure policy.


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